How to shift from a residential to commercial portfolio
Many things feel uncertain in the world at the moment, but one thing’s for sure, commercial property is producing some...
Quirin says his journey into the short-term rental market began when, as a frequent traveller, he identified an opportunity to monetise his absence by listing his property online.
However, dealing directly with online platforms soon proved difficult when managing people's expectations, Quirin co-found MadeComfy – an end-to-end service provider empowering property investors to maximise their returns by leveraging online platforms in the short-term rental space.
In this episode of The Smart Property Investment Show, Phil Tarrant and the team from MadeComfy give listeners insight into the key differences between short-term versus long-term rentals as well as how property investors can ensure they’re getting the most out of their portfolio.
Tune in now to hear all of this and much, much more in this episode of The Smart Property Investment Show!
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Phil Tarrant: G’day everyone, it's Phil Tarrant here. I'm the host of The Smart Property Investment Show. Thanks for joining us today. A bit of a topical issue we're going to cover off today, and by topical I mean there is a number of different segments of stakeholders in the market today, property investment market, who have varying opinions on whether or not your investment property should be made available for people to rent for six, 12 months or two years, or to make them available for short-term rentals. Now the argument goes that, in many places now, it's nearly impossible to secure standard rental accommodation, because most people are putting up their properties for short-terms rentals via places like Airbnb. Just recently, there was a piece in the paper about how Byron Bay is nearly impossible to find somewhere to live, because pretty much every rental property is available for short-term rentals.
On the flip side of that, people are arguing that they don't want parts of their block of units, if they live in a block of units, to be made available for Airbnb. They just want nice, long-term tenants in there who, in quotation marks, are “responsible”. So we're going to tackle this issue today. I've got two people in the studio who are probably going to be pro short-term rentals, versus the flip side of that. But I'm going to ask them some detailed questions around the opportunities for property investors to look at the short-term rental market to lease out their properties. So with that, I have Sabrina Bethunin and Quirin Schwaighofer in the studio. How are you going guys?
Sabrina: Hi Phil, thanks for inviting us today.
Phil Tarrant: Well thanks for coming along. It's good. And you're from a business called MadeComfy. From the little bit of research I've done on you guys is, you essentially empower property investors to leverage platforms like Airbnb to manage their investment properties. Is that a fair summary?
Sabrina: Yes. Definitely. So we offer an end to end service for short-term rental. So if a property investor want to make the property available from short-term rental, we will manage everything. From foreign exchange and styling and getting the property ready, to professional photography, managing the guests and looking after any maintenance issues that the property have. Yeah. Also, we will make sure their returns are improved and increased.
Phil Tarrant: So the juice of this, Quirin, we were chatting very quickly off air, is that you thought, well hang on a second, I'm going to start ... You travel a lot and therefore you've got a property sitting there with no one in. So you thought, let me monetise that a little bit. You found out about Airbnb, but then you worked out it was a bit of a headache to actually, it makes sense to actually do short-term leasing, but it's a bit of a headache to actually make it happen, considering you need to provide keys and there's problems of maintenance and stuff. What's the backstory of all this? How did you go from identifying a bit of a challenge into creating MadeComfy today?
Quirin: Yep. So it was back a few years ago. I used to travel a lot. I lived from one point and sort of realised that I leave the property empty for a lot. And heard about Airbnb, how easy it is to put your property up. Similar, it was when I discovered eBay. So I thought, great. I took some photos, put my unit up on Airbnb, got immediately a really good booking whilst I was away, and that's when the problems started. I didn't have anything set up and clean and made ready. So when I asked Sabrina to help me, she did that once, twice. But it became really difficult to manage people's expectations, to get the key into their hands, to be there if something doesn't work, the TV break down, the fuse box giving up. Guests want to have a great stay too. This is where it becomes difficult if you have a full time job and you don't live next door, how you manage all these things. So the returns are really interesting, but there's a lot of work involved as well.
Phil Tarrant: So as I preface this conversation, it splits the market in terms of, should all these properties be made available for short-term leasing versus providing long-term housing for people? Let's just deal with that for a second, your view on that. So short-term leasing versus long-term rentals, where do you sit?
Quirin: I think there's a balance of things. So you've got two things, you've got people who want to live in Sydney and you've got people who want to come to Sydney as well. So accommodation is short and long-term. The city does a lot to attract more visitors to Sydney, also to generate more jobs and to be the city Sydney wants to be like. Now, if you look at visitor numbers. 2010, 2.6 million people visited Sydney. 2016, 3.7 million people visited Sydney. Now, they have to stay somewhere, and this is where one recreation of the market comes in, this over-demand of accommodation short-term. On the other hand, you've got people who want to live in Sydney, of course. But if you look at the value of properties in Sydney, that has been increasing over the last 10 years, nine years it doubled in value. Investors need to cover their mortgages.
