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Has The Sun Set On Holiday Rentals?

Has The Sun Set On Holiday Rentals?

With all the talk of increased council rates and compliance for short-term holiday rentals, do they still make investment sense? Joanna Jefferies investigates.

By: Joanna Jefferies

1 December 2018

Location is key when it comes to purchasing holiday rentals, just as it is with long-term properties. Short-term rentals need to be located in places where travellers frequent such as at tourist hot spots; or in CBD areas of main cities.

Low rental yields and high entry price points across the country mean short-term holiday rentals look like a lucrative investment opportunity for residential investors. But moves to tax profits on holiday rentals are becoming more and more frequent due to shortages in long-term rentals for locals and pressure on infrastructure.

Councils across the country have introduced, or are looking to introduce increased rates for short-term rental providers, but in spite of this the number of available properties in New Zealand, currently sitting at around 50,000, is still growing.

In Auckland the number of entire homes available for short-term stays has sky-rocketed from 694 listings in October 2015 to 3,840 in October 2018, according to short-term rental data analyst AirDNA, however the percentage increase has slowed since Auckland Council introduced an Accommodation Provider Targeted Rate (APTR) for web-based holiday accommodation listings last year.

The APTR is applied to properties that book more than 135 nights a year (rated as businesses); those that book between 29 and 135 nights will be rated 75% commercial.

In Queenstown and Rotorua commercial rates are currently imposed on short-term rental accommodation providers under similar structures and other councils including Tauranga, Christchurch and Westland are poised to introduce similar systems. In Queenstown a resource consent is required for some short-term accommodation; and a “bed tax”, which is a user-pays system is also being explored in both Auckland and Queenstown.

Infometrics senior economist Benje Patterson says there are several district plans currently under review, and we’ll get more detail as they are finalised. However, he says not all councils are looking to restrict holiday rentals, in fact some are looking to enable expansion.

“Waipa are a really interesting case – I went to a District Plan hearing recently and they were trying to change their District Plan to make it more enabling.

“Part of it was because the existing settings were too restrictive, but the other side of it was that they realised that Lake Karapiro, with the rowing and Cambridge with the cycling, have big events with thousands of people staying nearby and there may only be half a dozen events a year - no-one in their right mind is going to build a hotel.”

So Where Does Short-Term Accomodation Still Make Sense?

Bookabach’s Simone McDermid says the location of a short-term rental has a huge bearing on its success.

“It’s about looking at where that demand is,” says McDermid. “Our top destinations, which vary on a week by week basis, are usually Queenstown, Wanaka, Coromandel, Lake Taupo, Rotorua and we’ve also seen an increase in our cities – Auckland and Wellington in particular.”

However McDermid says investors need to make sure they understand how local council rates, fees or taxes will apply to their investment and suggests investors contact their local council so they can factor this in to their annual costs.

Impression Real Estate general manager Aaron Tunstall, who runs a property management service specific to shortterm stay accommodation predominantly in Auckland CBD, says he is seeing many short-term rental providers spooked by the recent rates increases.

“They’re not sure exactly how much they will be. There has been up to a 300% increase and it has forced a lot of people out of the market.”

Due to the drop-off of rental providers, Tunstall says he has seen daily rates and occupancy increase marginally and across Impression’s rentals there’s a 75% to 85% occupancy rate.

But investors shouldn’t be put off investing in short-term rentals because of the increased rates, says Tunstall, because they can still be profitable.

“Typically a rate for a central city apartment might be $1,500 (pa), that would go up to about $4,000 to $4,500 (pa) [with the new APTR].”

The APTR is calculated according to the zone that a property is located in. There are three zones and Auckland CBD falls into Zone A, with the highest rate.

Apartment Profit Maker

Short-term holiday rental investor and Zodiak property management director Stefan Nikolic says while the new rates do have an impact on the profitability of short-term rentals, they’re still a great option for investors.

He purchased a one-bedroom unit with his brother in 2016 and rented the property for $475 per week including power. However, once the tenancy ended he couldn’t tenant the property again due to the seasonal nature of the apartment’s location. His costs were $622 per week and he turned to Airbnb to fill the property while it was vacant.

Nikolic says the property was booked quickly, so the brothers decided to stick with the new rental option – “At the end of the last financial year, we managed to pull in a whopping $49,000 in turnover for the apartment, and this was our first full year on Airbnb - that’s an average of $942 per week throughout the year!”.

In Auckland the high season lasts for about six months during which time the price of a one bedroom CBD apartment can easily reach between $180 and $230 per night, says Nikolic.

“The occupancy rate for our apartment during the last financial year was 85%, and this is the perfect occupancy rate to aim for as it means that the price is optimised – if the occupancy is lower than 80%, it means that the price is too high; if it is above 90%, it means that the price is too low.”

