Why the new state taxes won’t kill Airbnb

The NSW government has just closed its entries for people wanting to comment on changes to short-term letting laws.

One proposal has been a limit on the number of people who can occupy a rental property at the one time – supposedly ending the blight of the party flat.

The state is also likely to follow Victoria’s lead is bringing in a 7.5% tax on holiday lets.

The idea, in both states is to get more holiday rental properties back into long term rentals to help ease the housing shortage and, in Victoria’s case, provide $70 million to be put into the construction of affordable homes.

“Every part of the housing market is under the microscope for options to encourage a greater supply of long-term rental accommodation,” NSW Housing Minister Rose Jackson told the Sydney Morning Herald.

“The purpose of the discussion paper is to investigate policy levers to help unlock housing supply and affordability. A ‘guest limit’ is just one of the potential regulatory measures put forward by the NSW government for public consideration.”

Back to residential

With Victoria all set to implement its 7.5 per cent impost from January 1, next year, and NSW likely to follow, there are several questions that immediately arise.

And in view of the stated intention to push homes back into the residential rental market, how will this affect the profitability of owning and running holiday lets, will enough properties drop out of the holiday let market to make a difference to the availability of residential rental and will it affect tourism?

Listing on Airbnb may seem like a no-brainer, with holiday lets peaking at four or five times the level of residential rentals. But there are costs – both financial and social – that can make it much less attractive.

This is especially true of apartments where your holiday guests may be very unwelcome due to the potential disruptions they can directly inflict on residents’ lives.

Many owners corporations are beginning to realise that even if they don’t have the voting power to ban holiday lets completely (in NSW), they can make life uncomfortable for the hosts just by implementing the powers they do have.

Hassle factor

And then there’s the hassle factor.  All the experts say successfully running short-term lets requires effort, and that means you have to give up your time and energy or pay someone else to do it.

But first, you need a property to let, usually by buying one although there are plenty of “head tenants” who rent units and put them on the STRA market, often without the knowledge of absentee landlords. So put the cost of your mortgage or rent in the debit column.

Then you have to furnish the property and, depending on the kind of guest you want to attract, that’s going to cost a small chunk for a minimalist approach to a studio or one-bedder, to tens of thousands if you are planning to charge guests top-dollar fees that reflect a high-class fit-out, property and location.

Don’t forget that Airbnb and other holiday sites’ online reviews can be brutal, and if you have promised a palace but provided a pigsty, the world will know about it within seconds.

Handy guide

The website Floorspace.com offers a handy guide to what you will need and you can even download a spreadsheet that you can use to calculate your likely outgoings.

Once the furniture is in, and the basics for living have been installed, there’s the question of who is going to manage the property.  Are you in a position to change the sheets and towels, clean the place between guests and hand over and collect keys (although the latter is often done remotely through key safes and entry codes)?

If you don’t have the time or inclination for hands-on management, hiring a specialist company to do the heavy lifting can cost between 10 and 20 per cent of your rental, usually based on what you charge the guests, according to Hostaway, an international company that provides holiday rental management software.

Holiday lets are highly seasonal, so the same apartment that can rake in windfall rents during peak periods can lie empty when winter rolls in, so that five-times multiplier certainly isn’t guaranteed.

If you decide to switch to residential rentals during your “off” season, you probably need to put all your furniture, appliances, bedding and kitchenware in storage for the duration.  That’s another cost in both finances and the hassle factor.

Highest demand

Alternatively, this is where you might want to use the place when it’s otherwise vacant. But be warned, many hosts who planned to allocate a few weeks a year for friends and family stays, discover that the times they want to be there are when their properties are in highest demand from paying customers.

Not only that, they can’t (or shouldn’t) claim tax deductions for periods when the property isn’t actually available for rent.  Apparently the ATO is checking availability calendars to keep the hosts honest. Which brings us to negative gearing, which can diminish a lot of those figures in the debits.

So will these taxes push more holiday lets back into the residential rental market, improving affordability and availability? Some critics say that the kind of properties that are let as STRAs are beyond the reach of those struggling to find a home, anyway.

But there must be a trickle-down effect; people will live in the best place they can afford and if only marginally viable properties drop out of the game due to the proposed taxes, that’s still more options for permanent residents.

A 7.5 per cent tax on holiday lets won’t solve the housing problem but a serious look at what properties can qualify for negative gearing might.

By the way, I sent a series of questions about the economics of holiday letting to Madecomfy, one of the largest, if not the largest company managing holiday rentals for hosts.  They agreed to have a look and respond withing a couple of days. That was two weeks ago. Since then, nothing.