Now you've got overseas investors a lot in Australia, or in Sydney, but you've also got Australians who pay the mortgages, maybe not with the big funds they have or they got inherited, but they need to manage with the cash flows. So to capture your yield in a way that you can finance your investment property, you need to be able to generate an income that makes it viable for you. All in all, there's a shortage of stock, which is apartments, houses, where people can stay long and short-term. That's something I think the city has to deal with.
Phil Tarrant: So it's a balance equation, but it's reflective of the market and the fact that, we're talking about Sydney right now, it's an in-demand location for short-term rentals. What's your thoughts though on, and whether this is a myth that needs to be dispelled, because you find a lot of strata blocks are reluctant to allow short-term leasing and they would prefer to have long-term tenants in people's investment properties. Obviously a perception around security, that if people are coming and going, you lose a bit of that appeal. The upkeep of the properties, transient population, all this sort of stuff. So a lot of stratas are trying to block out short-term rentals, whereas on the flip side, some stratas are very open to it. What do you see are those pros and cons and can you dispel some of those myths that might be there?
Quirin: So, I guess, one myth that is that short-term people are worse than long-term people. Whenever you have people involved, things can happen. We get quite a few investors that say, "Over with long-term tenants, because those people trashed my place in six months. They didn't look after it. The agency didn't really do the inspections properly and I have to renovate my kitchen, my bathroom and I have to paint everything." Now that's one side of the story. I guess the press doesn't maybe write about that as much as that they do about if an Airbnb tenant has done something to a place, because they're also humans and they had a party, or they did something that no one should have known about.
Now it all goes down to control and managing people and putting rules in place. Whilst on the long-term side, a lot of rules about how you have to behave and what you have to do. On the short-term side of things, of course, if you are holidaying on the Bahamas and someone books your place, say there is one and then 10 people rock up, you as the owner can't do really much. Whilst, when we come in place, is that we do a lot of guest vetting. We make sure that people stay in properties that are designed for those people. We put rules in place, we make sure they know the rules, they know the consequences. We can enter property any time, as a long-term agent you can't enter property. So if we have any kind of message that there's an overcrowding or there's noise, we can go, we can check if something is not right, we can evict the property. So we can act much quicker and enable that there's stability in the community than a long-term agent can do.
Phil Tarrant: So property investment, we talk about this a lot on The Smart Property Investment Show is, should be viewed as a business, right? It is. You don't invest in property because it's a nice thing to do. You invest in property – the obvious reason is to create long-term wealth and hopefully you can hold as much property as possible for the minimum amount of money to get the effect of being in the market for multiple cycles. So it all comes down to cash flow and it all comes down to capital growth. So irrespective of whether or not you choose to make your investment property available for short-terms rentals or long-term rentals, you should be buying those investment properties on the basis that they will go up in value. But let's deal with the cash flow perspective or the yield perspective. Maybe a question for you, Sabrina, do property investors get better cash flow if they use short-term rentals versus a long-term rental? So there's a lot of different moving parts here but -
Phil Tarrant: - collectively from your experience and the experience of MadeComfy, how do the results come out?
Sabrina: Yeah, definitely for a long-term rental, you have a completely different dynamic than long-term rental, because long-term rental, you have the same cash flow every month, if you like. When you look into long-term rental the cash flow depends on the seasonality, the date. If you look within the month, the pricing changes depending on the day of the week, depending on the season as well. As an overall exercise, we have, for a full year period, we have noticed that the yield for our property investors has improved significantly. So we are talking about increases from 4 per cent to 6, 10 per cent. So if you look at a whole year exercise, effectively, the yield improves significantly.
Phil Tarrant: And is short-term rental only really relevant for areas where there is a business demand or a tourist demand? So a short-term rental in Blacktown, is there much merit to that, or does it need to be in Kirribilli or Mosman or Darling Point?
Sabrina: There are a couple of things that you need to consider, that is supply and also seasonality. So obviously, if the property is located close to the beach, for example, potentially is going to have a high seasonality impact. For example, if your property's in Bondi or if your property's in Manly, you are going to have high demand in the hot months. But then in winter, the demand is going to drop significantly. So as a property investor, you need to be prepare to face with the high ... Low season months.
Phil Tarrant: So there's quite a lot of fluctuations then, really, in cash coming through.
Phil Tarrant: So what would be the balance between a high ... A time when you've got very low vacancy rates and you'll probably put your price up, versus a winter period, where no one really wants to check in and if you do so, it's probably going to be the minimal rate.
