Can you justify investing in Airbnbs amid a national rental crisis? With the national vacancy rate at an ultra low, the shortage of rental supply has sparked a heated debate. Are investors exacerbating the problem by using properties for short-term lets?
This article has been republished from the Your Investment Property digital magazine.
Once touted as a simple alternative for holidaymakers looking for cheaper accommodation, the rapid rise of Airbnb and short-term lets nationwide has reshaped housing opportunities throughout private markets. No longer are property investors restricted to the traditional means of long-term rentals as investment vehicles to achieve their own version of the great Australian dream – yet some are hoping that could soon change.
With the noise growing louder, local councils and state governments are beginning to listen. In the past year alone, Byron Bay, Greater Sydney, and Newcastle have imposed 180-day caps on short-term rentals, while landlords in Brisbane who rent out their entire property for more than 60 days per year are being forced to cough up 50% more in council rates.
PRD Chief Economist Dr Asti Mardiasmo noted that in this increasing cash rate environment, investors cannot be blamed for looking to utilise the short-term rental market.
“[Investors] can negatively gear to try and ‘make up’ for costs, however, mortgage rates change on a monthly basis. Body corporate, urban utilities, and council rates are not a once-a-year cost either. So in a way, if the goal or ‘Australian dream’ is to utilise property investment as a road to a comfortable retirement, who can blame them?” Dr Mardiasmo told Your Investment Property magazine.
“The ethical question comes from the social responsibility side of looking out for one another and working together as an economy, as opposed to the ‘us vs them’ debate between landlord and renters.
“That said, some councils are cracking down on Airbnb owners with higher rates. So one can argue that Airbnb owners are paying their dues.”
Research conducted by the Australian Housing and Urban Research Institute (AHURI) back in 2018 revealed that the impact of rental housing being removed from long-term rental to the short-term letting market (e.g. Airbnb) has been a factor in worsening vacancy rates, but generally only in specific areas.
“Short-term let platforms like Airbnb are probably not significantly worsening rental affordability across our major cities as a whole, but are having an impact on the availability of rental properties in high-demand inner city areas with significant tourism appeal,” the report read.
“In these areas, two main factors— decreasing bond lodgement rates and increasing levels of property vacancy— point to the likelihood that short-term lets are removing properties from the long-term rental market.”
To put the number of short-term rentals available across Australia into perspective, UQ Economic and Urban Geographer Dr Thomas Sigler revealed approximately 270,000 unique properties were listed in 2022, equivalent to less than 1% of all housing stock.
“Approximately half of these are ‘professional’ listings, meaning that the host has multiple properties. Approximately 80% of the listings are ‘entire homes’, with the rest being shared rooms or private rooms,” Dr Sigler told Your Investment Property magazine.
“However, this only takes into account those listed on short-term rental sites like Airbnb, as there are many more shared rooms and private rooms on sites like flatmates.com. This also includes many dwellings that were purpose-built as short-term rentals such as beachside units.”
In the case of Airbnb, Dr Sigler notes it’s important to understand not all property ‘hosts’ on the platform are in fact, property investors.
“A cap would temporarily alleviate some of the supply issues, but it is worth bearing in mind that only about 1% of the housing stock in capital cities comprises dwellings that could be ‘converted’ from short-term rentals to long-term rentals,” he said.
“If they were—where would short-term ‘tenants’ actually go? Hotels are inadequate for certain types of stays (e.g. longer than a few nights), and cannot accommodate mega-events (e.g. conventions, festivals, sporting events). Policy regulation is certainly needed, but should take into account the needs of all parties involved, including owners, short-term tenants, economic development objectives, and neighbours (communities).”
Salvest Founder Anthony Ferraro echoes this sentiment, anticipating the government will step in to change the rules and regulations moving forward, especially as we will see a spike of foreigners landing on our shores.
“As an example, say Mr and Mrs Smith have a vacant room at the back of their home and look to use this as a ‘long-term Airbnb’. Where do foreigners with no bank account, credit, or leasing history in Australia get a rental property? They turn to Airbnb,” Mr Ferraro told Your Investment Property magazine.
