This episode looks at whether or not Airbnbs are a good property investment strategy.
Obviously, there’s risks with any purchase and any investment, but there’s a lot more risk relating to Airbnb.
Why people want to invest in Airbnbs
The reason people think about investing in Airbnbs is simple: They’re high yielding and a lot of people want to use them potentially for lifestyle factors as well.
From looking at it from an investment lens, you’re not purely looking at it from an ROI perspective potentially. It’s just maybe covering costs if you’re using it as a lifestyle property for yourself.
A lot of people do that. They buy one on the Gold Coast and they rent it out on Airbnb with the intention they’re going to go up there a week or two a year or whatever it is. So you start to question at that point whether it’s an investment or whether you’re buying a holiday house for yourself.
Because going into it, you’re not just buying it as an investment, but really you’re using it for yourself. If you’re using it for yourself, you’re basically just covering your costs.
Is an Airbnb a passive investment?
When you’re buying an Airbnb, you’re going to want it in a nice area. You’re going to want it in a touristy area somewhere where there’s going to be a high turnover of people.
Essentially, the way I look at having an Airbnb as an investment property, it’s almost like a second job unless you get a management company. That then eats into your profit, if you want to call it that, but it is a full-time job.
And even if you have the management company, it’s still an active approach managing them because if you’ve got, say, five investments that they’re managing, you’re still liaising with that property management company. Has there been any damage? Do you approve anything? No doubt you’re being sent invoices.
A lot of the time, the booking of it is just done through the owner as well. So, the booking and approvals of that are done through the owner and the management company look after restocking towels and cleaning and doing those sort of things.
So, it’s not going to be a passive property investment. There is going to be a bit of work involved.
Airbnb vs hotels: competition risk
One of the big things is there are risks with any purchase and any investment, but there’s a lot more risk relating to Airbnb because a standard residential property in particular is subject to the regulatory environment, but less so compared to Airbnbs.
Obviously you’re competing against hotels. They’re going to be your biggest competitor. So if you go and buy a unit in the middle of Sydney, you’re competing with every hotel in Sydney as well. So how are you going to buy a property that stands out on an Airbnb platform?
A lot of people are probably looking for accommodation on Booking.com for CBD stays and there’s plenty of hotels that come up. But if you’re looking at other areas of Sydney, say Manly for example, there’s a lot of tourists that go there. There’s only really two hotels on the Northern Beaches or in that pocket.
So you might find a little niche in Manly where you can buy those as an investment. And then you don’t have that competition risk from the hotels, but you’re still subject to regulatory environment for councils or states.
Airbnb regulations in Australia
New South Wales is the highest regulated market and it’s not surprising because of the rental market here. There is a 180-day rental cap, and that can be determined by certain councils as well, some have lower caps so check that before you buy.
Victoria is council controlled, so not state based, but it can be strict in certain areas as well, especially in areas where vacancy rates are quite low.
Queensland has historically been Airbnb-friendly because it is the holiday state as they call it. But the Gold Coast has very strict Airbnb caps. A lot of people buy units on the Gold Coast as standard residential investments, but a lot of people want the Gold Coast as a holiday area as well. They’re relatively cheaper units when you’re comparing them to a lot of other major cities, so not surprising that a local council has put their own restrictions on Airbnbs in that area.
South Australia and Western Australia are fairly unregulated with fewer blanket restrictions. Tasmania seems to have some regulation there but it is council based. The basic exclusions are if it’s a primary residence. So if you do live in it the majority of the time and you’re going away on holiday for six months or whatever, there’s no caps then because it’s not being removed from the rental pool.
If people want it for extra cash flow, that’s great. You always have event spikes. For example, in Newcastle when the V8 Supercars were on, or in Bathurst for the V8s, all the owner occupiers are moving out because for them it’s the worst time of the year.
Even major events like the Australian Open in Melbourne. Small houses, not even units, go up for lease and people decide it’s so busy in Melbourne for the weekend, they’re going to go away.
Tax implications of Airbnb investment properties
Tax wise, we’re not accountants, so double check with them for the full implications, but income earned from Airbnb is taxable.
Expenses are allowed. Your cleaning, management, utilities and those sorts of things. You do need to apportion that to personal use though, especially if it’s owner occupied. You need to keep clear records of how many days it’s rented versus how many are personal use.
The way it gets treated for tax purposes is really dependent on how you use it and how it’s held. Owner occupier or did you buy it just for a holiday home? Is it purely investment related? Is it owned through a company or a trust? There’s a lot of factors. Speak to your accountant.
It can affect capital gains tax. Again, speak to your accountant. It is subject to capital gains tax unless it’s owner occupied and you’re going for that six-year rule, but you need to be very strategic with the apportionment and how you approach it.
Financing an Airbnb property
When lenders use the income for Airbnb, they will usually take a 12-month average because it’s seasonal.
If you’re buying a property that you are intending to lease out under Airbnb, they can’t use the predicted income. It would need a general appraisal from a normal real estate because that’s always the fall back.
After 12 months, if it’s been consistent and it works out more than the standard rental figure, it can be used at that point. Each lender is different. Some use a 12-month average. Some won’t use it at all. Some add buffers. Some only use 80 per cent.
It’s really important that you explore via a broker to figure out which lenders are going to do what.
Best case scenario, just rely on a standard rental appraisal especially for affordability. Serviceability is what the lender will give you. Affordability is what you can afford.
Do your figures based on worst case. Don’t assume it’s going to be the best Airbnb on the Gold Coast and you’re going to be rolling in cash. Assume that it’s going to fail and that you’re going to have to rent it out under a standard lease.
Cash flow, fees and ongoing costs
Cash flow can look really profitable on the surface, but you’ve got to factor in cleaning, management and all associated costs.
On average, around 15–30 per cent of the gross income can go to those fees. Take that off straight away when you’re doing your calculations.
Are you approving and managing communication yourself or completely handing it over to the platform to manage? Are you a super host that gets automatically approved? Is the area seasonal?
In some cases, are you going to lease it out under a normal lease for six months and then convert it over? If it’s a lifestyle property that you’re only leasing for 30 to 60 days a year, you’re probably better off just getting a market appraisal because the average income will likely end up lower.
It’s a case-by-case scenario. You have to look at each one individually.
Risks of Airbnb investing
It is a lifestyle-driven investment unless you make a business out of it and you’re willing to take on risk.
One of the risks we haven’t touched on is another pandemic or some sort of economic factor that’s unpredictable. What happens when you go into a lockdown or something changes and you can’t lease out your place for a significant period of time?
There is also competition risk. Someone else can come in, set up a better property at the same rate as yours, and now you’re competing. Do you drop your prices or upgrade? There’s a constant turnover of new properties coming to market.
There are also compliance and insurance risks, especially if someone leases a property and then subleases it as short-term accommodation. That comes with more compliance and body corporate considerations.
Final thoughts on Airbnb property investment
Realistically, in summary, buying a property as an Airbnb can be profitable. It can be good, but you’ve got to pick the right area and the right price point.
There’s a lot more to it as opposed to just buying a property, throwing some tenants in and setting and forgetting it.
Do your research. Be conservative with your numbers. Don’t just stay in an Airbnb on the Gold Coast, pay a thousand bucks for two nights and think you wish you had one of these.
There’s a lot more to it.
Do your maths. Figure it out. Speak to a broker and work it all out before you commit to anything.