By Frank Newman on 2nd February 2019
In previous columns I have mentioned the rapid growth in short term rentals, and the opportunity it presents, especially in tourist hot spots. The growth in the number of properties listed on sites like AirBNB has been phenomenal. Some of the new listings are property investors converting from long-term tenancies and a fair bit of media attention has been given to the view that this may be contributing to the housing shortage. I doubt that is the case, as most of the properties listed for short term stays are those that are also used by the owners.
However, switching a property from long-term residential tenancy into short-term stays is certainly an option available to landlords.
Essentially the decision to switch is a trade-off between higher rental income and a lower occupancy rate. Every property will have a cross-over point or a minimum occupancy rate that would need to be reached to make short-stays worthwhile. For example, doubling the rent but halving the occupancy leaves you no better off in gross income.
Clearly, some properties will be better suited to short-stays than others. A unique location with beach access or is close to a busy business district for example will be in demand and attract a high nightly rental rate than a one bedroom unit in a provincial town.
Before taking the plunge into short-stay rentals it is worth doing some simple number crunching to see if the required occupancy rate is feasible. Fortunately, the numbers are readily available from the online booking sites. To check out the potential income, have a look at comparable listings in your area to see their nightly tariff and then look at their forward bookings calendar. You will quickly get a sense of their occupancy rate and gross income.
There are however some more things to think about before getting into short-term rentals.
Some say that short-term renters take less care about the property than long-term renters who are more likely to treat the rental as a home. I am not sure this is the case and many landlords can tell you stories that show otherwise. My experience is that short-term renters do respect the property, but it probably depends on the type of clientele a rental attracts. It is however worth being aware of this potential risk.
Another downside to consider is the increased costs. Furniture and furnishings, linen, and kitchen ware need to be provided. That’s an upfront and ongoing replacement cost to factor into the equation. Then there is the cleaning cost, generally after each stay, and lawns and gardens to look after, and some local councils also want to get in on the act and help themselves to your gains in the form of increased rates.
And then there are the tax matters. There will be additional accounting and compliance costs, especially if the mixed use asset rules apply as there needs to be an apportionment between private and business use. But the tax issues do not end there. A short-term holiday rental is a taxable activity for GST purposes. Therefore, the ordinary GST rules apply.
GST registration is compulsory if the total rental income is greater than $60,000. Registration is voluntarily if the revenue is less than the $60k threshold. Long-term residential rents are not subject to GST.
A taxpayer can of course claim GST on the expenses so all is not lost, but losing 15% of your gross income will affect the trade-off equation mentioned above.
Most short-term rentals fall below the $60k level so GST would not be an issue unless one chooses to register, or if the taxpaying entity has other business income that when combined takes them over the $60k limit.
The GST issue does get a whole lot more complicated because it also extends to include the capital value of the property. This creates the opportunity to claim GST when the use of a property changes from residential to commercial, which is great for cash flow, but it also creates the liability that GST will be payable when the property is sold (unless the property is sold as a going concern to a GST registered purchaser), or if the use changes back to residential. Serious sums of money are involved in these cases so it pays to proceed down this path with caution and only after taking advice from someone expert in these tax matters.
Having outlined these negatives, there are cases when switching a long-term residential rental into short-term stays will be beneficial. I suspect however that will be the exception rather than the rule. I think it is more likely that this will appeal more to those who have a property with spare rooms or a property that they do not occupy all year round.