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When COVID-19 hit and the borders closed, many landlords who operated their investment properties via Airbnb made the switch to long-term tenancies. Now that international travellers are set to return and the threat of competition from large-scale accommodation providers is decreasing, some landlords are asking whether or not they should return to hosting on Airbnb - with the goal of achieving a higher ROI. 

Below you’ll find a summary of seven key financial considerations to bear in mind when making your decision.

Key financial considerations

1. Location 

Some cities and suburbs earn more rent on Airbnb than others. For example, 2021 data showed that properties in Hastings, New Zealand could fetch 80% more rent on Airbnb than from a long-term tenancy. However, areas like Stratford, Taranaki yielded, on average, 11% less rent than long-term rentals. 

2. Pricing

One of the perks of renting your property through Airbnb is the ability to change the price whenever you like - meaning you can increase it during peak periods to achieve maximum profit for a period of time. Long-term tenancies are more restricted in that once you have signed a lease agreement, you can only increase the rent once every 12 months provided you also meet certain conditions and give the correct notice to tenants.  

3. Seasonality & Stability of Income

With Airbnb, although you have the flexibility to increase your price during peak periods, oftentimes, demand will be seasonal - impacted by things like your location and local attractions. You may find that you have long vacant periods during winter when people aren’t travelling as frequently. Airbnb income is very hard to predict and higher prices during peak periods aren’t guaranteed to make up for the lack of income during long or frequent vacant periods. 

In comparison, traditional, long-term rentals provide a stable, steady, and largely predictable income stream. Occasionally you will have vacant periods in between tenancies but generally speaking, as long as you manage your property effectively, these periods of no income will be few and far between.

4. Demand

Aside from seasonality, you also need to consider demand for your property. In the current market, long-term rentals are in high demand and so long as your property is in good condition and is up to standard you shouldn’t have too much trouble finding tenants relatively quickly. With Airbnb however, if your property is newly listed, you will need to have a few five-star ratings under your belt before demand starts to pick up. Until it does, you may need to reduce your price or put in more effort to intrigue guests.

5. Initial & Ongoing Costs

With the nature of Airbnb being short-term accommodation, properties are required to be fully furnished and equipped to accommodate guests. This means forking out extra money in the start-up phase as well as ongoing costs to keep the property and its furnishings in immaculate condition. You may have to replace or refill certain things frequently - some of which would normally be a tenant's responsibility in a long-term tenancy. 

With a long-term tenancy in place, you will be responsible for covering general maintenance and repairs but you won’t be forking out for the likes of professional cleaning services, Wi-Fi, replacing bedding and towels, or refilling the coffee station.

6. Tax 

No matter how big or small, rental returns are subject to tax. Additionally, short-term accommodation, like Airbnb, may be subject to GST. As soon as your income from Airbnb reaches over $60k you have to register for GST - meaning you lose 15% of your income & a big part of your margin! Not to mention, some local NZ councils have targeted rates levies if you are an accommodation provider (such as Airbnb). 

7. Commission Fees

If you opt for Airbnb you also have to consider the commission they charge hosts (otherwise known as the “service fee”). The “service fee” is usually around 17% of the price of the property. There are two options Airbnb hosts can choose from when it comes to paying the Airbnb “service fee”:

• Split-fee: the “split fee” option splits the “service fee” between the host and the guest, with the guest covering most of the “service fee”.. Usually the guest pays around 14% on top of the price of the property. The remaining 3% of the “service fee” is then deducted from the Airbnb payout amount before it arrives in the host’s bank account.
• Host-only fee: When hosts opt for the “host-only fee”, rather than being passed onto the guests at checkout the full “service fee” is paid by the host and can range anywhere from 14% to 20%.

Whilst property managers charge management and admin fees for managing rental properties, these generally don’t exceed 10% of the rent.

Other factors to consider

Aside from financial considerations, there are a lot of other variables to think about when deciding between Airbnb or renting your property via a long-term tenancy. Whilst long-term tenancies managed by a good property manager are largely on autopilot, with Airbnb, you are essentially running an accommodation business. 

Location is a major factor in how much your property will earn on Airbnb and there is potential to make a good profit if your property is in the right area. Success will also depend on how well you run your Airbnb ‘business’. If you use the right systems and have good procedures for the likes of checking in and out, getting good reviews, managing complaints, and dealing with laundry you’ll likely do quite well. 

The Bottom line

So, will your investment property earn more on Airbnb? The answer is not absolute. As mentioned above, there are a lot of variables to consider. If you can withstand all of the extra work involved in running an accommodation business, you will be rewarded with profit. However, Airbnb is not for the faint-hearted. A lot of people have tried Airbnb only to return to traditional tenancies because they require a lot less time, work, and hassle.

If you’re still a bit unsure about which path to take, get in touch with our friendly team! We’ll be happy to talk you through your options. 

 

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DISCLAIMER: The above advice is written by Propertyscouts New Zealand (2020) Limited and is intended as a broad guide for educational purposes only. The advice should not be regarded as legal, financial or real estate advice. In all instances, you should make your own inquiries and seek independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions.

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