19th October 2018
Direct Comparison of my Apartment Before and After Airbnb
In this post, I will be taking you through my Airbnb property investment journey so far and we will assess how my Auckland CBD apartment performed with a regular tenancy and then as an Airbnb. Hopefully, I can answer a lot of your question about whether Airbnb is a viable investment strategy by showing you the actual figures for our apartment.
With the help of our parents who loaned us the money for the security deposit, me and my brother secured our first investment property aged just 25 and 23 in 2016: a 48m2 one bedroom apartment located in Auckland CBD.
Wow! We owned a property! Half a property each to be exact. But what now?
Well, the tenant’s agreement didn’t end for another couple of months after we purchased the apartment so we were safe for now. That tenant was paying $485 per week including water and electricity. Our mortgage repayments at the time were $342 per week, and the electricity bill was costing us roughly $60 per month, so only around $15 per week. Council rates for the year were $1,253 and the Body Corporate levy was $4,888 per year. Let’s calculate all the costs and see if we were making any money.
Mortgage = $342 pw
Electricity = $15 pw
Council Rates = $24 pw
Body Corporate Levy (includes water) = $94 pw
Total Costs = $475 pw
With a weekly rental income of $485 pw we were making $10 pw profit. Just like that me and my brother were property investors with a positive cash flow on our very first purchase. An extra $5 in my pocket every week – watch out Warren Buffet!
But wait…did I mention that our parents loaned us the amount needed for the security deposit? Being so young, we didn’t have great paying jobs, nor had we worked for long enough, to be able to save the money for that pesky security deposit. The security deposit required was 30% of the value of the property in 2016 (it’s now 35% in October 2018), so this was an enormous amount of money for me and my brother to save at this time in our lives. Without our parents help in loaning us the amount needed for the security deposit, we couldn’t have made the purchase.
This now gives us an extra weekly expense on the property though…
Security Deposit Repayment to Parents = $147 pw
New Total Costs = $622 pw
Total Rental Income = $485 pw
Profit = -$137 pw
My hopes and dreams of relaxing on the beach somewhere watching the bank account rise on my laptop all on its own as if by magic were dashed in an instant. Now I had to work for even longer and have less income to save from my already low-paying job to help pay down the property expenses, and I had to rely purely on the possibility of future capital gains to allow me to invest in more property in any foreseeable future. This is just pure speculation and not investing as the king of cash flow, Graeme Fowler, would say.
To make matters worse, the tenancy was coming to an end soon and neither I nor my brother had any property investing experience so we had no idea how to find another tenant. Finding help by enlisting a property manager and adding extra expenses to our already negative cash flow wasn’t an option, so I decided to list the apartment on TradeMe and show potential tenants around myself after work and on the weekends. I asked too high of a rent for the time of year (it was the start of October in 2016), but I had no idea about the rental market at the time – I just needed to help cover that gaping hole of -$622 pw that we now had to deal with.
Two weeks later and after many sleepless nights, the stress just kept mounting and mounting as we still had no tenant, even after dropping the price lower than what our previous tenant was paying – how do you find one of these tenants? I thought there was a shortage of apartments for rent in Auckland!? I thought it was going to be easy. Lesson learnt: never believe what you read or hear in the news.
However, my mother came to the rescue yet again! One day she asked me, “have you heard of this thing called Airbnb?” Surprisingly, I had never even heard about Airbnb at the time – here was my mother introducing me to new technology and I was supposed to be the tech-savvy millennial. She explained that it was a website where people look for somewhere to stay when they travel and that anyone can list a spare room or even an entire property on the website for these potential guests to book. I was like…pfftttt. Doesn’t sound very reliable to me. How can we be sure that someone will book? We’re down $622 pw! That’s a lot of money to messing around with.
But, we decided to give it a go as we really had no other choice – we would list the apartment on Airbnb to help cover the expenses whilst we continue our search for a long-term tenant.
So, in October 2016, we listed our one bedroom apartment on this random website called Airbnb – what does that even mean anyway? And what’s with the logo? Our logic was simple – let’s list it for $70 per night and if we can rent it out at least a few nights a week, we would help cover our expenses. We decided to start with $70 per night because $70 x 7 days = $490 pw: similar to what our tenant was paying before.
