Dealing with Increased Risk for Airbnb Owners

Picture shows typical interior for Airbnb in Prince Edward County

Considering buying an Airbnb in Prince Edward County? This article highlights some recent developments which are leading to increased risk for Airbnb owners and what to do about them.

Airbnb licensing

The most obvious development is the implementation of Short Term Accommodation licensing by the municipality. Starting this year, all short term rentals in the County will require a municipal license in order to operate.

The annual licensing fees are actually not onerous when compared to the potential revenue which an Airbnb can generate at present. However, some of the other costs may not be so immediately obvious.

Just because a property is eligible to apply for a license doesn’t not mean it will qualify for one. There are requirements for amenities and fire safety which may require capital investment to satisfy.

In fact, the Short Term Accommodation licensing review can bring to light building code and similar violations. At a minimum, if you are buying a property to use as a short term rental, inform your house inspector and also check for building permits.

In addition, where the owner or tenant does not live on site, there must be a designated property manager located within 60 minutes of the rental unit. This will add another layer of operating cost for absentee owners who already have to pay for cleaning, laundry, etc.

Potential accommodation tax

Until recently, municipalities could only tax real estate. However, in 2017 the provincial government passed legislation which allows municipalities to levy a tax on tourist accommodations.

Cities including Toronto and Ottawa have already implement an accommodation tax. Our municipal council will soon decide whether to implement such a tax here. It looks like we will have an accommodation tax of 4%. Customers who stay in both hotels and Airbnb’s will pay the tax on their lodging bill.

An accommodation tax added on the bill would not be an additional cost for the Airbnb owner. However, it would raise the cost to the consumer and have some level of negative impact on demand.

Alternatively, if to an Airbnb owner has to reduce their rate by the amount of the tax to stay competitive, it is an increase in operating cost.

Factors threatening demand

In addition to these cost increases, there are growing risks on the demand side of the equation.

It is certain that we will eventually face an economic downturn and recent developments are increasing the risk:

Global economic slowdown

The trade wars provoked by the US administration have already dampened the global economy.

While these global developments seem far removed from Airbnb demand in Prince Edward County, we are a trading nation which is heavily dependent on foreign trade.

In Canada, exports make up 32% of Gross Domestic Product (GDP), a common measure of economic output. We are nearly three times as dependent on exports as the United States where exports equal 12% of GDP and twice as dependent on exports as Japan (16% of GDP.)

Coronavirus pandemic

The recent spread of coronavirus is a further risk to the global economy. The Chinese economy, the second largest in the world, is slowing and global shipping and travel are curtailed. Even closer to home, as the pandemic evolves, travelers may choose to stay home out of concern about exposure. During the SARS epidemic, tourist revenues in Toronto fell by 30-50%.

Household debt magnifies impact

Finally, the high level of indebtedness of Canadian households will amplify the impact of any economic downturn on tourist demand. For consumers with large mortgage and credit card debt, travelling to Prince Edward County on a weekend getaway could be the first thing to go when the newspapers start to fill up with layoff announcements.

Mitigating risk

The increased risk for Airbnb owners does not automatically make ownership a poor investment. However, the risks do mean that before making any such investment, you need to have a “B” plan which assures adequate income in the event of a downturn. In particular, you should become familiar with the local long-term rental market and assure yourself that you could survive on long-term rental if you had to.

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