Air BnB as an investment

[CraigD]

I have a friend who is thinking about buying a low-end $380K property in a tourist town and letting it through Air BnB who will also property manage for 15%. The nightly rental seems to be around $150 on average and Air BnB gave indications that he should expect 50% occupancy, which would be a 7% gross yield. With all outgoings (interest on 100% loan,insurance,management,utilities) it seems to around 4K -ve.

Does this all sound reasonable for an Air BnB investment? Does anyone have any experience with the pro's and cons?

Cheers

[Anthonyacat]

Short term lets are a much higher risk proposal than long term, I'd be wanting WAY more than 7% gross. Doesn't seem like a good buy to me.

My experience with AirBnB and short-term management companies has not been particularly positive, for my AirBnB apartment in Auckland CBD.

[Courham]

I'd be wary. The more properties flooding the Air B&B market the less money everyone will make- it's a race to the bottom. I've heard the average return is about $3500 per year.

Tourist towns (eg Queenstown) are starting to regulate them too- via rates and limiting number of nights people can stay. May be better buying traditional rental in the town for the workers no longer able to afford to live there

Craig

[absoluteproperty]

I am a full time, professional host with AirBnB. I have been so getting on towards 4 years now.

The market I operate in is absolutely saturated with listings, mostly due to agents thinking it is a great marketing idea to pitch to mum-n-pop investors that "hey this property is not quite to standard, it has a few issues" or "its a little overpriced and the market is uncertain, but..", "this would be a great AirBnB, because it pays more and the silly tourists don't know that the place they have booked has watertightness issues, or is quake prone!".

I have seen this first hand in Wellington. I only buy in buildings that meet the current and previous NBS.

To my knowledge, AirBnB do not directly manage properties in New Zealand. If they did, I would be concerned about the conflict of interest in the same company preparing your property for you as you have to call, often asking for compensation or action against the guest, when things go wrong.

And things do go wrong.

Last week I had a Mongrel Mob member trying to book one of my properties for one night, posing as a legitimate clean cut guy. Through channels I established he was not, and I had to be creative to ensure my property was protected and I would not end up with holes in my walls, things stolen (yes, I have had a lot of assets stolen during my hosting experience), tenants bringing in more people than agreed (increasing wear and tear), tenants defecating on the floor, spilling wine over carpets and driving off into the sunset, hanging soaking wet towels over vacuum cleaners and then wondering why there is smoke pouring out of the vacuum cleaner, denying it was the water and then a look of shock on their faces when I showed them the soap suds on the motor.. the list goes on and on.

My occupancy rates are high, but I have been in the game a long time, I have formal education and now developed experience in marketing the properties, as well as formal education in business statistics so I do my best to maximise income. On top of this, if you are smart you are paying taxes, because it is a new industry with a lot of heat coming from a very envious and upset hoteliers association, who would do anything to see AirBnB banished from the shores of Aotearoa altogether. Do not be surprised if at some point, the IRD declares they are targeting AirBnb hosts, no doubt there are huge numbers not meeting any tax obligations at all, hoping nobody will notice.

Cleaning is also a huge cost, so if you are not doing your own cleaning chances are you are going to struggle to make decent money - and you need to, because it costs to set the property up properly for AirBnB tenants - I worked out the other day I spend $13,000 on average, above and beyond the cost of the property to set it up specifically for short term tenants.

It is advertised as a short term game, but I can assure you that it is a very long term game with fading reward and high levels of regulatory and market risk involved. With apartments in my building renting for only $20 per week less than I earn during the winter after all expenses, I have seriously considered moving off the AirBnB platform in recent months - at least then I can stop waking at 2am because Sally from Michigan and Garry from Scotland want immediate answers to how far your place is from the airport, where is a good place to park, where a great Thai restaurant nearby is, and how many minutes to walk to the sky tower.

Tell your friend to think carefully.

[Wayne]

Great answer!

[Murph]

What town are you thinking of buying in?

[Beano]

I am a full time, professional host with AirBnB. I have been so getting on towards 4 years now.

The market I operate in is absolutely saturated with listings, mostly due to agents thinking it is a great marketing idea to pitch to mum-n-pop investors that "hey this property is not quite to standard, it has a few issues" or "its a little overpriced and the market is uncertain, but..", "this would be a great AirBnB, because it pays more and the silly tourists don't know that the place they have booked has watertightness issues, or is quake prone!".

