In recent years, the rental market landscape has undergone significant changes, with the advent of online platforms like Airbnb revolutionising the way people think about accommodation. This shift has led to an increased interest in short-term rentals, where property owners can offer their spaces for periods ranging from a few days to several weeks.
Short-term rentals have gained popularity for their flexibility, potential for higher income, and the opportunity to meet diverse guests from around the world.
On the other hand, long-term rentals, typically lasting six months to a year or more, have traditionally been the backbone of the rental market. These rentals offer stability and predictability for both landlords and tenants, with fixed rental income and longer tenancy agreements.
Long-term rentals are often preferred by those seeking a more permanent living situation, such as families or professionals relocating for work.
As a prospective or current property owner, your bottom-line depends on you understanding the nuances of these two rental options. Each has its own set of advantages and challenges, and the decision between short-term and long-term rentals will depend on your goals, lifestyle, and investment strategy.
Read on to delve into the pros and cons of both options, with a focus on the unique aspects of the market in our region, to help you make an informed choice that aligns with your objectives.
Short-term Rentals: Pros and Cons
| Pros | Cons |
|---|---|
| Higher potential income | Greater management and turnover demands |
| Flexibility in pricing and availability | Seasonal and market fluctuations |
| Opportunity for personal use | Potential GST obligations |
Higher Potential Income:
Short-term rentals, often facilitated through platforms like Airbnb, have become increasingly popular for their potential to generate higher income compared to traditional long-term leases. Property owners can capitalize on peak tourist seasons and special events in their area by adjusting prices accordingly, often resulting in significantly higher returns than fixed monthly rental incomes.
Flexibility in Pricing and Availability:
The flexibility in pricing extends to availability as well. Owners can choose when to rent out their property and for how long, allowing them to block out personal time for family vacations or maintenance. This adaptability is particularly appealing for those who wish to use their property sporadically throughout the year, rather than committing to a continuous long-term rental.
Opportunity for Personal Use:
Personal use is a notable advantage of short-term rentals. Owners have the liberty to enjoy their property whenever it's not booked, providing a perfect balance between generating income and having a holiday home. This flexibility is especially valuable for those who own properties in desirable locations and wish to use them for their own vacations.
Greater Management and Turnover Demands:
However, the benefits come with their challenges. Short-term rentals demand greater management and turnover efforts. Frequent guest changes mean more time and resources spent on cleaning, restocking essentials, and handling check-ins and check-outs. This can be particularly taxing for owners who manage multiple properties or those without a dedicated property management team.
Seasonal and Market Fluctuations:
Market and seasonal fluctuations also play a significant role in the viability of short-term rentals. Income can be inconsistent, with peak seasons bringing in high revenue, while off-peak periods may see significantly reduced bookings. Owners need to be prepared for these fluctuations and have a financial buffer to cover expenses during lean times.
No Need for Healthy Homes Compliance (if under 28 days):
In New Zealand, short-term rentals of less than 28 days are generally not subject to the Healthy Homes Standards, which apply to long-term rentals. This exemption can reduce compliance costs and simplify the process for owners. However, there are specific conditions that need to be met and it's important to stay informed about local regulations, as these can vary and may impact your rental strategy.
GST Implications:
Owners of short-term rentals may also need to consider Goods and Services Tax (GST) implications. If the income from your short-term rental exceeds the GST threshold, you will need to register for GST and pay it on both your rental income and any capital gains when selling the property. This can add a layer of complexity to your tax obligations and should be carefully considered when evaluating the profitability of short-term rentals.
Long-term Rentals: Pros and Cons
| Pros | Cons |
|---|---|
| Steady, predictable income | Limited flexibility and accessibility |
| Lower maintenance and management effort | Potentially lower returns |
| Less exposure to market volatility | More regulations and compliance |
| Outside of the GST net | Stuck with bad tenants |
Steady, Predictable Income:
One of the primary advantages of long-term rentals is the steady, predictable income they provide. Landlords can rely on a fixed monthly rent, which simplifies budgeting and financial planning. This consistency is particularly appealing for investors seeking a stable cash flow without the fluctuations common in short-term rentals.
Lower Maintenance and Management Effort:
Long-term rentals typically require less maintenance and management effort compared to their short-term counterparts. With longer tenancy agreements, the turnover of guests is significantly reduced, meaning fewer instances of cleaning, repairs, and check-ins. This can lead to cost savings and a more hands-off approach for landlords.
Less Exposure to Market Volatility:
Long-term rentals are generally less exposed to market volatility and seasonal fluctuations. While short-term rental income can vary dramatically depending on tourism trends and events, long-term leases offer a more consistent revenue stream, irrespective of external market conditions.
Outside of the GST Net:
A notable advantage of long-term rentals is that they are generally outside the Goods and Services Tax (GST) net. Unlike short-term rentals, which may require GST registration and payments if income exceeds the threshold, long-term rentals do not typically have these tax obligations. This simplifies the tax process for landlords and can be a deciding factor for those looking to minimize their tax responsibilities.
Limited Flexibility and Accessibility:
However, long-term rentals come with their own set of challenges. One of the main drawbacks is the limited flexibility and accessibility for personal use. Once a property is leased on a long-term basis, landlords cannot use it for their own purposes until the lease expires. This can be a significant downside for those who wish to have occasional access to their property.
