It’s an interesting question for investors to consider. While investors have traditionally been about long-term rentals with tenants paying down the mortgage over time, the rise of short-term rental platforms like Airbnb and VRBO provide another option. Most municipalities define short-term rentals as less than 28 days and they are often for a period of a day or week.
Let’s look at the three questions that need to be answered
What sort of renter does the property appeal to?
This is a pretty basic question but it’s surprising how often it isn’t asked by investors.
By their nature, Airbnbs are for people who are not living in an area, but rather visiting it.
When you look at the reasons why people visit an area for a short amount of time, it is typically either for a business trip or for a leisure activity.
Business trips mean that the visitor is looking to be located near central business districts. While you will have the occasional visitor from out of town who is conducting business at a factory well outside of the downtown core, Airbnbs work best where you can appeal to a broad market of business travellers and the central business district is where they want to be located.
If the visitor is in town for a leisure activity, they again want to be located close to the purpose of their visit. Properties near sports stadiums, concern venues, amusement parks and so on tend to be very attractive to leisure visitors.
In contrast, people who are looking to live in an area are less focused on close proximity to the central business district or visitor attractions. Whether it is a student looking to live near a university, an employee looking to live near their work or some other situation, there are many cases where properties located far from the central business district or visitor attractions can be lucrative long-term rental properties.
For every property you own or are consider buying, look at the location of the property and what sort of tenant it would appeal to most. If it’s close to the central business district or some major tourist attractions, Airbnb could be a great option. If it’s not close to those areas but has good proximity to schools and transit connections, it will likely be a good long-term rental.
Do you want an active or passive investment?
The second question we need to answer is less about more about if it makes a good short-term or long-term rental and more about if you make a good short-term landlord.
One of the most attractive aspects about income properties is that apart from an initial acquisition period and tenant turnover periods, they can be a passive investment. By their very nature, short-term rentals have more uncertainty than a long-term rental and a higher risk of vacancies during the course of the year.
The right property in the right location with the right tenants can see years of equity growth through market appreciation and the tenant paying down the mortgage with their monthly rent payments.
Whenever you’re considering running an Airbnb or other short-term rental model, you need to think about the level of involvement you want with your investments. While no direct property investment is totally hands-off, a long-term rental is the closest to that model.
In contrast, Airbnbs requires you as the operator to:
- Sign up with a marketing platform (such as VRBO.com or Airbnb)
- Respond to enquires about the property
- Establish methods by which guests access the property
- Answer questions that guests have during their stay
- Respond to any issues or problems during their stay
- Clean and restock provided consumables, cutlery, linen, etc.
- Pay recurring fees for each customer to the marketing platform
Regardless of whether short-term rentals can result in a higher return on your investment, the question that needs to be answered is whether you want to take such a hands-on role with your investment property.
It is of course possible to hire someone to handle some of the work overseeing a short-term rental but it needs to be at a rate that means it is still a more lucrative investment than a long-term rental. In the end, it boils down to whether you want to actively engage with guests in your income property or if you would prefer to have it reduced to occasional contact throughout the year.
Is it permitted in the building or community?
As a new model in the rental industry, short-term rentals like Airbnb are facing opposition from housing types and even communities that weren’t designed with it in mind.
The vast majority of condominium apartments now have regulations in force prohibiting Airbnbs and other short-term rentals. This is because these buildings were not designed for daily or regular turnover of residents and all the activity that comes with it.
- Elevators were not designed for a significant portion of the building residents entering and exiting with luggage each day.
- Security personnel were not staffed at levels to accommodate regular groups of visiting tourists who may not have the same work hours as residents.
- Building infrastructure was not designed for high daily use of in-suite items such as washing machines, dryers and dishwashers when guests come and go.
- The safety and security of the building and the residents can be compromised by systems put in place by short-term rental operators to allow their guests to gain access to the building and the rental units.
At the heart of it is the fact that condominiums are designed around long-term residents who understand the rules and regulations of the building, which are in turn written with expected patterns of behaviour based on people living and working in the community.
Given this situation, it is quite rare to find a condominium apartment that permits Airbnbs. There are large fines that can be levied against home owners who decide to operate a short-term rental in violation of these rules. Given the public facing nature of the enterprise, it is often quite easy for condominium buildings to monitor if any suite owners are in violation of the rules.
In addition to the difficulty in finding a condominium building where it is permitted to run short-term rentals, communities often face pressure from residents to restrict or license such endeavours.
Within the City of Toronto, short-term rentals are currently not permitted. That’s correct, regardless of whether it is within a condominium building or not, as it stands right now, within the City of Toronto, you are not allowed to use a property for the purpose of short-term rental.
In early 2018, Toronto City Council approved the regulation of short-term rentals in Toronto, which would require short-term rental companies to obtain a licence and short-term rental operators to register with the City and pay a Municipal Accommodation Tax (MAT) of 4 per cent.
This amendment has been appealed by the Local Planning Appeal Tribunal (LPAT) and as such they are not yet in force. This means that the status quo remains the same and short-term rentals are not permitted in Toronto.
The hearing for the appeal will take place in August, 2019, and if the City receives a positive decision at the LPAT, the short-term rental regulations will come into effect. Soon after, individuals will be given a period of time to submit applications for a licence or registration and the 4 per cent tax will be implemented.
If you want to read all the details, you can find them here.
Without question there are people doing short-term rentals in Toronto now, so like many by-law issues, the real issue becomes how aggressively it is enforced and the fines that are applied against violations. The rule against short-term rental was scheduled to be enforced beginning July 2018, but with the appeal as described above, it means that restrictions on short-term rentals are not currently being enforced.
A careful review of the current legality of short-term rentals is an important aspect of the purchase decision for an income property. It doesn’t matter if it’s in a great location for an Airbnb and you’re willing to do the work to oversee the unit if you can’t legally rent it out!
If you’re considering an income property, it’s important to work with a Realtor who understands the current options for short and long-term rentals and can help advise as to which would be the best option for you, for the property and for the future.