To Airbnb or not to Airbnb

It's difficult to go past the income you can earn from renting your property via short-term accommodation platforms such as Airbnb, Booking.com, and Vrbo (Vacation rental by owner, partner of Stayz).

In fact, it's not unusual for properties to earn more in one night than they would over an entire week on the permanent rental market.

Understandably, this can be very tempting for investors looking to maximise returns on their investment properties over standard 3-4% yields.

But reaping rental returns via short-term letting platforms is not as simple as taking some nice pictures, listing your property, and hoping for the best.

Before we get into the nitty-gritty of whether your investment property - or properties - could cut it in the short-stay rental market, let's take a brief look at the rise of online short-term letting platforms.

Short-term accommodation is certainly nothing new, particularly in traditional holiday markets. However, its wide availability through global online platforms has only been around since 2012. Initially, these platforms were a way for people to rent out spare rooms in their homes to travellers, but now almost exclusively feature entire houses or apartments.

They also provided thousands of mum and dad property owners a vehicle to offer their homes or investment properties for short-term rental, often earning far more than they could on the permanent rental market.

Many are managing their own short-stay rental properties, sometimes with the help of cleaners and linen services, and maybe local 'hosts' who liaise with guests and are on-call should any issues arise.

But the industry is evolving. Just as markets have become more sophisticated, so too has the short-stay business model, with thousands of symbiotic businesses springing up globally to offer their services for a cut of the profits on offer.

One such business is Hometime, an Australian-owned Airbnb property manager that offers the full gamut of services nationally, including home styling, professional photography, cleaning and linen, listing optimisation, guest management, and, most importantly for property owners, revenue building.

More than a bed for the night

In almost a decade in the industry, Hometime has learned a thing or two about what makes a home successful on the short-stay market. And when you're talking property, it's not surprising the most important factor is location, location, location.

"Basically, you need to be in a location where people want to visit because it always comes back to that supply-demand curve," Hometime's head of sales Shaun Craike told Your Investment Property Magazine.

Shaun Craike, head of sales at Hometime (Image supplied)

"If we look at somewhere like the outskirts of Melbourne, it's not somewhere with a whole lot of visitors travelling at any period of time. So, while there are fewer Airbnbs in that area, there's also not a whole lot of demand.

"Whereas, if you look at the Gold Coast, say, somewhere like Surfers Paradise in particular, there's just a crazy demand throughout the year of people travelling internationally and domestically to visit that area. That puts upward pressure on prices, and that's where you get your really good yields and really good returns."

As a general rule, properties in year-round tourism markets, near business or corporate centres, and close to transport links tend to perform well on short-term accommodation sites.

But even then, outsized yields are not guaranteed, according to Mr Craike.

"There are certain markets where the long-term rental income is very comparable to short-term rental income once you factor in the different shorter-term accommodation fee structures and all other expenses.

"Take Melbourne, for instance, or Sydney. At a glance, it can look like the short-term markets are way more attractive than the long-term, but by the time you crunch the numbers, a lot of the time, they're among a big cohort of properties, and it can be a similar sort of yield return."

As a general rule, short-stay accommodation platforms take a 15-20% cut of the rental income generated, depending on the platform and its fee structure. Add in costs for cleaning, linen services, paying hosts or managers, maintenance between bookings, and utilities, and yields can drop considerably.

Then there is the all-important factor of occupancy.

"Seasonality is a big one, particularly in certain locations like coastal markets or even somewhere like Thredbo, the winter markets, that perform really well for three months of the year when the snow season is on.

"You could look at that short period of time, and the income made over that time is astronomical. But then the properties will sit vacant for the following six to nine months."

"Sometimes this can work if the owner wants to use the property too. But if their motivation is just about chasing yield, they could end up doing quite terribly on the short-term market and might be better off on the long-term rental market, and we'll tell people that," Mr Craike says.

He says Hometime consultants spend considerable time determining what property owners want to achieve by listing their homes on the short-stay market to assess whether it's the right move for them. Sometimes, even if properties are situated in hotspot markets, success can come down to specifics.

"It not only depends on the location, but where the property is situated at that location, then the property itself - how it presents and its facilities."

In some locations, these can be big-ticket items. In North Queensland markets, for example, having a pool is almost essential to short-stay success. Mr Craike says properties without them are generally better off in the long-term market.

But attractions that differentiate your property from competitors don't have to be expensive or flashy.

"It might be a collection of board games. Maybe it's a pizza oven. Maybe it's eskies and picnic blankets that people can take to the beach. Just something that differentiates your property from the masses."

Mr Craike likens the short-stay booking process to online shopping.

"If you're renting a property on the long-term market, or if you're selling a property, traditionally, the tenant or buyer will turn up and inspect the property before they commit to it. Whereas the short-term market, whenever you book a holiday, you're just purely online shopping at that point in time and buying based on what you can see online."

That's where furnishings, home styling, and the quality of photography can be critical - all services Hometime provides.

"Furnishing properties can be a pretty big barrier to entry, and ideally, the cost should be kept proportional to the price of the property," Mr Craike says.

