Comprehensive Guide to Converting Your Long-Term Investment Property to Airbnb or Short-Term Rental

The landscape of property rental in Australia is swiftly changing as Airbnb or Short-Term Rental options are gaining remarkable traction. For landlords and property owners, transforming a long-term rental into a short-term one is becoming an increasingly profitable endeavour. With the advent of vacation rental platforms such as Airbnb, Booking.com, and Stayz, the demand for short-term accommodations has surged, particularly in sought-after tourist hotspots. In this blog post, we’ll take a closer look at the process of converting a long-term rental property into a short-term one, as well as the important considerations every property owner should weigh before taking the plunge.

Why People Are Converting Their Long-term Rental Properties to
Airbnb or Short-Term Rental

This change isn’t merely a trend; it’s an informed decision driven by several compelling advantages. Below are the primary reasons the short terms rentals like Airbnb are becoming increasingly popular among property owners.

Potential for Higher Income

One of the most attractive reasons for this switch is the higher income potential associated with short-term rentals. Despite the fact that rental income can be less predictable, the property owners are often able to earn more annual income from short-term rentals compared to traditional, long-term leases. This is particularly true during peak tourist seasons when owners can adjust pricing to reflect demand, sometimes implementing a minimum stay requirement to boost earnings. It’s reported that short-term property owners can make up to 50% more each month, although it’s important to note that this can be
influenced by factors such as property type, location, and the level of competition in the area.

For landlords, operating a short-term rental becomes a dynamic business venture. They no longer just collect a fixed rent but actively engage in market analysis, adjusting lease prices in response to supply and demand curves—a fundamental practice in the business world.

Enhanced Flexibility

Flexibility is another significant benefit that comes with short-term rentals. Owners have the luxury of using their property personally on short notice or during unbooked periods, like weekends, without the hassle of displacing long-term tenants. This flexibility is a game- changer for those who want to enjoy their property themselves or for family and friends.

Take the case of one of our clients Steve, a resident of Sydney, who, along with his wife Bunty and their two children, cherishes their familial roots in a picturesque beach suburb merely 20 minutes from Adelaide in South Australia. This area isn’t just a treasured family hub but also a magnet for tourists. Stephen and Bunty make six-monthly trips to visit Steve’s parents, a tradition they hold dear. To meld investment with convenience, Steve recently acquired a property in this beloved suburb and opted to rent it out as a short-term rental via Airbnb.

This strategic decision means that each visit to his parents is complemented by a stay at his own property, much to the delight of his children who revel in the comfort and joy of their private retreat, far from the cramped quarters of couches or floors during the
prior family visits. For Steve and his family, the flexibility of short-term renting has transformed their travel experience, intertwining the warmth of family visits with the practicality and ease of having their own space.

Reduced Wear and Tear

It may seem counterintuitive, but short-term rentals often experience less wear and tear than long-term tenancies. Since short-term rentals are primarily occupied during high- demand periods, such as holidays or events, they are not lived in as continuously as long- term rentals. Guests tend to use the property more as a place to sleep and less as a full-time home, which can lead to less overall usage. Moreover, since short-term rentals are cleaned regularly in between guests, any maintenance issues are likely to be noticed and addressed promptly, unlike long-term rentals where problems might go unreported until they become
more serious.

The Guest Versus Tenant Perspective

There’s also a psychological element to consider. Short-term guests often have a different attitude toward the property they’re staying in compared to long-term tenants. Guests are typically on vacation and treat the accommodation as such — with a temporary mindset, leading them to be more careful with the property. Additionally, because they’re paying a premium for a short stay, there’s an expectation of quality and maintenance that both guests and owners tend to uphold.

How to Turn Your Property into Short Term Rental

Check Local Guideline

Transforming your property into a short-term rental, like Airbnb, could be a lucrative move, but it demands a deep dive into the legalities set by your State, Territory and local governments. Consider New South Wales (NSW), where you’re permitted to rent out your property for up to 180 days a year when absent. However, this cap doesn’t apply universally across NSW, with some councils adopting more relaxed approaches. Importantly, NSW mandates a Short-Term Rental Accommodation (STRA) registration before you can start
hosting.

It’s a different story in Victoria and other States and territories. The City of Melbourne stands out with a bustling short-term rental market and robust occupancy rates. Interestingly, the regulatory grip here is less tight; property owners can skip the hassle of obtaining planning permits from Victoria Planning Provisions, unlike in other locales. However, there is a significant regulatory change on the horizon: the Victorian government plans to impose a 7.5% levy on Airbnb properties, a measure set to take effect from 2025. It’s an evolving landscape, one that requires property owners to stay informed and prepared
for new policies affecting their rental ventures.

