How to make the most of your Airbnb investment

Property News November 7th, 2018
How to make the most of your Airbnb investment

Airbnb describes itself as “a trusted community marketplace for people to list, discover, and book unique accommodation around the world.” For all intents and purposes it’s truly living that statement. Currently active in 65,000 cities across 190 countries and constantly expanding, this £23 billion behemoth has completely taken over the short-letting marketplace.

Before Airbnb began in 2008, a short-term rental could get complicated, often too complicated: advertising, making payments, carrying out viewings, and dealing with disputes… these processes that made running short-lets prohibitive have been simplified by Airbnb, making short letting accessible to the masses.

It’s easy to see why they’ve enjoyed such a meteoric rise, short letting is THE hot topic in property investing at the moment, with many in the UK, London in particular, seeing it as the only viable rental business model in a world where chronic supply shortages and unrestricted international demand have driven house prices to record highs, crushing yields in the process. Consult the website of any Airbnb hosting company and they will likely estimate that you can earn two to three times more from your property by using Airbnb compared to standard rents.


No one can question the opportunity, but how can you make the most of it? With hotels and other pressure groups unionizing to protect their markets, this question is even more pressing; the Airbnb gold rush is unlikely to last forever.


Build trust

One thing that all successful hosts have in common is positive reviews. As with everything that’s driven the sharing economy revolution, the entire premise of Airbnb is built on trust. Why would you invite a stranger or group of strangers from another part of the world into your home if you didn’t trust them? Or more importantly, why would they trust you? That’s why getting positive reviews is of the utmost importance. If you’re just starting out, a few bad reviews can destroy your reputation and cut short your venture. But getting good reviews means more guests and ultimately more profit. And it really isn’t that hard, just common sense and being considerate (put yourself into your guests’ shoes):

 

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1 – Give accurate and honest descriptions and pictures – no one likes a nasty surprise, least of all on holiday;



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2 – Communicate with your guests before arrival so they won’t be wondering whether they can even get in, particularly concerning after a long journey;



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3 – Check in on guests, and at the very least check in after the first night – not just for your peace of mind but to iron out small issues. Most issues only come to light after the first night, like connecting to the Wi-Fi, turning on the hot water, etc. Checking in also shows that you care about their experience;



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4 – Keep it clean – make sure the property is cleaned and ready for when your guests arrive. It’s obvious that clean sheets and a nice smell will have a positive impact, don’t miss out on these easy wins. For longer bookings you should consider offering cleaning services during the stay.


Find the right location

The location of an Airbnb is one of the most important factors for success. Some investors have used Airbnb to take advantage of the differences in the cost of living between countries. The low cost of living in many tourist destinations can be translated to huge returns. In Bali, it’s common to find US expats who have bought a property on the island for the equivalent of a rental deposit in the US, fixed it up and hired someone based locally to manage it on Airbnb, earning a return they could only dream of back home.

 

Similarly, Airbnb investments in Auckland, New Zealand, have proven to work out as great investments, with many hosting companies cropping up in the area. The median price to rent an Airbnb apartment in Auckland is about £100 a night, one of the highest in the world, and the city enjoys high occupancy rates.

Las Vegas is another location for prosperous Airbnb properties. As one of the most popular cities in America for tourism, many come to the city with the intention to spend big and are often happy to splash out on an upmarket Airbnb on the strip. The high earning potential cancels out the transient lodging tax that hosts are required to pay.

 

Be non-seasonal

Many Airbnb’s are seasonal, with peak periods during the summer and few bookings in winter. Peak season earnings of beach houses in Spain or Portugal don’t quite make up for off-season lulls. Instead, properties that are unaffected by seasonal changes, in cities for example, make money all year round and earn higher average returns.

 

Be aware of changes in law

Local laws limiting the number of days properties can be short-let have been introduced in cities throughout the world. Regulators have been spurred by a rise in landlords moving their properties from the local rental market to short-let Airbnbs which largely cater for tourists, leading to chronic housing shortages in some areas.

In Paris, there is a 120 day per year limit on Airbnb hosts. Similarly, New York state has had a long-standing law against all short term rentals, making any rental less than 30 days illegal. Amsterdam is another city particularly affected by the new Airbnb laws; just last year, the city limited short-lets to no more than 60 days a year and recently it was reported that in late 2018 this will be halved to just 30 days.

In 2015, it was announced that Londoners are only allowed to short-let their homes for a maximum of 90 days a year (this can only be extended with council consent). Matt Hutchinson, director of flat-sharing website SpareRoom, said “The 90-day rule is vital as it means London keeps as much of its housing supply as possible for residential, which is so desperately needed.”

Despite potentially hefty fines, many landlords are ignoring restrictions. While Airbnb may comply to local laws by automatically delisting properties that exceed local limits, they cannot regulate other popular short-let platforms. After their stint on Airbnb ends, less scrupulous hosts have switched to other short-let platforms such as HomeAway and Booking.com.

The hosts of a flat in Ladbroke Grove, London, were able to get around the 90-day quota by listing on multiple websites including Booking.com and Airbnb, but after complaints from neighbours, the property was removed from all platforms (with no further repercussions). Thousands more properties in the Capital are slipping under the radar as local authorities simply don’t have the resources to enforce the 90 day limit.