These set-up costs also need to be factored in when comparing short-term and long-term returns.

After nearly 10 years in the business, Mr Craike says Hometime has built a very effective data pool and routinely provides advice to hundreds of property investors a week on locations and types of properties that will be most successful on the short-term rental market.

This data can also provide valuable information on pricing, another factor that can be critical to short-stay success, according to Mr Craike.

"We see a lot of self-managing owners set their price at $400 a night. They might get that part of the year, but for the other part of the year, they might be massively underselling their property - or the property is sitting vacant," he says.

"The data can help people be dynamic with their pricing, adjusting to demand and other factors, which can help them increase their returns."

Data is king

It seems data is the emerging force in the short-stay marketplace. Already, there are several companies providing sophisticated analytics across global markets whose customers are not only property investors but also institutional players, real estate developers, and global investment firms.

One such company is the US-based AirDNA, which now crunches the numbers daily for more than 16 million properties worldwide in 120,000 markets across multiple booking platforms.

James Kinnersly, sales director at AirDNA (Image supplied)

AirDNA's sales director James Kinnersly says the tools the company provides can be invaluable to smaller-scale investors.

"They let you input any address and instantly see an estimate of what the property could earn as a short-term rental, based on a customisable performance list of comparable listings nearby," Mr Kinnersly told Your Investment Property Magazine.

"Once you're live, you can track how your property is doing against the market, adjust pricing based on real-time demand, and identify underperformance. [We can also] help investors understand which areas offer strong year-round demand and which might be more vulnerable to seasonality or regulation."

AirDNA recently ran the figures based on annual revenue potential in Australia, taking into account 15 performance indicators across all markets with 100 or more Airbnb listings.

Here are the company's top 10 locations with potential for the highest profits in Australia:

*Revenue per available room is a metric that combines the average daily rate and occupancy to show earning potential.

Ready to list? Not so fast

The elephant in the room of the short-term vs long-term rental conundrum is that some properties can be immediately ineligible or unworkable because of regulations.

These can be imposed by local councils, strata owners' corporations, and state governments. In some cases, properties in certain residential neighbourhoods are forbidden to be rented to short-term tenants, while in some towns, homes may only be rented to short-stay guests for limited days per year, taking the gloss off returns.

In the Greater Sydney area, there is a 180-day annual limit for unhosted short-term rentals - or those where the owner is not present at the property. In the Byron Shire, the limit for some properties is 60 days per year.

Many states also require specific registrations or permits. These can depend on how the properties are rented - by room or in entirety - or whether other services are provided, such as breakfasts.

One state, Victoria, imposes a state-wide levy of 7.5% on short-term accommodation bookings while Tasmania imposes 5%. In many areas, local councils also charge annual registration fees.

It should go without saying that the first step in deciding whether to put your property on the short-stay market is researching whether it is permitted in your location and what needs to be done to ensure the property complies with local regulations. Local councils can provide more specific details and guidelines. Airbnb's help centre also provides general information and links to Australian local government websites for popular locations.

While there can be better returns in some short-term rental markets, for those who're seeking to manage their own properties, Mr Craike points out it can be hard work.

"It is definitely not passive income," he says. "It can be very much a job in that it's not unusual for guests to lock themselves out at 11 o'clock at night."

"If you're laundering the linen to change over a four-bedroom house two times a week, it's amazing how many loads of linen that is by the time you include towels and pool towels.

"So, yes, it's absolutely doable to self-manage, provided you live near your property, but what I would say is that it's a lot of work."

Pros and cons of short-term renting

If you're considering whether to put your investment property on the short-stay market, here are a few things to weigh up:

Benefits

Higher yields

Short-term rentals have the potential for higher yields, although this depends on location, the property itself, and occupancy.

Access and flexibility

Putting your property on the short-term market allows you, your family, or friends to use it between bookings. It also allows you to better monitor and maintain it.

Less wear and tear

Properties with short-term tenants may have less wear and tear. As well, any damage or maintenance issues can be attended to promptly.

Downsides

Suitability

Not all properties are cut out for short-stay success. Consider location, the property itself, amenities, access to transport, and year-round demand. Do your research and calculations, factoring in a conservative estimate of a 30% vacancy rate.

Unpredictable income

There are many variables that can affect short-stay rental income: seasonality, local competition, wider economic conditions, and even the weather.

Higher upfront costs

Short-stay rentals need to be fully furnished and well-equipped with amenities. As well, there are costs for photography, marketing, and complying with legal and insurance requirements before any income is earned.

Hands-on management

If you're looking to increase your returns by managing your property yourself, it will involve considerable cleaning and laundering, as well as being on-call for check-ins, guest communications, and any tenant issues that may arise.

Outsourcing costs

If you choose to engage a property manager or outsource other responsibilities, such as cleaning and laundering, this will eat into your rental returns.

Utility costs

Unlike many long-term rental agreements, it will be you, not your tenants, who will be responsible for paying utility costs such as electricity, gas, excess water charges, etc.

Complying with regulations

You will need to comply with all local and building regulations. Many platforms will remove your property from their listings if your property doesn't.

Image by aes on Unsplash