Before diving into short-term rentals, it’s also crucial to examine the legalities, especially if your property is under strata management. Strata schemes often have specific rules that could restrict or prohibit short-term letting. Ignoring these rules can lead to serious legal issues and fines. To avoid this, thoroughly review your strata’s bylaws and consult with the strata board or management. This ensures your rental plans comply with existing regulations. Being legally compliant not only adheres to the law but also respects your property’s community framework. Understanding and following strata guidelines is key to a
successful and hassle-free short-term rental venture.

Market Research

When contemplating the transition from long-term to short-term rental, market research is your guiding start. The location of your property is paramount—those nestled in tourist hotspots naturally surge ahead in the race, thanks to their proximity to attractions, ease of access to public transit, and an abundance of dining options. Such locales are magnets for renters seeking the pulse of the city and the convenience of nearby amenities.

But it’s not just about the ‘where’; the ‘what’ matters significantly. Modern renters are drawn to properties that promise an extra layer of comfort. Think of a refreshing pool or a serene outdoor space—features that transform a simple stay into a memorable getaway. Prior to rebranding your property as a short-term rental, it’s crucial to ensure its well- appointed, catering to all the essentials—and a few luxuries—that renters might anticipate. A thorough assessment of both location and amenities is essential to certify your property as an appealing choice for those seeking a home away from home.

To further enhance your guests’ comfort and convenience:

• Stock the kitchen with all the necessary utensils and provisions.
• Supply the bathrooms with a full range of toiletries.
• Provide necessary laundry detergent or washing liquid for the laundry room.

Consider the adoption of a keyless entry system for smooth, hassle-free access. Additionally, the creation of a detailed guestbook is instrumental.

This guestbook should include:

• Instructions for operating appliances.
• The Wi-Fi network name and password.
• A list of recommended local restaurants.
• A guide to nearby attractions and shopping areas.

This guestbook is more than a manual; it’s a conduit to a personalised, stress-free stay, allowing guests to feel fully at home while providing them with the insider’s edge to your locale’s best-kept secrets.

Set Terms and Condition

Effective communication with tenants about the terms and conditions of property use is paramount. Clearly articulating these guidelines ensures that all parties are aware of the expectations and responsibilities. For instance, it’s crucial to emphasize that the property maintains a smoke-free environment indoors, to preserve the quality and safety of the space.

Additionally, it is important to stipulate that night-time parties are prohibited if they pose a risk of property damage or could potentially disturb the peace of the neighbourhood. Establishing and enforcing these rules not only protects the property but also fosters a considerate and respectful community for everyone involved.

What you Should be Aware of Before Converting your Property
into Short-Term Rental

Uncertainty in Rental Occupancy

Short-term rentals introduce an element of unpredictability that can make it challenging for property owners to forecast occupancy and income. With guests typically booking for just a few days or weeks, the fluctuating nature of short-term tenancies can lead to an irregular income stream, making financial planning more complex compared to the relative stability of long-term rentals.

24/7 Guest Support

When you step into the world of short-term property rentals, you aren’t just offering a space—you’re providing an experience. This means that from the moment your property is listed on popular holiday rental websites like Airbnb, your role expands beyond that of a host to a concierge who is always within reach. Whether it’s handing over the keys in person with a warm welcome or being just a message away for any inquiries, your availability can significantly influence your guests’ satisfaction.

At times the around the clock services will feel daunting. In the digital era of instant gratification, guests may perceive any delay in communication as a sign of poor service, which can be detrimental to your reputation. The pressure to maintain high ratings for visibility on the platform might lead to a stressful hosting experience.

High Operating Cost

When considering the switch to short-term rentals, it’s imperative to factor in the extra costs that are generally not as prominent in long-term leasing. These expenses go beyond the standard upkeep and can significantly affect your bottom line. Short-term rentals typically encounter higher housekeeping expenses due to the frequent need for cleaning between guests. Utility bills may also rise, given the constant turnover and the expectation for the property to be always fully functional and comfortable.

Moreover, providing amenities such as high-speed internet, premium cable packages, or streaming service subscriptions can be a draw for guests but also add to your monthly outgoings. Platform fees are another consideration, as listing your property on popular rental sites like Airbnb or booking.com often incurs a service charge. Additionally, marketing and advertising play a crucial role in maintaining high occupancy rates and can demand a considerable budget to ensure your property stands out in a competitive market.

In sum, while short-term rentals can offer higher revenue potential, they also come with a unique set of operational costs that need careful financial planning and management.

Reporting Tax

If you rent out your property on Airbnb and also use it for your own vacations, you need to be careful about how you report your expenses for taxes. Only the costs for the times when guests are renting your place can be counted as tax deductions. You’ll need to figure out the part of the year your property was rented out compared to when you used it yourself. Then, split your bills—like repairs, power, and insurance—based on that. This way, you can correctly claim tax breaks for the rental side of things and avoid any trouble with the tax office.