The residential council rates for the apartment have risen from $1,253 to $3,759 per year with the new APTR, but even with the extra expense Nikolic and his brother managed to make a profit of just over $20,500 before tax for the last financial year, despite the property being financed at 100%.

To Self Manage Or Not?

Self-managing a short-term rental has its pros and cons. On one hand, you’re not subject to the same tenancy laws as long-term rentals, on the other hand, you’re expected to provide a hotel-like service and the online feedback from your customers will have a big bearing on whether your property is a financial success.

Blair Chappell self-manages his short-term rental and his advice to those looking to invest in holiday rentals is to find a great cleaner, because they will be the one on the ground and will notice if anything has gone missing or if there’s any damage. Chappell’s cleaners charge $45 per clean which includes washing the linen and re-stocking the tea and coffee, etc.

The $45 charge is passed directly onto the guest, who pays the non-optional fee on top of the booking cost, regardless of the length of stay.

Chappell says self-managers should always employ a team of cleaners, rather than a single cleaner, because if one cleaner is sick or busy the property can still be serviced, which means landlords won’t be pulled away from their Christmas dinner to clean their holiday rental.

However, Impression’s Aaron Tunstall says if you self-manage multiple short-term properties the logistics of everyday things such as getting keys to each holidaymaker, or fielding calls late at night about hairdryers can be a nightmare.

Management fees for short-term stays sit between 15% and 25% and are much higher than residential fees because of the increased service on offer.

“But professional managers are set up for it. The [properties] are like hotels, they’ve got laundered sheets, they have all the teas and coffees set up, they have clean fresh tea towels, little tablets for the washing machine, nice bottles of liquid soap and shampoo – things like that – it’s no different to walking into a Quest hotel.”

For investors who are looking to get into the game he says it’s crucial to refurbish the property, and make sure it presents well “because if not, the nightly rate you’re going to get will be a hell of a lot less and the guests are going to come and complain.”

Bookabach’s Simone McDermid says regardless of whether you list yourself or you go with a property manager, the property listing is crucial to attracting your customer.

“The title of your property as well as the copy is so important. First of all you need to think ‘who is my target market?’ If it’s a property on Lake Wanaka and you know that there are lots of families who like to visit year-round, ask yourself ‘how do you make that copy sound more family friendly?’ How do you talk about the features that a family or group will use in your home?”

A picture paints a thousand words and McDermid recommends using a professional photographer to get the right imagery in front of potential customers, because “people will judge you on the quality of these photographs”.

McDermid also suggests looking at your local competitors’ listings for ideas on how to increase your bookings – it might mean installing a spa, improving your images, or offering something special, like a bottle of local wine upon arrival.

Regional Rocket

High entry price points in short-term stay meccas such as Auckland Central and Queenstown mean investors are looking elsewhere for better yields from their holiday rentals.

Christchurch investor Blair Chappell, together with his business partner Matthew Horncastle, have invested in five new one bedroom townhouses a stone’s throw from the CBD, expressly built for the purpose of renting them as short-term accommodation.

Chappell self-manages one of the townhouses, which was completed in September. The purchase price was $390,000 and the dwelling would typically rent for $380 per week (just under $20,000 per annum). But Chappell has had it listed on Airbnb for between $100 and $130 per night since October and it is achieving a 90% occupancy, with bookings right through to March.

“You have to have five, five-star reviews before you jump in the ratings, so it started off at about $80 per night,” says Chappell. “I’ve already earnt $8,000 this year across October, November, December and then for 2019 we’ve only got bookings in January, February, March and I’m already on $7,000 on earnings. If you extrapolate that out with seasonal adjustments I reckon it’s got to be better than $25,000 [per annum].”

Chappell’s projections are conservative, considering that one of the Airbnb townhouses finished in June achieved a 75% to 80% occupancy through the July, August, September months – which is typically the off-season in Christchurch.

“I don’t think the low period is as bad as people portray it when you have prime CBD properties.”

Location is crucial to a property’s success, as is property type. Chappell says he and Horncastle chose one bedroom townhouses specifically because they’re unlikely to have issues with guests having parties, which can be one of the risks of letting short-term.

Maintenance should always be taken into consideration with short term rentals, as the wear and tear on walls and carpet with frequent arrivals and luggage can take its toll quickly; Chappell says keeping maintenance costs to a minimum was another reason he chose a small footprint.

Investors looking to invest in short term rentals need to assess the qualities of potential properties the same as they would any other property, including accommodation zoning for rating purposes, location and suitability. “If you are going to do short-term accommodation you need to treat it as a business,” says Chappell.