Many landlords are starting to explore their options when it comes to renting out their properties. With online platforms such as Airbnb and Bookabach, the number of new opportunities is increasing for property owners to share their homes and make a secondary revenue doing so on a short-term basis.
By entering the short-term rental market, owners are able to experience a flexible alternative to long-term residential tenancies. Renting a property to someone else is nothing new for New Zealanders, however, the growing number of property investors choosing a short-term rental model instead of long-term tenancy is. But is renting out a property short-term really all that it is cracked up to be?
Both long-term and short-term rentals come with their advantages and disadvantages. In this article we will outline some of the pros and cons to help identify if renting out an investment property through Airbnb or other similar platforms are a smart idea for your long term gains.
Advantages of short-term rentals
Short-term rentals offer freedom and flexibility by enabling the landlord (host) to let out their property when it is convenient for them. Tenants (guests) can elect to stay anywhere between one night to a few weeks at a time, with the host able to outline maximum and minimum stays. The owner of the property benefits from increased visibility with their property and how long a guest will stay.
Another benefit of short-term rentals is the user rating system. This enables a host to check on whether a potential guest has treated other properties with respect before allowing them to stay. Hosts are held to a similar standard but this openness can give hosts peace of mind when allowing strangers to stay in their property.
There is also greater earning potential with short-term rentals. Higher rates can be charged due to the nature of the stay, nightly rates can also be adjusted based on the time of year, events, and increased demand. During large scale sporting events, for example, a short-term rental host can increase their nightly rate to make the most of the volume of interest versus the limited supply of accommodation. This is a gamble however!
Disadvantages of short-term rentals
Unlike long-term residential tenancies that obtain a signed contract, there is no guarantee of income when it comes to short-term stays. While the rewards may be high with short-term rentals the risk of zero income is also increased.
What happens if you can’t rent your property out right away, or have a period of vacancies? Can you and your family afford the additional mortgage payments to the bank as well as the additional costs of power, internet and maintenance? Even though the attractiveness of potentially making more per night with short-term stays, it’s important to balance the risks. By adding up the additional management and maintenance as well as vacant nights, the question that needs to be asked is does it all balance out in the end?
With travel restrictions still ongoing at a global level the short-term rental market took a sharp hit. This led to increased property listings in Queenstown and Auckland as people relying on the tourism income found their mortgages unserviceable.
As a host your property needs to stand out from the rest and this can require quite a financial commitment as properties need to be fully furnished and equipped with all the amenities for a guest. This can often include a television, power and WIFI as well as tea coffee and biscuits. For example, properties that are listed on Airbnb are encouraged to provide essential amenities in all their listings, including toilet paper, hand and body soap, towels, linen and pillows. Recommended quantities of each item depends on the number of guests and the length of their stay. For more extended stays, if you provide extras of each amenity, this ensures guests have everything they need.
While short-term rental companies may be becoming a powerhouse and a massive competitor to the hotel industry, many countries are starting to enforce restrictions on them and their hosts. In several countries, rules and regulations around short-term rentals are continually changing and some hosts are finding themselves already on the wrong side of the law with some countries/states making Airbnb illegal. Learn more about those places here. This can create some uncertainty around the future of short-term investments. New Zealand has seen similar restrictions enter tourist regions. In Queenstown, visitor accommodation laws came into effect in March of 2019 with the new rules limiting short-term stays under the residential visitor accommodation category depending on where the property is located.
Unexpected situations such as COVID-19 put a halt on travel as the tourism industry took a significant impact following the shutting of our borders and the country lockdown. According to RNZ an Auckland based Airbnb property manager lost more than a third of its clients since the pandemic broke out. With bookings going from 300 a month to 60 cutting their profits by 70 per cent.
Disadvantages of long-term rentals
The main disadvantage of long-term rentals is the lack of flexibility and control. This means that landlords are unable to visit their property unannounced and without warning. Big changes to the property also need to be planned out carefully and approval from the tenants is paramount. This can cause some headaches for both parties if not managed well.
The healthy homes scheme has also added a challenge to some landlords who now need to follow the healthy homes standards that have been set out by the government. Even though this means that additional work may need to be done on the property, long-term this can have a positive outcome as tenants are more likely to stay longer if a property is safe and healthy. For more information about the Healthy Homes standards and what is required from landlords click here.
Homeowners can also run into problems finding the right tenants, and if the proper vetting hasn’t been completed properly those tenants can cause a headache for the property owners and it might not be easy to part ways with them if things turn sour.
Advantages of long-term rentals
There are some clear advantages to investing in properties that are rented to tenants on a long-term basis. Tenants sign an annual lease which means a consistent income all year long. There’s no need to worry about busy seasons versus slower times if your tenants are living in the property.
Unlike short-term investments, long-term tenants are responsible for paying their own electricity, internet and content insurance bills meaning fewer ongoing costs.
Long-term rentals are less vulnerable to global factors impacting tenancies. While the loss of a job or a change in circumstances can always result in a lost tenant, global politics and pandemics are less likely to impact a long-term rental property, depending on the property’s location.
Hiring a property manager to manage your long-term investment is a lot cheaper than hiring a short-term property manager because long-term managers have less occupancy turnover, ongoing maintenance and marketing requirements. The market rate for long-term property management is on average around 8% -12% of the collected rent. On the other hand, hiring a property manager for a vacation rental can cost 27% + GST or more of the rental income. Property managers also run potential tenants through an online system which checks their names in over 200 online databases to make sure there are fewer surprises from a potential tenant.
Like most investment decisions, there’s no perfect answer for everyone. Real Estate is one of the best performing investments for good reason but how you choose to maximise your investment can come down to how much income consistency you want, how much time you want to spend on your investments, and how you feel about the other benefits and drawbacks of each type of rental property.
If you would like to discuss both short-term and long-term options then contact our property management team for an open assessment on your property’s value on the long-term rental market.