Figuring out how much of the year the property was rented versus used for your own breaks can add a lot of paperwork. It’s a detailed process that can be quite a headache. But you don’t have to do it alone—an accountant can guide you through it, making sure you claim the right tax deductions and keep the tax people happy. And don’t forget, good records are your best friend here to prove your claims if asked.

Capital Gain Tax – 6 years Exemption

Renting out a room in your property can significantly boost your cash flow, especially in NSW, where there’s no cap on the number of days you can rent out one or two bedrooms, as long as you’re living in the property at the same time. However, it’s important to be aware that this can lead to a heavier tax burden down the line.

Generally, homeowners do not pay capital gains tax if they rent out their whole property and convert it to an investment property for up to six years. The six-year rule that usually exempts you from capital gains tax won’t apply if you’re renting out part of your house, so you could be on the hook for capital gains tax when you sell. In this instance, you will only be eligible for a partial
exemption.

Plan of action for the readers

1. Conduct Initial Research and Legal Compliance Check:
   • Understand Local Regulations: Research the specific regulations and laws in your area regarding short-term rentals. Check with your Strata management, state, territory, and local council requirements.
   • Register for STRA: If required, like in New South Wales, register for Short-Term Rental Accommodation (STRA).
   • Stay Informed: Keep well-informed of upcoming changes in legislation, such as the planned 7.5% levy in Victoria.
2. Evaluate Financial Implications and Market Demand:
   • Analyse Income Potential: Consider the potential higher income from short-term rentals, especially in peak seasons, and weigh it against the unpredictability of occupancy.
   • Understand Operating Costs: Account for additional costs such as increased housekeeping, utilities, platform fees, and marketing expenses.
   • Market Research: Assess the demand in your property’s location. Properties in tourist hotspots or near attractions have a higher potential for success.
3. Prepare Your Property:
   • Upgrade and Furnish: Ensure the property is clean, well-furnished, and equipped with modern amenities.
   • Stock Essentials: Provide necessary items in the kitchen, bathroom, and laundry room.
   • Implement a Keyless Entry System: For convenience and smooth check-ins.
   • Create a Guestbook: Include instructions for appliances, Wi-Fi details, and local
4. Set Terms and Conditions:
   • Establish House Rules: Clearly define rules regarding smoking, parties, and noise levels to protect your property and maintain neighbourhood harmony.
   • Communicate Clearly: Make sure guests are aware of and agree to these terms before booking. recommendations.
5. Plan for Guest Interaction and Support:
   • Be Available: Prepare to offer round-the-clock support or consider hiring a property manager if you cannot be constantly available.
   • Foster Positive Experiences: Ensure guests have a smooth and enjoyable stay, as this impacts your ratings and success on rental platforms.
6. Manage Financial and Tax Responsibilities:
   • Track Expenses and Earnings: Keep meticulous records of all rental-related expenses and income.
   • Understand Tax Obligations: Be aware of tax implications like reporting rental income, claiming deductions, and potential capital gains tax issues.
   • Seek Professional Advice: Consider consulting with an accountant like Investax Group to ensure compliance and optimise tax benefits.
7. Review and Adjust Strategy:
   • Monitor Performance: Regularly assess the performance of your rental property.
   • Adapt Pricing and Marketing: Be ready to adjust pricing based on demand and explore various marketing strategies to enhance visibility.
   • Solicit Feedback: Use guest feedback to make improvements and enhance the rental experience.
8. Stay Updated and Network:
   • Join Online Forums or Local Groups: Engage with communities of property owners to stay informed about trends and share experiences.
   • Continued Education: Consider attending workshops or webinars related to property management and short-term rentals.

Conclusion

In conclusion, while converting your long-term rental into a short-term one offers potential benefits, it’s crucial to navigate the financial and legal intricacies wisely. To ensure you’re making the most informed decisions and adhering to all regulatory requirements, consider consulting with Investax Tax professionals. Their expertise in tax and compliance matters can be invaluable in maximizing your investment’s profitability while keeping you aligned with the latest legal standards. Remember, a well-informed approach is key to the success and sustainability of your short-term rental venture.

Reference:

1. 180 Days Per Year – https://www.planning.nsw.gov.au/policy-and-legislation/housing/short-term-rental-accommodation#:~:text=In%20some%20NSW%20council%20areas,Ballina%20area
2. STRA Registration: https://pp.planningportal.nsw.gov.au/stra
3. consumer.vic.gov.au – Short-stay accommodation – owners corporations
4. Partial exemption – https://www.macquarie.com.au/advisers/partial-main-residence-
   cgt-exemption.html
5. 6 year exemption – https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-
   and-capital-gains-tax/Your-main-residence—home/treating-former-home-as-main-
   residence/#:~:text=If%20you%20use%20your%20former,period%20covered%20by%
   20your%20choice.