Sabrina: Yes, so as I was saying before, it also depends on the supply. As you were mentioning a property in Blacktown. Blacktown is an area that has really low supply of short-term rental, so the occupancy rate is suspected to be high, because it's not only for travellers. The short-term rental is not only used for traveller, but is also used for people that are effectively coming for work, for people that are renovating their properties, or also for people that want to be close to their family if they are coming to Sydney. So potentially, people that have family in Blacktown are going to be using these properties available for short-term rental.
Phil Tarrant: And do you have any signs yet between ... I'm very conscious, and you make a valid point in terms of supply and demand. So if there's very little short-term accommodation available and there is a demand for it, it means you're going to have high -
Phil Tarrant: - rates. Whereas, let's go back to your example of, say, Manly or Bondi.
Phil Tarrant: Do you have any signs yet around how many investment properties in those markets are actual short-term versus long-term. So is there an oversupply of short-term rents?
Sabrina: So if you look at Bondi, for example, there is an oversupply of short-term. Not necessarily because of investment properties, but because a lot of private homes have been made available in Bondi for short-term rental. Yeah. So there is an oversupply of properties in Bondi. If you look at, for example, Redfern, their supply of short-term rental is significantly low, so you can expect that your occupancy rates are going to be better.
Quirin: What you also see is that a lot of people own property, maybe in Bondi and in Manly, and they've been previously just empty, and now people say, "Well, if I'm not there in the winter, I'll just put it up on Airbnb and see what I get." So this is why you have a bit of a higher supply as well, because more people just own summer properties in those suburbs. People can afford it and maybe people do, in Redfern or the Inner West is a great example.
Phil Tarrant: So are you seeing yet property investors who purely have an Airbnb strategy? So they transition their whole portfolio to being short-term rentals, or the other side of that is that they are deliberately buying properties in markets where there is a pilfer short term. Is that dynamic happened yet or is it happening?
Sabrina: What we have seen is that, so from investors that have multiple investment properties, they are trying to combine their strategy and the Airbnb strategy is effectively looking for higher cash flow, higher yield. Effectively, they take the properties that are more suitable for short-term rentals and then chief them to the short-term rental market.
Phil Tarrant: What is it, do you think, if I was a property investor and I was considering ... I don't have any of my properties on for short-term lease or through Airbnb, because frankly, I thought it'd be too hard to administer it. But I guess that's a solution that you guys are trying to resolve. But they're in markets where I always had a perception that there wouldn't be a large demand for short-term rentals, but maybe I might rethink that. But irrespective of that, if you're considering of using an Airbnb strategy or short-term lease strategy for your properties, what are those two or three things that you really need to consider and get right before you choose whether that's right for you?
Sabrina: So I could say you should have, effectively, an analysis on the exact location. You should identify that there is not an oversupply of properties available for short-term rental and that this seasonality doesn't impact significantly the return of your property. Yes.
Phil Tarrant: So what are the keys – whether you've perhaps got a property in a location like this already or you're looking to secure investment property in those locations – if you want to go the short-term rental route, what do you need to identify in a property to make it most attractive for short-term rental market?
Quirin: Well, we have three key pillars on that. The first one is location. You can't change the location once you buy it, so make sure that the location has a strong return on short-term rental. And there's data you can look at, that's something we usually provide. The second one is that you make it really attractive, so it's not about just having an empty property, put some mattresses in there, like Airbnb might have started with some air mattresses. It's about make it really look nice, funky, quirky. Something different to hotels and something that stands out and makes people to click on your listing, and then want to stay in it so people can start to dream. The third one is to provide an amazing guest experience, because what you see in most short-term rental platforms, reviews are almost everything. So whilst it's great to have a good location, a great looking place, you need to also provide the experience to the guests so they'll leave a great review, even come back, and make sure that your occupancy and your rates that you can achieve are on the higher side.
Phil Tarrant: So on the point of seasonality, if you've got a property in Manly and it's summer, it's probably going to fetch more than Manly in winter. Just makes sense, right? Number one, what sort of fluctuations are you going to get, plus or minus, 100 per cent of a weekly rent? How does that work normally?
Sabrina: If you look at the properties that we manage, you could be getting from 20 per cent to 100 per cent more than long-term rental.
Phil Tarrant: Based on seasonality.
Sabrina: Yeah. It depends on the type of property, the size of the property, again the supply. There are areas where there is under supply of three bedroom properties, for example, and then if you have a three bedroom property there, your returns are going to be fantastic. Yeah. But that's effectively-
Phil Tarrant: So it's really about getting a ... Because I said that as a positive, as in I can double my income in summer months. But it means in winter months, I need to make sure I've got plenty of buffers in place or good cash management so I can still pay my mortgage during those periods.