Sadiq Khan recently called for all short-let websites to come together and find a solution which will ensure hosts follow the laws. This has not come into effect yet, and the Residential Landlords Association found that there are still many properties in London listed on several short-let platforms for up to 200 days a year.

Yet, as platforms like Airbnb continue to dominate the short-let market, it’s likely that help will be given to local authorities to ensure these laws are enforced. Currently, failure to adhere in London can result in fines of up to £20,000 and even court action.

 

Be aware of other restrictions

There are several other potential restrictions to consider before making a serious Airbnb investment. A spokesperson for Airbnb said hosts are heavily encouraged to check all relevant regulations: “‘We remind hosts to check permissions and follow local rules before they list their space and throughout the year.’’

For buy-to-let investors using Airbnb, you will need to apply for planning permission from your local council. This will enable you to change your property use class from C3 (Dwelling House) to C1 (Hotels, Boarding Houses, Guest Houses). It means that you can rent out your property for longer than the limit already in place e.g. 90 days in London, certainly worthwhile for hosts who expect short-lets to be their main source of income. However, the process can be costly and time consuming, treatment will vary greatly between councils.

Another major consideration is the terms of your mortgage contract. Many mortgage lenders see renting a property as a breach of their mortgage terms, as it increases their risk of lending which has not been reflected in the existing deposit and mortgage interest rate. It will however depend entirely on who your mortgage provider is, for example Nationwide does not allow a property to be let on Airbnb if it’s the owner’s only residence, whereas Santander will generally allow renting whole properties for a fee.

However, most mortgage lenders will not have a problem if you are simply renting out a room, although they may still request to be informed. HSBC, Lloyds and Santander stipulate being informed, whereas Barclays lets its borrowers have short-term guests without this requirement.

Breaching your mortgage contract could leave you facing a range of harsh penalties – from needing to pay higher interest rates or even having to pay back your loan in full at short notice. However, most lenders indicated they would work with their customers to find a solution. Ultimately, if you want to list your property on Airbnb, you should check your mortgage terms and conditions first, if in doubt, seek clarity from your lender.


Take advantage of tax reliefs

On rental income

Airbnb can make your taxes complicated. In the U.K, Airbnb income is treated as normal income and is therefore subject to income tax at your highest rate. Potential reliefs largely depend on whether the property is also your main residence.

If you rent a room in your primary residence, you will qualify for the Rent-a-Room scheme. As a result, you will get a yearly tax-free allowance of £7,500. It’s important to note that the tax-free allowance does not mean £7,500 off your tax bill, but a reduction of taxable profits. If your gross rent receipts are less than £7,500 in a tax year, you don’t even need to declare this in a tax return as the income is automatically exempt.

If your gross rental receipts are more than £7,500, you have two options:

1 Calculate rental profits in the standard way, i.e. deducting all allowable expenses from the gross rental receipts and pay tax on the net rental profits;
2 Don’t deduct any allowable expenses, but instead claim the £7,500 tax-free allowance.

 

NB. you can’t deduct allowable expenses and use Rent-a-Room relief together.

The second option is generally better if your total expenses are less than £7,500, but of course it all depends on your personal circumstances.

If you own a buy-to-let property which you let via Airbnb, it will likely qualify as a Furnished Holiday Letting* for tax purposes. This means you will escape the newly introduced Section 24 interest relief restriction, which limits the amount of mortgage interest that is an allowable expense against rental income for higher rate tax payers.

On capital gains

There are several capital gains tax reliefs available if you meet the conditions to be a Furnished Holiday Letting. This includes the ‘Entrepreneurs’ Relief’ which means that when you sell your property, the capital gains tax rate will only be 10% instead of the normal 28% for higher rate taxpayers. Another is ‘Rollover Relief’, which means that if you sell your existing Airbnb property and purchase another Airbnb property, you may be able to defer capital gains tax on the sale of the existing property so you don’t pay any tax now.

There are a number of other reliefs you could be eligible for, but it should be noted that with all relief schemes (including ‘Entrepreneurs Relief’ and ‘Rollover Relief’), there are various conditions you need to meet, and so it’s best to consult a property tax expert.

* *Due to London’s 90 day rule, all London properties will not meet the Furnished Holiday Let conditions of being short-let for at least 105 days per year and being available to let for at least 210 days per year. So if you want to qualify for this relief, you either need to get planning permission from your council or buy outside London.

Price competitively (not cheaply)

Charging more may be tempting, but the consequent lower occupancy rates will negate any gains. Just because tourists make up most Airbnbs guests, doesn’t mean they are willing to pay tourist prices. Millennials and Generation Z have been quicker to embrace home sharing than other demographics; over 60% of all bookings on Airbnb have been made by millennials.

The downside is that young people often travel on a tight budget, choosing Airbnb over a hotel for just that reason. For an Airbnb host to be successful, the price needs to match the expectations of the target market and the competition, which isn’t just hotels, but other Airbnbs in the area.


Use property management software

If you decide to get an Airbnb investment, its best to use one of the new generation of cloud-based property management platforms to keep an eye on your portfolio from anywhere in the world. Arthur Online offers one such service, enabling property managers to respond instantly and solve problems fast, be it with guests or hosting agents.

With Arthur Online, the relationship between you and your guests will become much simpler and easier to manage. Everything is accessible on one system, so you don’t have to retain separate records for contractor visits or extra fee payments. Your guests can even communicate with you and track any issues via the free property management apps.


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