We opened the calendar and…BOOM! We had our first booking within the hour. No joke. Then…BOOM! We had our second booking within the next couple of hours. It was like going fishing with dynamite!
The bookings just started pouring in and we started upping the price to see if we could possibly cover our entire $622 pw deficit. We easily covered this amount after a little optimisation of the listing and the price. I was hooked!
We can’t actually make a profit, can we? Surely not! With Airbnb? Isn’t finding a long-term tenant with a secure agreement the only way to do this property investing thing? Get a little cash flow that will help pay the loan off over the next couple of decades and then one day you can enjoy the fruits of your labour? Well…we decided to give our little fruit tree some growth hormones and spray a little pesticide on there to speed up the process.
At the end of the last financial year, we managed to pull in a whopping $49,000 in turnover for the apartment, and this was our first full year on Airbnb. That’s an average of $942 pw throughout the year!
There are peaks and troughs in income during the year, and the majority of earnings come in the summer months when Auckland is full of tourists and the hotels can no longer cope with demand. In Auckland, the high season last for about 6 months during which time the price of a one bedroom CBD apartment can easily reach between $180 – $230 per night, and that’s still undercutting the hotels significantly. The occupancy rate for our apartment during the last financial year was 85%, and this is the perfect occupancy rate to aim for as it means that the price is optimised – if the occupancy is lower than 80%, it means that the price is too high; if it is above 90%, it means that the price is too low.
Of course, there are extra expenses to factor in when running an Airbnb compared
to a regular tenancy, such as the servicing of the apartment (cleaning, amenities etc.), internet costs, and the Airbnb fees, but that’s about it. It does take a lot more organisation and constant work though as guests stay for about 4 nights on average, but the benefits are well worth it, especially if you are new to property investing like we were and have a brand new mortgage to pay off. Even with the extra expenses, we managed to make a profit of just over $20,500 before tax for the last financial year, and remember, this is with the loan for the property being at 100% of the value, not at 70% like it would have been if we didn’t have to borrow the money needed for the security deposit from our parents.
Frankly speaking, this is an amazing opportunity that we are presented with today as property owners, and more and more investors are beginning to realise this which is great!
But What About the New Rates for Airbnbs?
Here’s the truth. Remember: never believe what you hear or read in the news as they just want to sell papers…and sensationalist news always sells
Auckland Council has brought in new rates targeting Airbnbs and of course this will affect profitability, but Airbnb will still remain more profitable than long-term tenancies even with these rates. Our residential rates for the apartment were at $1,253 in the above. The new rates mean an increase of about 3 times the residential rates, resulting in the new rates sitting at $3,759 – an increase of $2,506 for the year. Okay, our profit will be less, but we will still earn a significant profit instead of being at a loss for our apartment. Plus, this extra expense can and should be passed onto our guests as this is a business, so it is only a matter of time until the playing field is levelled again and profitability increases back to what it was before the new rates. You can find out exactly how the new rates are calculated here.
On the other hand, suburban properties that are listed on Airbnb will be hit a lot harder with these new targeted Council rates because they come with more land than CBD apartments, meaning that the Council rates are much higher to begin with. Because the new rates are calculated by adding a percentage to the regular residential rates, properties with a lot of land will see a disproportionately larger increase to their rates than those with little land. On top of this, suburban properties don’t do nearly as well on Airbnb as CBD apartments so the income that these properties can generate is disproportionately lower given their value when compared to CBD apartments.
For example, a one bedroom CBD apartment with the value of $450,000 will generate a turnover of about $50,000 per year (11.11%) whereas a $2,000,000 four bedroom in Mt. Eden will be lucky to generate $100,000 per year (5%). Plus, the Council rates on the Mt. Eden home will be much higher than what the apartment owes due to the Mt. Eden home coming with a lot of land in a good area, close to schools etc. When the Council increases these already higher rates by 3 times, then of course Airbnb is no longer a viable option for suburban properties, but it’s mainly due to the fact that the yield these properties can generate is disproportionately lower given their value and not solely because of the increased expenses.