Sabrina: Effectively, in the areas where there is a high seasonality. But there are areas where, all year round, you have good occupancy rate and that is not the case. You have more on the upside than downside. But when you have seasonality, yeah.
Phil Tarrant: Let's talk about money. So, I'll go back to my point where I've never put any of my properties up for short-term rent, because, number one, I hate going through the process of doing rent reviews. I like it when it goes up, but if it goes down I don't really particularly like it. But my property manager looks after all that, and I do that every six months or 12 months or whatever it is. I've been looking at short-term letting, it's a mindset that pretty much every single week, or maybe even day, you're going to have someone else in your property. Would you say that a short-term rental strategy is a lot more time-intensive for the investor versus a longer-term rent play?
Sabrina: Not at all. I think if the property is managed for you, it's exactly like having a long-term rental, a long-term tenant. Yeah. So if someone is managing, your property is going to be exactly the same.
Phil Tarrant: Which is what you guys do?
Sabrina: Yeah. Because it's effectively, mind tenants, guest management, guest communication. Everything is managed for you.
Phil Tarrant: How much does that cost? So I look at my portfolio and my managements can range between 5 and 8 per cent, depending on the location. To have someone manage a short-term rental property, what are you looking at in terms of management fees?
Quirin: The way we operate, it's more on a value-adding side. So in average, we achieve 40 per cent higher returns that the average Airbnb host does. And for all those value-adding services, we're charging a 20 per cent commission.
Phil Tarrant: Okay.
Quirin: So all in all, you're better off using us than if you did it all yourself, minus all the stress and work that is involved.
Phil Tarrant: So for 20 per cent, you guys are working pretty hard then, to deliver that value.
Phil Tarrant: I imagine you're incentivized then to make sure that you've always got people in people's properties, right?
Phil Tarrant: That's the idea, yeah.
Quirin: Of course.
Sabrina: Yeah, it's a partnership with the property investors as well.
Phil Tarrant: When you first speak to people about the potential for transitioning your investment properties, and I know you do people's homes as well, but I don't want to touch that. But for property investors, what's the normal prejudices that come along with that? When you're sitting in front of a property investor who has not really thought about it beforehand, myself included, and they think, oh I'll shift short-term. What are those couple of prejudices that you typically address?
Quirin: The one is higher wear and tear. People think that's a higher wear and tear short-term. But we experience, in the last two years we've been doing, that is that when people stay three, four, five days, they often don't use the kitchen, they are usually out because they come here to either work, or they come here to experience Sydney. So they are less in your place. Now of course, they pull in and out your suitcases or their suitcases, but that is not damaging your property as a long-term tenant, maybe, that's in there. And this doesn't take issues of house parties, long-term people have parties. They have celebrations, they have birthdays...
Phil Tarrant: Okay.
Quirin: Everything, baby showers, and in that moment that's often okay. So that's one thing, that there is less wear and tear. The other one is the predictability of income – that is of course a big concern. What we do for that is that we provide people with a 12 months revenue prediction of what their net revenue is going to be, including fluctuations and increases in lower times in the year. So they have a clear understanding where that will be and that's based on previous facts, and we describe the market. We know what happened in the last 12 months and we know the demand and supply with statistical models that we have, how it's going to be in the next 12 months. That then often helps them to understand that there's maybe less of a risk on the revenue side than they think there is.
Phil Tarrant: So you guys are highly invested to deliver results. You say the word partnership-
Phil Tarrant: And it sounds like you actually ... It's cool. It makes sense. As I started this conversation, there's quite a lot of noise around this, so it has polarised the marketplace, both renters and also owners of property. I know the government's looking at this quite closely. The government has responsibilities to make sure that there is enough properties for Aussies, in inverted commas, to live in and to create neighbourhoods, which aren't transitioned too far in one way or another, whether it's owner occupiers or investors or short-term rentals. What's your view towards pending government legislation or regulation around short-term rentals? Do you have any major concerns about that or is there anything you think should be flagged?
Quirin: I think what was really great is that the government, the way it all started was with an 18 month parliamentary enquiry, so they really got engaged with communities, with businesses, with home owners, with stratas, with building managers. So they got everyone's opinion and built a report on that, which is accessible through the government website. Now there have been a first announcement, is that the government is seeing short-term renting not as a negative thing, however they would like to make sure that everyone is addressed. So the big question that is still open is, can strata ban short-term renting as a basic? And if so, what majority votes have to be involved? Also, what happens if something, if there is a complaint, if there is a noise, how can residents act and complain? There has to be a formal process on that. And long-term, you know what you can do.
