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Taking the Long View of Short-Term Rentals

As New Zealand’s tourism industry gathers momentum is this the perfect time to invest in the short-term rental market?

8 March 2023

There are some major advantages to offering Airbnb-style rental accommodation – you still get to stay in your house, you’re not bound by the rules of the Residential Tenancies Act, and you can make serious money in a busy time.

But there’s also more work involved, with intensive customer service required to meet the needs of travellers, high demands on cleaning and the sometimes brutal process of being reviewed online for every stay. Your costs are higher and your tenants are demanding, yet if you can get it right the rewards can be well worth the effort.

Demand high, supply down

Covid had a major impact on the short-term rental market, explains Madeleine Parker of AirDNA: “When borders first closed in 2020, supply also dropped off as many properties were either rented out long-term, sold, or became primary residences. As demand has been slow to return to New Zealand, supply has still not returned to its pre-pandemic levels in these markets.”

Since borders reopened, bookings have spiked, with demand up by 228 per cent in Auckland and 226 per cent in Queenstown, although Parker notes supply “remains cautious”. Property owners burned by pandemic lockdowns are not re-entering the market in the same numbers, which may present opportunities for others to cash in.

Should you list the family holiday home?

Many Kiwi families have a holiday home that dates back to the days when property was cheap. If your parents or grandparents have a bach or crib that doesn’t get a lot of use, could you turn it into a source of income?

Sue Hutchinson lives in Picton, but owns a house in Auckland so she can regularly visit her children. For some time it was uninhabited, until she listed it with The Stay Hub, and since then it’s available to rent whenever she’s not using it. When Hutchinson arrives to stay the house is clean and the beds have fresh linen, which she loves – and the bookings also provide a helpful source of income for her retirement.

“I get just what a guest gets,” she says. “I love it – it feels so luxurious. It’s also a real thrill to see it earning money, which was more than I could have imagined. There’s all sorts of maintenance issues I don’t have to worry about because those are taken care of. I am very pleased with this efficient type of rental, I just wish I’d discovered it earlier.”

The guest essentials: clean, good bed, fresh linen

Although Hutchinson’s place is modern and well appointed, even a more dated property can perform well on the short-term market when managed well, says Rex Demanser, revenue and operations manager at The Stay Hub.

“Those properties you might call ‘rustic’ can go very well if you sell them accurately. They won’t be for every customer, but if you resolve any big issues before you list it, that will help. A good bed is very important, and we insist on a linen package that protects all mattresses and pillows to guarantee hygiene.

“You don’t want to muck around with the bedding; as you can imagine a good night’s sleep is important for any guest. So is cleaning – a house can be old, but it’s got to be clean. All our properties are deep-cleaned before being deemed guest-ready, with every surface checked and a steam clean of furniture.”

You can manage your property yourself, but it’s labour intensive – far more than a traditional tenancy. You can expect calls or texts late at night asking where the TV remote is, or to tell you the shower handle has fallen off or the power is out. It’s effectively a part-time job.

If you hand this over to a management company the standard fee is around 20 per cent of the nightly rate, plus GST. A good manager, though, should raise your occupancy rate and your nightly average price, which helps cover the extra cost.

Rates of $200 to $400 a night

Some markets are year-round, like Auckland, Taupō and Queenstown. Others are highly seasonal, like most beach hot spots and ski towns. The Stay Hub operates in Auckland and sees huge occupancy rates: around 80 per cent for three-bed houses with an average nightly rate of $348. A few standout properties really demand top dollar, with multi-million-dollar homes usually having lower occupancy rates but attracting rates of up to $5,000 a night.

In comparison, tiny Ohakune is mainly busy in the ski season and at the height of summer as people stop on their way up or down the North Island. Occupancy is around 70 per cent, with nightly rates for three-bedroom homes typically around $300 in winter and $150 in summer, says Chayla Beaver, business manager at Ruapehu Chalet Rentals. Owners can expect “lumpy” income, with good results in the ski season and bookings scarce in spring and autumn.

“Over the past three or four years we’ve seen a massive increase in guest numbers coming through the town,” she says. “We think part of that is Tourism NZ telling people to get out and try something new – this is quite a low-cost summer holiday option for families. Over that time we’ve had struggles in the winter with lockdowns, an avalanche and a few issues, but we’re quite resilient; we’re confident that with a good amount of snow we will have a successful season.”

Beaver says the basics apply to all the houses she manages: they need to be spotlessly clean and meticulously managed to get the best rates and the most bookings. Spa pools and views are drawcards, along with lockable storage for mountain bikes and ski gear. Owners need to be ready to deal with problems that can crop up in the downtime when a house might be empty for a month or so – a water leak, for instance.

“If you don’t check on your house regularly, if it’s vacant for a few months it might have issues that mean it’s unusable when the guest arrives,” she adds. “We’re only five minutes away, so we check in on houses and owners really appreciate that.”

Could you achieve positive cash flow?

You’ll get a lower income in a seasonal location, but prices will often be lower too. If you find the right balance it’s possible to be cash flow positive even with the management fees taken into consideration. Taupō, for instance, is more affordable than Auckland but maintains high occupancy, and a house there can potentially cover a 60 per cent mortgage and all its regular outgoings on short-term rental income.

An older two-bedroom townhouse in the centre of Taupō, with a purchase price of $580,000, could bring in between $4,000 and $6,000 a month ($60,000 a year). The management cost will cut that to around $48,000 a year, plus you need to meet costs a long-term tenant might typically incur: power, water and broadband, plus any gardening or other maintenance. That might soak up another $1,000 a month. A 6 per cent 30-year P&I mortgage will cost around $25,000 a year, plus $3,000 a year in rates and perhaps another $2,500 for insurance.

That would bring your profit to $5,500 for the year, which will drop into the negatives if there’s a lockdown or potentially see a surge in a boom year. If you can squeeze a couple of holidays out of the house, that will give you some extra value, but every time you take a holiday in the peak season you miss out on the income that you might otherwise generate, so you need to weigh that up.

Buying for Airbnb?

Could you buy an existing house specifically to rent out? There are some hurdles, particularly around lending and insurance. Banks do not have a clear policy on considering short-term rental income, and may dig their heels in over this issue. You’ll need to do your research on this before you buy – talk to your broker. Expect questions from your insurer, too.

As for buying the right property, you’ll need to think about your target market. Airbnb and AirDNA are great sources of data on local markets, and local managers will be able to give you some pointers.

“You want a place that’s clean and tidy, multiple bedrooms and a couple of bathrooms – family orientated,” Demanser says. “Anything with a view or a spa pool will be a selling point. You must maintain and manage it very well. A property doesn’t have to be super-high class, but it does have to be well-maintained and clean. Most important of all, whoever manages it needs to be extremely responsive to any guest questions or queries, day or night.”

If you do have a holiday house that’s underutilised this could be the perfect time to get it ready to go on the short-term rental market. For an investment property it’s also an appealing option if you can iron out the challenges and choose the right house. As usual, you’ll need to do your homework and get the right advice to maximise your chance of success.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.


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