What's best for your investment property? Holiday accommodation or long term rental

Not all properties are created equal. Some are better suited to holiday accommodation vs being a long term rental.

what is holiday accomodation?

We define this as properties which are run similar to a motel or hotel. The guests pay a nightly rate and typically stay only for a few days or perhaps one week. Their fees cover everything involved with providing the accommodation including power, gas, internet, furnishing, linen, cleaning, maintenance, and usually consumables such as soap, shampoo, coffee, tea etc.

What is a long-term rental?

A long term rental is a property that is occupied by an individual or group (e.g family or flatmates) for a set period of time as outlined in an official ‘tenancy’ agreement. The owner of the property is paid ‘rent’ by those living at the property, at an agreed frequency. In New Zealand this is typically weekly or fortnightly, although sometimes monthly arrangements are agreed to. Those renting and the owner are both protected through legislation, and have guidelines to follow to keep the relationship positive.

7 key differences between Airbnb and long-term rentals

There’s a lot of differences between operating a short term booking property and long term rental. Let’s cover 7 of the most common below:

Duration of stay

Depending on our circumstances, we may need a place to stay for a week visit, or something more permanent. While Airbnb’s model is for travellers primarily, there are instances where locals book Airbnbs - such as when they have renovations done on their home or are looking for the right rental and need a stop gap. As a property owner, you’ll have quite a different job as an Airbnb host vs. a long term rental property owner. In fact, with an Airbnb, there may be many instances where you never even meet guests.

Airbnb stay duration:

  • Short-term

  • Fewer steps to accepting the stay.

  • Flexible - cancellations and changes are common.

  • Less risk with unfit guests as stay duration is short.

  • Long-term rental duration:

  • Guests are there for the long haul.

  • Less flexibility but more stability for both parties.

  • More details to go through when confirming who will occupy the property.

Admin time

Speaking of details, the admin involved in Airbnb vs. a rental property is quite different - although both do require an investment of time. Owning an investment property has the operational costs and admin, on top of standard expenses of home ownership. Running an Airbnb comes with a regular admin component, fielding bookings, enquiries and reviews. You may also have time involved cleaning unless you have a cleaner arranged. And then there’s any property maintenance to keep it in shape for every guest. For a long-term rental, there is the upfront admin of securing a person or group into a tenancy, but there’s also regular admin of rent collection, property maintenance, inspections and fielding questions from those living at the property. As this can take up a fair bit of admin time, many opt for a property manager to take care of this for you.

Airbnb admin time:

  • Accepting and managing bookings

  • New, different visitors frequently

  • Cleaning

  • Maintenance

  • Reviews (of guests and responding to your own)

  • Updating the property listing on Airbnb

  • Long term Rental admin time:

  • Confirming a tenancy agreement

  • Inspections

  • Property maintenance

  • Support and communications with occupants

  • Rent collection

  • On call

  • Avoidable with property management

Running costs

The cost of an investment property shouldn’t outweigh the returns you get from it. Both Airbnb and Long-term rentals have been profitable models, with the former currently experiencing some turbulence from Corona Virus. An Airbnb has a great number of guests throughout the year, requiring cleaning fees (unless you’re a DIYer). Then Airbnb owners have the repairs or replacement of chattels expense to factor in. The price of stay can be adjusted to cover costs if these change, although hosts need to be careful not to price themselves out of consideration.

A long-term rental also comes with running costs from the initial marketing of the property, to the ongoing maintenance to ensure it’s comfortably liveable for those renting. Running costs will also extend to insurance (as with Airbnb). Then there’s the time cost of doing inspections or fielding questions about the tenancy or rent. If your time is money, you can quickly sink a lot of time into a rental that you might not get back. That’s why a property manager is a good option - you have controlled costs, and win back your time to spend on other things.

Running costs of an Airbnb:

  • Cleaning

  • Repairs

  • Maintenance

  • Commission from Airbnb

  • insurance

  • Flexibility around per night pricing if costs change

  • Running costs of a long-term rental:

  • Marketing the property

  • Time finding the right person or group to live at your rental

  • Repairs

  • Maintenance

  • Property management time

  • Insurance

  • Petrol costs (going to and from inspections or other calls)

  • Property Management Agency costs

Legal and tax implications

There is some compliance you’ll need to keep to running an investment property. For an Airbnb, you will find that short term accommodation such as this is subject to GST and other income tax implications, depending on a number of factors. We’d suggest speaking to your accountant about what your responsibilities are here.

With a long term property, you’ll not only have income tax to think about, but some legal obligations with regards to being a rental property owner, too; recently the Healthy Homes Standards, along with the Residential Tenancies Act.

Demand

The demand for an Airbnb is different to a long term rental, especially in mid-2020 with a greatly-reduced tourism industry. In normal circumstances, an Airbnb’s demand would be seasonal. Which season, depends on where it is - if you have an Airbnb in Ohakune for instance, you’ll likely see a spike in the middle of Winter. A beach house in the Coromandel? Summer’s going to be the high season. For some areas of New Zealand like Queenstown and Rotorua, year round tourism helps to keep a steady flow of guests. Again, this assumes the tourist accommodation demand recovers to the same level as pre-COVID-19 in the not too distant future.

Demand for rentals in New Zealand has been a widely publicised story for many years. With a growing population, particularly in urban areas, Kiwis are looking for rentals more than ever. A rental property doesn’t just yield additional income, it helps increase supply into a market that needs it. Auckland and Wellington are two cities where renters can compete with many others for a property. In small towns, the competition is not as high.

Airbnb demand:

  • Greatly reduced due to COVID-19.

  • In normal circumstances it will spike during a season depending on location.

  • Some areas get year round bookings.

  • Influenced by the town’s tourism and events.

  • Long term rentals demand:

  • Depends on area, but broadly demand outstrips supply in NZ.

  • Wellington and Auckland require more rental properties to be available for a growing population.

  • Types of properties in demand vary depending on the location or demographics.

Tenant screening/control

On the guest or tenant screening side of things, these two types of properties are totally different. Airbnb’s online platform uses a two-way review system that allows guests and hosts to rate their experiences of each other. Over time, guests will build their history and can enjoy quicker booking confirmations. Hosts/properties with good reviews will show up more prominently on the website’s search results.

A long term rental requires a much more stringent process by the renter and the owner to make sure the property and tenancy is right. Property owners will have to hold viewings, interview a number of potential occupants and do reference checks. Those looking to rent will also need this time to get to know the owner and the property to make sure it’s a good fit. Finding the right tenant is one of the more time consuming parts of the upfront rental process, and that’s why many opt for a property manager to do it for them.

Airbnb screening:

  • Online

  • Review system

  • Less long term risks

  • Long term rental screening:

  • In person

  • Done over a longer period of time

  • Requires reference checks

  • Will meet a number of potentials before deciding

  • Viewings

  • More of a relationship than a transaction

Insurance

No matter what way you operate, your home will need insurance. This will often extend beyond the home itself, and into liability insurance to cover damage to other properties. An Airbnb is often furnished, so for these properties, contents insurance is essential. Some long-term rentals are furnished, but most will be empty, negating the need for contents insurance.

If you own a home, you need insurance. Speak to a broker or your existing insurer before you start the purchase and rental process. If you need advice on who to talk to, Quinovic can point you in the right direction.

If you’d like to discuss this with me personally, don’t hesitate to contact me directly:

Rueben Skipper
rueben@dunedinpropertymanagement.co.nz
+64 22 6386784

Rueben SkipperDunedin Property Management