Lower Returns Compared to Short-Term Rentals:
While long-term rentals offer stability, they often yield lower returns compared to short-term rentals in high-demand areas. The premium prices that can be charged for short-term stays, especially during peak seasons, are often higher than the fixed monthly rent of a long-term lease. As a result, landlords may need to weigh the trade-offs between stability and potential income.
Regulatory Considerations in New Zealand
Firstly it should be noted that the information in this section is general in nature and should not be considered as financial or legal advice. It's up to you to check with the relevant legal, and tax experts, and local council or other authority, in order to keep up to date with the latest laws and regulations.
Navigating the regulatory landscape is crucial for both short-term and long-term rental property owners in New Zealand. For long-term rentals, compliance with the Residential Tenancies Act is essential. This Act sets out the rights and responsibilities of both landlords and tenants, covering aspects such as bond handling, notice periods, and maintenance obligations. Ensuring adherence to these regulations is vital for a smooth and lawful rental experience.
The Healthy Homes Standards, which set minimum standards for heating, insulation, ventilation, and other aspects of rental properties, apply to short-term rentals just as they do to long-term ones, except in cases where the short-term rental is excluded from the residential tenancies act.
Under sections 5(m) and 5(k) of the Act, it is likely that your Airbnb accommodation will be excluded from the Act so long as the premises:
k(i) are intended to provide temporary or transient accommodation (such as that provided by hotels and motels), being accommodation that is ordinarily provided for periods of less than 28 days at a time; and
k(ii) are subject to an agreement that has been entered into for the purpose of providing temporary or transient accommodation that continues to be provided under the agreement
(m) where the premises are let for the tenant’s holiday purposes
Short-term rentals are subject to a different set of rules, often governed by local council bylaws. These bylaws can vary significantly from one region to another, covering aspects such as the maximum number of days a property can be rented out and the requirement for special permits.
It's important for hosts to stay informed about these standards to provide safe and compliant accommodation.
Tax implications are another important consideration for both rental types. For long-term rentals, income is subject to income tax, and expenses can be deducted.
Short-term rentals, on the other hand, may require GST registration if the income exceeds the threshold set by the Inland Revenue. This means that hosts may need to charge GST on their rental income and can claim GST on expenses related to the rental.
Additionally, once registered for GST, any capital gains from the sale of a property used for short-term rentals will likely also be subject to GST. This point has significant implications and it's important for you to check with a chartered accountant if there's any chance that you may fall into this situation.
Understanding the tax situation of your Airbnb business is crucial for maintaining compliance and optimising financial outcomes.
Market Trends and Demand
In recent years, the rental market has seen a dynamic shift, with short-term rentals gaining significant traction, particularly in tourist-heavy regions.
The demand for short-term rentals has been bolstered by the resurgence of tourism and the popularity of events, festivals, and conferences that attract both domestic and international visitors. These short-term accommodations offer flexibility and convenience, making them an attractive option for travelers seeking unique and personalized experiences.
On the other hand, long-term rentals continue to be driven by traditional housing market trends. Factors such as population growth, urbanization, and the availability of employment opportunities contribute to the steady demand for long-term housing.
The increasing interest in short-term rentals has led to a tighter long-term rental market in some areas, with potential impacts on availability and pricing.
The interplay between short-term and long-term rental demand is complex and influenced by a variety of factors, including economic conditions, regulatory environments, and consumer preferences. As the market evolves, it goes without saying that potential hosts and investors need to stay informed about these trends to make strategic decisions in the ever-changing landscape of the rental industry.
Financial Considerations
When venturing into the rental market, it's essential to understand the financial implications of both short-term and long-term rentals. The initial investment and setup costs can vary significantly between the two.
Short-term rentals usually require a higher upfront investment to furnish and equip the property to meet guest expectations, while long-term rentals might need less initial expenditure but could require more substantial renovations to ensure compliance with the Healthy Homes Standards.
Ongoing expenses are another critical factor to consider. Short-term rentals typically incur higher maintenance and utility costs due to the frequent turnover of guests. Management fees can also be a significant expense, especially if you choose to use a property management service to handle bookings and guest interactions.
In contrast, long-term rentals often have lower maintenance and management costs, as tenants usually cover utility expenses and there's less wear and tear on the property.
Revenue projections and occupancy rates are important for assessing the profitability of your rental investment.
Short-term rentals can offer higher revenue potential, especially in high-demand tourist areas or during peak seasons. However, they also face greater occupancy rate fluctuations due to seasonal trends and market volatility.
Long-term rentals provide a more predictable income stream, with consistent occupancy and steady rental income, making them a potentially safer but less lucrative investment option.
So there we have it
In summary, the decision between short-term and long-term rentals involves a careful consideration of various factors, including potential income, flexibility, management demands, regulatory compliance, and market trends.
Short-term rentals offer higher income potential and flexibility, but come with greater management requirements and exposure to market fluctuations. Long-term rentals provide a more stable income and lower management effort, but may offer lower returns and less flexibility.
For potential hosts, your chances of success will be greatly improved if you assess your goals, resources, and risk tolerance before making a decision.
If you're seeking a higher return on investment and are willing to manage the demands of short-term rentals, this option could be a lucrative venture. However, if you prefer a more stable and hands-off investment, long-term rentals might be more suitable.
We encourage those interested in short-term rentals, especially via AirBnb, to explore this opportunity, keeping in mind the importance of informed decision-making and adherence to local regulations and standards. By staying informed and compliant, you can navigate the rental market successfully and make the most of your investment.