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Looking beyond the Airbnb glitter

Dramatically higher returns can flow from short term rental accommodation, but experts are warning investors to think about the potential pitfalls before rushing in.

Thursday, February 16th 2017, 1:00PM

by Miriam Bell

Tales of the tasty profits being earned by homeowners in holiday hotspots who provide their properties for short term rental accommodation, via services like Airbnb and Bookabach, are legion.

Those tales are helping to make short-term rental arrangements an increasingly attractive option for investors who have seen their rental property yields eroded by the upward march in house prices.

An illustration of the charms of renting via Airbnb rather than traditionally can be seen in recent data from London-based online agent Nested.

The data compares the length of time it would take investors to recuperate the cost of an average house in their city via a traditional rental arrangement or via Airbnb.

In Auckland, it would take 31.6 years to recuperate the cost of a three-bedroom property bought at last year’s average price of $783,668 if it was leased at 2016’s average monthly rent of $2,062.

But if the property was leased through Airbnb at an average monthly rent of $7,252, it would take just 22.6 years to recover the purchase price.

Prominent Auckland investor David Whitburn said there is no doubt the cash flow earned from short-term rentals can be excellent.

Some investors are generating more than 15% net yields on their Airbnb properties but success depends on the demand for the location, the property presentation and the feedback rating earned, he said.

“Investors need to be aware that going down the short-term rental track is a time-consuming business.

“You have shorter term stays and need to arrange bookings, answer questions from those thinking about renting from you, arrange cleaners, handling key transfers, do administration tasks and so on.

“If you have a good manager, this is OK. And some specialist Airbnb property managers have already been established.”

But it is important that investors know what they are in for, and either have great systems in place or a top manager, Whitburn said.

“Otherwise they will harm the financial performance of their investment.

“A big risk is getting bad reviews on the Airbnb website, as this can severely undermine the future financial performance of a property.”

Location is a key consideration – and, potentially, risk – for investors considering a move into short-term rental provision.

Apartment Specialists director Andrew Murray is a big fan of Airbnb and uses it to rent out several apartments, but he emphasised the location of a property is critical.

Short-term rentals can work well and can lead to significantly raised returns for an investor, he said.

“But you want to be able to ensure that you can let the property and get money for it all year round. So you need a location that will be attractive all year round – not just in summer.”

Good, all-year locations tend to be in central city areas and near reliable transport options or hubs. Holiday hotspots and locations which are not central are not as good.

Murray said that in order to get high returns it is necessary to have as few vacant periods as possible.

“So with less central / more holiday hotspot properties, you might want to opt for short-term rentals over the peak season and then a six-month traditional lease for the rest of the year.”

Costs need to be factored into the nett income earned but it is still worth paying for professional property management due to the time factors involved, he said.

“It’s worth noting that one big advantage with short-term rentals is that the property is not likely to get as damaged as it would in a traditional tenancy.

“This is because of the very regular inspections and professional cleaning required. Plus the users have a rating which follows them and which most don’t want to destroy.”

Not all investors favour short-term rentals over more traditional rental tenures.

Auckland Property Investors Association president Andrew Bruce said he tried Airbnb with one of his apartments in Auckland’s CBD, but it didn’t have sea views and that limited traction.

“Much does come down to the location of the property. You are probably likely to do pretty well with a nice studio apartment in the CBD as opposed to a three-bedroom house in Onehunga.

“But you probably need to be able to offer some point of difference, like a sea view or a heritage fit out, to do really well. Particular types of properties just tend to do better than others.”

As a landlord Bruce prefers longer rental arrangements which he said may not bring the same level of returns but have less vacancies and offer more stability.

“It doesn’t take many weeks of vacancies for the costs to add up and returns to erode. Chasing significantly higher rental prices doesn’t tend to pay off long term.”

Investors thinking of moving into short-term rental provision also need to consider the GST implications if it earns them more than $60,000 per year, as well as the rules and requirements of their council, their insurer and, potentially, their body corp.

Read more:

Boosting Auckland returns with Airbnb 

Profits take flight with Airbnb 

« Slow growth for Auckland rents – B&TMoving forward on meth contamination »

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Lender Flt 1yr 2yr 3yr
AIA 4.55 2.55 2.69 2.79
ANZ 4.44 3.15 3.25 3.39
ANZ Special - 2.55 2.69 2.79
ASB Bank 4.45 2.55 2.69 2.79
Bluestone 3.49 3.49 3.49 3.49
BNZ - Classic - 2.55 2.69 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 3.15 3.29 3.39
BNZ - TotalMoney 4.55 - - -
CFML Loans 5.50 - - -
Lender Flt 1yr 2yr 3yr
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 3.35 3.85 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online - - - -
Heretaunga Building Society 4.99 ▼3.85 ▼3.95 -
HSBC Premier 4.49 2.45 2.60 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 3.69 2.55 2.65 2.79
Kainga Ora 4.43 ▼2.93 ▼3.07 ▼3.24
Kiwibank 3.40 3.30 3.54 3.54
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.55 2.79 2.79
Liberty 5.69 - - -
Nelson Building Society 4.95 3.45 3.49 -
Pepper Essential 4.79 - - -
Resimac ▼3.39 3.45 ▼2.99 ▼3.35
SBS Bank 4.54 ▼3.05 3.19 ▼3.25
Lender Flt 1yr 2yr 3yr
SBS Bank Special - ▼2.55 2.69 ▼2.75
The Co-operative Bank - Owner Occ 4.40 2.55 2.69 ▼2.79
The Co-operative Bank - Standard 4.40 3.05 3.19 ▼3.29
TSB Bank 5.34 3.35 3.49 3.79
TSB Special 4.54 2.55 2.69 2.99
Wairarapa Building Society 4.99 3.65 3.69 -
Westpac 4.59 4.15 4.09 4.49
Westpac - Offset 4.59 - - -
Westpac Special - 2.55 2.69 2.79
Median 4.55 3.05 3.13 3.12

Last updated: 11 August 2020 8:24am

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