Holiday and short-term rentals: Do the finances stack up in a real life case study?
Recently, we identified new ways to rent out your investment property, via the likes of Airbnb. Though this strategy will not work for every property, there is clearly opportunity to be had in renting your apartment with this approach.
Property Correspondent has since contacted a friend who has shared some top line stats of his experience.
Is it worth it?
We asked our friend, who owns a modest two bedroom unit in the inner west of Sydney (within 5 kilometre access to the CBD; Balmain area) about his experience with his unit because he’d rented it out in the tradition way for a number of years, before converting it to an Airbnb property recently.
Here’s some rough apples-for-apples comparison numbers for his first year of operation:
Pre-Airbnb:
Rented on a standard lease at $620 per week: $29,760 annually
Real estate agents’ management fees of 6% of rental revenue: $1,785.60 annually
Maintainance & repairs allowance: $1,500 annually
Total actual revenue: $26,384.40
Post-Airbnb:
This example assumes an average of 5 out of 7 nights per week of rental occupancy.
There were several initial up front costs:
Initial cosmetic ‘light’ renovation (simply paint and new carpets) – $1,400
New furniture (master suite, 2nd bedroom suite, washer/dryer combo, ironing equipment, kitchen cookware, utensils, fridge, lounge, coffee and dining tables, side tables, art/decoration, TV/AV/Internet facilities, linen) – $7,600
Security key installation – $110
Then there are administrative running costs that needed to paid on a regular basis, so I’ve calculated these as an annual figure:
Airbnb listing costs (nomimal): $100 annually
Housekeeper costs: $200 per week, so $10,400 annually
Maintainance products (Cleaning products, soaps, shampoos, handwash, toilet paper, kitchen towel, perhaps a welcome gift each time. My friend joined Costco for about $50 and buys all of this in bulk once per quarter): $3,800 annually
Property maintainance and repairs (Year #2 onwards only): $2,500 annually
Nightly commandable rent rate: $230
Total rental revenue ($215 x 260 days): $59,800 annually
Total annual expenses (Year #1): $23,410 annually
Total net revenue (Year #1): $36,390
Total net revenue (Year #2 onwards): $43,000
Of course, both ‘revenue’ figures will then require strata, water, council rate, tax and other additional property operating expenses furhter to those listed above. I asked my friend if there were any horror stories thus far in his experience. His feedback was that problems were minimal, providing that he was always contactable and available, and he screened his tenants carefully.
He did mention a couple of incidents where the tenant had clearly had parties, requiring additional housekeeping costs. Additionally, there were instances where tenants had lost keys. Although the tenants paid the key/lock replacement costs out of their bond; it did cause the property to be out of action for more days than expected, resulting in future-booked tenants having been cancelled. As you could imagine, this did not help his review ratings at the time. These were just a handful of little bumps along the road that he is still discovering.
This case study highlights the profit potential for renting an entire property out. What is missing is the ‘human’ cost – of your time commitment – in running the property for twelve months. There is also the opportunity to live in a two bedroom property yourself, and ‘Airbnb’ the second room out at a reduced nightly rate. However, investors need to be mindful of tax implications in producing rental revenue from their owner-occupied home.
Still, it may well be worth it. If instead of renting your second room for say $250 per week, you could get someone in at least four nights per week, for say $90 per night ($360 per week minimum), you’d be well ahead. An added benefit would also be that you’d only have a flatmate for four to five nights per week.
Australian investors are best served to keep this in mind when considering this approach to renting out their properties.
Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.