Airbnb – not quite as simple as you might think
24 Jul 2017
By Mike Toepfer, Director, Aspiring Law
There’s no doubting it, the Airbnb phenomenon has truly bedded in, and, much like Facebook, is such an intrinsic part of modern-day culture, it’s hard to believe it launched less than a decade ago.
Essentially an online accommodation marketplace and service, Airbnb enables people to lease or rent short-term lodgings – be it an entire property or a single room. The owner decides what rental to charge, while Airbnb serves as broker, receiving commission from both guests and hosts for each booking.
With the Internet and social media fanning its success since 2008, Airbnb says it’s accommodated more than 160 million guests in 65,000-plus cities, throughout 191-odd countries. Its 3 million listings traverse everything from standard family homes and apartments, to luxurious pads, tree houses and even a selection of over 1400 castles, if you’re inclined to go super retro.
Increasingly, property owners have seized on the Airbnb model to earn a return from the capital that’s tied up in their family home, or to let out investment properties short term, which tends to offer greater profits than the traditional long-term tenancy.
Income generated can then be used to help pay off the mortgage, or to bolster the family or business coffers. Many property owners find it a great way to meet interesting people, too.
Yes, there are undoubtedly numerous positives and, potentially, a lot of fun to be had through Airbnb. But, it does come with some very real, often unexpected and, potentially, costly, pitfalls. Anyone thinking of partaking in Airbnb needs to keep in mind, whatever your motives, it’s still essentially a business transaction, and thorough due diligence beforehand is a must.
Would-be Airbnbers can be left quite surprised by some of the risks, liabilities and hidden costs. Here are some issues you want to have your head around before plunging in:
Safety liability issues and damage
Under the Health and Safety at Work Act 2015, an owner renting rooms could be prosecuted if the owner is negligent, and a guest is injured or killed as a result. For example, if there is some hazard in the home, such as a loose carpet or stair, and the guest receives an injury as a result (e.g. trips over and falls), the owner could be prosecuted. It is possible to insure against this risk, but insurance cover will not cover any court imposed fines, as the Act makes it illegal to insure against fines.
There have been reports of guests holding parties and damaging homes, or even refusing to leave. Long-term tenants can be required to pay a bond to cover damage, but Airbnb guests do not, and it would be harder to recover from a short-term guest, especially if they live an overseas. The risk is greater if the guests are renting the whole property. Owners should try to vet guests, and meet them in person when they arrive.
Airbnb does offer host guarantee cover for accidental damage to a property and belongings, and host protection insurance if a guest is injured or causes property damage. But sussing out exactly what you’re covered for, and what further risk and liability you might need to account for, should be assessed as part of a wider insurance assessment.
If you are thinking of offering a room in your house for Airbnb, you need to sit down with your insurer and legal adviser and be very clear on what cover you have through Airbnb and what comes with your current insurance cover. Will your insurer even still cover you if you become involved with Airbnb? You should also check to see if your premiums will increase and, if so, by how much. Under most policies, any loss caused by a tenant or guest is excluded, and if the whole property is used for rental accommodation, EQC cover may also be affected, so you need to establish through your insurer whether you are covered, or whether cover needs to be extended. Even if cover is extended, there will still be limitations that apply, and you need to be very aware of what these are.
You will also need to check your council’s district plan to see whether the zoning rules for the property allow it to be used for a short-term accommodation business.
There will be costs incurred in using a property for Airbnb, on top of the commission payable to the company. Some owners may find that they have to pay increased rates if they start using the property for Airbnb, because the local council charges a higher rate for an accommodation business than for a residential property. For example, the Queenstown Lakes District Council has been tracking down properties involved with Airbnb by monitoring advertising and listings, increasing their rates by up to 25 percent.
An owner is liable to pay income tax on any rental generated from the property. However, an owner can claim as a deduction any direct costs incurred in producing that income. This will include direct costs such as commission fees and cleaning costs, and also a portion of costs such as rates, power and insurance premiums. In the cases of family homes, these are normally apportioned between the residential part of the property and the rooms used for rental accommodation on an area basis.
If the income generated from the Airbnb business exceeds $60,000 in any 12 month period or will generate $60,000 in the next year, the owner will be liable to become registered for GST, a tax that will then be payable on the rental received. Further, if the property is sold, the owner will have to pay GST on at least part of the sale price.
If you want to apply for a bank loan, the bank will only take into account the income generated by the Airbnb business when looking at your ability to service the loan if there is a reasonable history of returns from it.
If you are renting a property and want to sublet a room using Airbnb, you will first need to check your tenancy agreement to see whether or not you are allowed. Earlier this year, a Wellington couple was fined $1300 for breaching their tenancy agreement by subletting rooms through Airbnb.
If the property is part of a unit title development, an owner may run into problems with the body corporate if guests are noisy or create a nuisance for surrounding units.
While renting through Airbnb can be a great way to generate additional income from the family home or open up your investment property to a much broader, and often lucrative, market, there are costs involved and, also, potential risks.
Have a good talk with your lawyer, accountant and insurer before deciding whether to proceed. If you push go, with their guidance, ensure you have the right plan and framework in place to meet your tax obligations and have a thorough understanding of, and cover for, any liabilities.