I have seen this first hand in Wellington. I only buy in buildings that meet the current and previous NBS.

To my knowledge, AirBnB do not directly manage properties in New Zealand. If they did, I would be concerned about the conflict of interest in the same company preparing your property for you as you have to call, often asking for compensation or action against the guest, when things go wrong.

And things do go wrong.

Last week I had a Mongrel Mob member trying to book one of my properties for one night, posing as a legitimate clean cut guy. Through channels I established he was not, and I had to be creative to ensure my property was protected and I would not end up with holes in my walls, things stolen (yes, I have had a lot of assets stolen during my hosting experience), tenants bringing in more people than agreed (increasing wear and tear), tenants defecating on the floor, spilling wine over carpets and driving off into the sunset, hanging soaking wet towels over vacuum cleaners and then wondering why there is smoke pouring out of the vacuum cleaner, denying it was the water and then a look of shock on their faces when I showed them the soap suds on the motor.. the list goes on and on.

My occupancy rates are high, but I have been in the game a long time, I have formal education and now developed experience in marketing the properties, as well as formal education in business statistics so I do my best to maximise income. On top of this, if you are smart you are paying taxes, because it is a new industry with a lot of heat coming from a very envious and upset hoteliers association, who would do anything to see AirBnB banished from the shores of Aotearoa altogether. Do not be surprised if at some point, the IRD declares they are targeting AirBnb hosts, no doubt there are huge numbers not meeting any tax obligations at all, hoping nobody will notice.

Cleaning is also a huge cost, so if you are not doing your own cleaning chances are you are going to struggle to make decent money - and you need to, because it costs to set the property up properly for AirBnB tenants - I worked out the other day I spend $13,000 on average, above and beyond the cost of the property to set it up specifically for short term tenants.

It is advertised as a short term game, but I can assure you that it is a very long term game with fading reward and high levels of regulatory and market risk involved. With apartments in my building renting for only $20 per week less than I earn during the winter after all expenses, I have seriously considered moving off the AirBnB platform in recent months - at least then I can stop waking at 2am because Sally from Michigan and Garry from Scotland want immediate answers to how far your place is from the airport, where is a good place to park, where a great Thai restaurant nearby is, and how many minutes to walk to the sky tower.

Tell your friend to think carefully.

Charging your time into the equation what net yield would you earn ?

[CraigD]

In Rotorua

[sidinz]

Has your friend checked out how much competition there already is, not just on Airbnb but Bookabach? Doing this has been a 'thing' is Rotorua for decades....long before Airbnb even existed.
Does the location offer the guests something 'extra'? Has your friend factored in commercial insurance and high utility costs? The fixed daily electricity charge for a non owner-occupied property is over $2 per day. Will need to get broadband on. Does that return also account for the $30K involved in kitting it out?

I have one and certainly couldn't afford to have someone manage it and still make a profit. Don't forget that the management fees don't include the booking website's commission.

[newbie investor]

This is absolutely right from my perspective too. Too much saturation from new hosts who underprice the market in order to garner reviews and realise it's not worth it - except that there are plenty of new hosts who do the same.

[sparxNZ]

Tread carefully with AirBNB.
Southern Lakes, Christchurch and Tasman councils are already looking at either making professional AirBNB hosts pay commercial rates or apply for resource consents.
AirBNB is profitable because it's unregulated. Platforms like that expand at the speed of the internet while regulation moves at the speed of Government, but eventually regulation will catch up.
Look at Japan. AirBNB listings have dropped something like 80% this year because the government finally realized that it's commercial accommodation on a small scale and now requires fire safety compliance, registration, inspections etc.
NZ loves to regulate things. It's only a matter of time - and probably not a lot of time - before significant compliance costs hit AirBNB hosts.

And so they should. It's fair for two reasons.

Firstly, all professional AirBNB hosts are being effectively subsidized by all non AirBNB hosts on council rates. Hosting a guest is a business arrangement and genuine commercial accommodation providers pay commercial rates. AirBNB hosts should too.

Secondly, when you provide a service to someone you have an obligation and a liability to ensure those services are provided safely. This includes short term accommodation. That's why genuine commercial operators have to have a fixed wired fire alarm system which is tested monthly and annually and an evacuation plan usually including illuminated emergency exit signs which must be tested annually and a Bwof issued and held on file with the council. When councils sit around the table and think about this for a while now that it's an issue in the public space they're going to realize that AirBNB rentals need regulation along the same lines.