Host of Pizza and Property Podcast Todd Sloan said one of the important things to consider when looking at investing is how many Airbnb accommodation places are on the market, specifically focusing on if they are holiday homes or simply have a ‘spare room’ being rented out.
“There are actually far fewer properties on the market than others would have you believe,” Mr Sloan told Your Investment Property magazine.
“This also leads to a larger issue – if we start telling property owners and investors how they can and can’t rent their property, this opens a Pandora’s box of control the government then has over everyone’s property.”
What to do when investing in Airbnbs and short term lets
Speaking to Your Investment Property magazine, 10 Properties in 10 Years CEO Goro Gupta has identified dos and don’ts for investors looking to utilise Airbnb or short-term lets for investments.
Dos
- The type of house is important. You have two choices:
- Apartments in high-traffic locations – these can be good, but as a property owner may not be the best investment, and you risk competing with hotel rooms, which may be easy or hard, depending on location.
- Luxury villas/homestays – this is my preferred type of investment, as you don’t take away rental stock from people that need it, and fill a space in the market in which hotels cannot compete. However, you have to factor in somewhere between $30-70K for furnishing costs in the house.
- Get a top-quality and experienced manager. Most good Airbnb hosts meet the guests onsite these days to give them a warm reception to their temporary new home.
- Have all the mod-cons of home away from home and don’t be afraid to spend on the smaller things like coffee machines, high-quality cutlery, etc.
- By focusing on the type of tenant you want, you can curate the experience for them – then and only then the money can come in. By trying to do what you think is minimal/right/highest profit, you risk the strategy falling into a heap. Step into your tenant’s shoes, and fill their experience with joy, and then the money will come in as part of this process.
What not to do when investing in Airbnbs and short term lets
Don’ts
- Don’t take away housing stock from the existing market, eg. a 4 bed 2 bath in a location which is typically for mum and dad owner occupiers – this is not the right place for an Airbnb. It is better to rent these properties long-term to families, as Airbnbs like these have a twofold negative impact:
- They take away from desperately needed housing stock for families.
- They’re more likely to be trashed at a party, as most of these are in outer suburbs – we have all seen the horror stories on the news.
- On days these are empty, they’re more likely to be broken into. Not a good look for the property itself or the neighbourhood in general – prevent crimes of opportunity.
- Don’t try to manage it yourself – unless of course, you want another part-time job after hours. Between cleaning, meeting residents, and fixing things – it’s a challenge.
Beyond Airbnb: Alleviating the rental crisis
To ease the boiling pot that is the current state of the rental market, Dr Sigler believes an increase in supply and de-financialisation are two methods that could benefit.
“Many inner-city areas are zoned for low-density housing, precluding anything else like townhouses or duplexes from being built,” Dr Sigler told Your Investment Property magazine.
“This creates an artificial void of developable land, meaning single-family dwellings must continue to be built on the urban periphery to satisfy demand. There are many suitable inner-ring and middle-ring suburbs that could easily be densified if it weren’t for outdated zoning policy,”
Of the same view is Salvest’s Anthony Ferraro, noting government policies should be reviewed to ensure they are not inadvertently contributing to the rental crisis such as overly restrictive zoning regulations that reduce the availability of new rental properties.
De-financialisation is another solution proposed by Dr Sigler, yet one he believes is unlikely to happen given it is political suicide for any legislator.
“That said, prices are kept artificially high by the generous financial benefits owners receive. This includes negative gearing, but also the capital gains tax rules which are different based on whether you live in the house or not, and how long you’ve owned it.
“If housing were treated as a social good like it is in Scandinavia, then we wouldn’t be in this mess. But at the end of the day, property is Australia’s main wealth generation mechanism and the current system is too lucrative for too many people to change.”
Echoing this sentiment, PRD Chief Economist Dr Asti Mardiasmo believes the key is to not put all our eggs into one basket for a ‘quick-fix’ approach.
“We need a multi-layered, multi-front attack approach,” she said.
“This includes a mixed method between targeting existing investment properties, creating new supply in the form of different types of dwellings using different methods, and repurposing some of the assets we currently do have that are not in use, for example, COVID isolation facilities or unused university buildings.”