Simply put, the criteria for an Airbnb isn’t just any property – it is specifically CBD apartments only if you actually want to generate the great returns that are possible. Read the recent news articles about the targeted rates again and find me a single one regarding an Airbnb owner in the CBD that’s going out of business – there are exactly 0 such as articles. All of them are about suburban Airbnb owners.
Back to Our Airbnb Apartment
After running our Airbnb for the first year whilst still working full time, me and my brother realised it is indeed a lot of work! We would go to the apartment straight after we finished work, clean the place, make the beds, replace any amenities we were running low on, and then wait for the next guests to arrive so that we could check them in. We took it in turns to wait for the guests as we realised that their schedules can change due to last minute itinerary alterations.
On top of this, guests would ask questions during their stay that we would have to answer as soon as possible to make sure they were happy and that they gave us great reviews in the end. This is very different from regular property management so customer service is very important – you’re running an accommodation business, not just managing a property.
There were also times when one of us would have to rush out to the apartment to fix an issue that the guest was having, even for tiny things such as if they couldn’t figure out how the Sky TV works or didn’t know how to reset the timer on the oven to get it to turn on. We would try our best to explain over the phone first of course, but calling international numbers gets very expensive very quickly, and the language barrier with some guests also meant that certain things just had to be done for them on occasion.
After a while, we realised that running an Airbnb was simply a lot more work than what we bargained for as we still had full-time jobs, so we decided to call to see if any property managers would run the operation for us. There were some companies, but their customer feedback wasn’t the best and some of them didn’t offer all of the services we felt were necessary to run a highly successful Airbnb. By this time, we had achieved SuperHost status on Airbnb which meant more than 80% 5-star reviews from guests, and we had started using Booking.com as well for even great returns – we weren’t prepared to watch what we had worked so hard to create a drop in quality.
This is when I decided to quit my full-time office job and start my own Airbnb management company! I would focus on providing the best quality service possible, including every service required to make the most out of an already amazing opportunity. This includes services such as listings on multiple booking channels (Airbnb, Booking.com, Expedia etc.) for wider reach, hiring check-in staff to greet every guest in person to make them feel welcome in our city, organising the servicing of the apartments with consistent quality, completing inspections after every guest’s stay to pick up on maintenance issues or any damage caused, and automating the messaging, booking and payment processes to improve efficiency and the end-user experience.
It’s taken me more than a year, but I have now created my new business model for the accommodation industry which can rival almost any hotel service available in the city (except maybe The Hilton…for now). Essentially, the model is designed to yield the highest returns possible for CBD apartments for property owners even after all expenses, whilst turning the apartment into a totally hands-free investment so that the property owner can have the time to enjoy their new passive stream of income doing whatever it is they love to do!
It has taken a lot of trial and error (mainly on my own apartment), and optimisation of the processes involved over time, but the service is now at a very optimised level. Of course, this will become even more finely-tuned over time, and this is why we always welcome feedback from our clients on how to offer even more value as our aim is to be the best at what we do.
We now have an excellent portfolio of high-quality CBD apartments and are growing at a steady pace as more and more investors see the benefits of using Airbnb for their central apartments. Really, it’s a no-brainer – the math tells the story as should always be the case with every smart investment decision. We only manage above-average quality apartments though as these do the best on Airbnb. Because of this, we are quite picky about which apartments we will take on as we don’t want to compromise the brand we are building for all of our other existing clients. The long-term aim is to essentially have a virtual hotel spread across the CBD instead of being cramped up in one building, offering guests a wide range of choices of high-quality apartments in amazing locations where they will feel at home during their visit, whether for business or for pleasure.
If any of this sounds interesting to you and you would like to find out more, then please get in touch for a chat or fill out the form on our website and we’ll get back to you shortly. You can read more about the comprehensive management service we offer here. We can also advise you on any Airbnb-related issues or even help you find the perfect CBD apartment to make the most of Airbnb. You can find out more about our consulting services here.
Thank you for reading our story and happy investing!
Founder and Director