Looking at a feasibility study based on AirBNB returns right now, assuming they will be just as good in five years and investing based on that assumption is folly.

[Courham]

Tread carefully with AirBNB.
NZ loves to regulate things. It's only a matter of time - and probably not a lot of time - before significant compliance costs hit AirBNB hosts.

And so they should. It's fair for two reasons.

Firstly, all professional AirBNB hosts are being effectively subsidized by all non AirBNB hosts on council rates. Hosting a guest is a business arrangement and genuine commercial accommodation providers pay commercial rates. AirBNB hosts should too.

Secondly, when you provide a service to someone you have an obligation and a liability to ensure those services are provided safely. This includes short term accommodation. That's why genuine commercial operators have to have a fixed wired fire alarm system which is tested monthly and annually and an evacuation plan usually including illuminated emergency exit signs which must be tested annually and a Bwof issued and held on file with the council. When councils sit around the table and think about this for a while now that it's an issue in the public space they're going to realize that AirBNB rentals need regulation along the same lines.

Looking at a feasibility study based on AirBNB returns right now, assuming they will be just as good in five years and investing based on that assumption is folly.

AFAIK Air B&B et al are no different from renting your property to regular tenants, should all regular rentals have the same fire plans/compliance costs/ commercial rates etc? That will never happen as it would kill the rental industry overnight and then where will people live?

If I rent my bach out for 90 days per year then it is empty for the remaining 275 days per year why should I pay commercial rates etc for those days it is empty? I am actually SAVING the council money but not using sewage, roads, libraries etc 24/7 Surely I should get a rates rebate as a result...yeah right!

Regulating air B&B etc is just more of the council pigs getting their snouts in the feeding trough- something they are experts at.

The move to regulate is being done at the beck and call of the hotel industry that hates competition and the fact that people have had enough of being ripped off. Renting a bach for a family of 4-6 for a week where they an do their own cooking etc is far more affordable than renting a motel or hotel and hence the reasons kiwis have been doing it for years.

The sad fact is though we will wake up one day and wonder why we can't use our neighbours bach anymore or camp by a river/lake/beach. I feel really, really sorry for the next generation as all those things that made being a kiwi great are being regulated the hell out of and will soon no longer be able to be done.

Viva le progress

Craig

[eri]

the speed with which

councils round the world are 'regulating' airbnb

would make me very wary of an investment

that only worked with short-stays

+ no regulation

[elguapo]

the speed with which

councils round the world are 'regulating' airbnb

would make me very wary of an investment

that only worked with short-stays

+ no regulation

Exactly. Airbnb is simply bypassing the traditional hotel business by realising there is plenty of unused accommodation and most people are not interested in many of the services and costs imposed by hotels. Don't forget you are competing with people who just want to make a bit of income from an existing property and are not looking for serious returns. They will always undercut anyone looking for a business return.

[sparxNZ]

AFAIK Air B&B et al are no different from renting your property to regular tenants, should all regular rentals have the same fire plans/compliance costs/ commercial rates etc? That will never happen as it would kill the rental industry overnight and then where will people live?

Craig

The reason AirBNBs should have fixed wired fire alarms, emergency escape plans and illuminated emergency exit signs is the same reason genuine commercial operators need them.

It's because when there are a bunch of people sleeping in a building and there is a fire, all the occupants need to hear the alarm at the same time. You can't guarantee someone in a bedroom down the hall will wake up when a smoke alarm in the kitchen goes off, and you can't guarantee that one of the other guests will go and make sure everyone knows there is a fire.

When the alarm is activated, most if not all the occupants will likely be asleep. When awoken they will be in an unfamiliar building.
That's not the same as a domestic rental property. A domestic rental property is most likely familiar to the occupants.

And yes, IMO you should only have to pay commercial rates on your AirBNB for the number of days it was used to host guests. I think that's what the CCC is mulling over at the moment.
I reckon they'll come to the conclusion that it's too hard to implement and copy what QLDC is doing.
Unfortunately I think it will take a couple more AirBNB fires like the one in Christchurch before councils start looking at resource consents and proper fire alarms though.