Short-term, it's maybe a bit amateurish, everyone can do it. Getting some structure in place that is becoming more professional, and people understand if someone next door is doing that and they have short-term people in there, if something happens I'm not happy with, what can I do? Who do I approach? Because currently, if someone starts doing that on Airbnb, you don't know the owner, there's almost no way that you can act and complain. And that makes people frustrated, I guess frustrated when they can't do anything and they feel left alone and not involved. I think what's happening at the moment is really great, that the government takes the time, and I'm really confident that they are making a decision that is benefiting the residents of Sydney, but also people that come here and also people that own property. A lot of Aussies own property as well in Sydney and to have to pay the mortgages. And that has to be considered in this equation as well.
Phil Tarrant: So you guys are pretty optimistic then around the government process which is underway, but also the opportunity for investors to consider the opportunities through short-term rentals. You need all these different things to move in unison and, as I said beforehand, every community needs to have a range of housing available. I know where I live, I live in Kirribilli, it's a very transient sort of area. In the block of units that I live in, there is a number of them which are open for short-term rentals. Most of them are just hen's parties and buck's parties, but you know what, it's not too bad. It works quite well. But I know the guys that rent these places out, they do quite well from a yield perspective. I look at some of the prices they get for renting out short-term and it blows my mind. But there's pros and cons of everything. It's whatever works for you. But, anything you guys want to finish up with? Do you think we've given this topic a reasonable play? Is there anything that we've missed?
Quirin: I think it was great. It's important to look at this from every angle, and we are maybe not like the ones who are always pro and say everything is great when things are not great. Our work is all about people. We work with homeowners, we work with neighbours, we work with strata. I mean, it's just, with building managers, with guests. So we get a really good feel of everyone and we don't want the people that are frustrated or let down in these sites. So I think it's great. It's important to have a balance. We want to have a happy city. I came here a few years ago because I love Sydney. People are happy, open and are really also positive to change. What's happening at the moment with a sharing economy, things are changing and I'm really confident that Australia is dealing with that change really well.
Phil Tarrant: That's good. Sabrina, anything to finish up with?
Sabrina: Yeah. I think, well I will invite property investors to explore the additional opportunities they have in the market to optimise their property portfolios, and see how also including short-term rental properties in their portfolio they can improve returns and improve, yeah, the yield of their investment properties.
Phil Tarrant: Which most investors are trying to achieve.
Phil Tarrant: Everyone wants to make a few more bucks out of their properties. But if I was going to summarise this chat, and I'm very neutral towards the opportunity of short-term rentals versus long-term rentals, and as Sabrina and Quirin have identified, I think it's very much, it comes down to the numbers. I know you guys are doing, creating quite a lot of science behind this and I'm a numbers sort of guy. And with every property investment purchase or property portfolio that you create, you need to understand that every property has a role within it, some of them are going to be more capital growth player versus a yield player. But the important thing about a short-term rentals that I've taken from this chat is that you really need to understand the dynamics of the particular market. Just because your investment property might be in an area where tourists don't frequent, it doesn't discount the need for people needing short-term accommodation.
On the flip side of that, if you have properties in areas which have high tourist demand or high short-term transient demand, you need to be careful that there's not an oversupply of short-term rentals in those markets. Often, being different might be to have long-term rental opportunities and you can secure that market as well. These type of properties need to exist in every market. You just need to make sure that you're using the option or the solution that best affects your portfolio and that is one that gives consistency to your rentals. You don't want to be holding a rental property without anyone sitting in there, because it means you're not generating any money. So explore the market, do your homework, do your research. I'm sure the guys at MadeComfy will be happy to share some of their findings with you.
If you've got any questions for me on this, I'm happy to chat about this a little bit more, actually, I think it's a good point. I might get some guys in from the data houses to come and challenge the pros and cons of this as well. Contact us at [email protected] We'll probably write up some stories on this as well, so go and check out smartpropertyinvestment.com.au. I'll get some different opinions on this as well. Remember to follow us on all the social media, Facebook, Twitter, LinkedIn. You can follow me if you like, @philliptarrant on Twitter. Remember those reviews on iTunes, please keep them coming in. Five stars, we love them. But please leave a comment and a recommendation as well. We want to try and get as many Aussie property investors as possible listening to The Smart Property Investment Show. We'll be back here next week. Until then, we'll see you later. Bye bye.
Disclaimer: The information featured in this podcast is general in nature and does not take into consideration your financial situation or individual needs, and should not be relied upon. Before making any investment, insurance, tax, property or financial planning decision, you should consult a licensed professional, who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.