Should I Give Up On My Airbnb? A Listener's $20,000 Decision

A listener left us a voice message... he's about to spend $20,000 furnishing a new Airbnb, and he's having second thoughts. So, should he take the punt or turn it into a long-term rental now? In this episode, Ed and Andrew model his exact decision and the GST trap most short-stay owners don't see coming. You'll learn: Should you give up on your Airbnb? Real listener’s scenario … and what he should do What he'd have to sacrifice if he changed course nowThe lesson? The GST decision isn't a formality at the time of purchase. It's a strategic decision. Let us know your thoughts by leaving us a voice message on the Property Academy Hotline⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.speakpipe.com/PropertyAcademy For more from Opes Partners: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Sign up for the weekly Private Property newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.opespartners.co.nz/newsletter-sign-up⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.instagram.com/opes_partners/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠ https://www.tiktok.com/@opespartners

• 0:08Speaker 00

  Hello and welcome along to the Property Academy Podcast. I'm your host, Andrew Knight.

• 0:11Speaker 01

  And I'm Andrew Coleman.

• 0:12Speaker 00

  And this is the show that helps Kiwis go from zero to five investment property. So you could be financially free and stick around for the next 15 minutes because you're going to learn, should you give up on your Airbnb after the government's major decision? The real listener's scenario and what he should do and what he'd sacrifice if he changes course now. Now, as you guys know, we've recently announced or released the Property Academy Podcast hotline, where you can leave us voice messages and we can play them on the show and respond and talk about it all. And so a listener has just left us a voice message because he has to make a $20,000 decision. He's bought a new build townhouse in Christchurch that's going to be finished later this year.

• 0:56Speaker 00

  And the plan is to Airbnb it. And he's about to spend $20,000 buying the furniture and furnishing the property, making it all Airbnb ready. But now he is reconsidering what to do. And the reason is because the Christchurch City Council recently took an Airbnb owner to the government's building referee, saying that their property had to comply with the building consent rules for motels, which meant that the property would need to have, you know, wheelchair access and a whole heap of other things. Now, the issue is that property was never going to be built for that. And effectively, we were saying on our recent podcast that the Christchurch City Council's been quite clever

• 1:41Speaker 00

  and that they're trying to get rid of Airbnbs through the building consent rules. Now, let's listen to what this listener had to say.

• 1:50Speaker 02

  Yeah. Hi guys. Thanks for the work that you do. Um, we have a property at

• 1:56Speaker 02

  that is currently being built and we bought it zero rated GST. So we can pay the GST on the purchase because we're going to be running it as an Airbnb. And we've set up a company to do that. The question I have is we're about to spend about $20,000 on furniture, setting it up. With that new ruling that's come out, our property wouldn't comply because it doesn't have a lift and it's got a set of stairs to get to the first floor and then another set of stairs to get to the bedroom. Do we just bite the bullet now, pay the GST and have it as a long-term rental? Or do you think it's worth taking the risk on setting it up as an Airbnb?

• 2:41Speaker 02

  And hoping that we're able to get away with it for two or three years before it not being accessible enough?

• 2:49Speaker 00

  Well, that's an interesting one. And there's a bit in there that we're going to discuss. Now, just keep in mind, while this listener has sent in, you know, their specific situation, because we're not sitting down in front of him, being able to ask lots of questions back, this isn't going to be personalised financial advice. We were saying, listener, this is what you should do with your money. But we can still give you some general thoughts. Now, Andrew, there's quite a lot in here. Can you explain for some of the new listeners what all of this means?

• 3:16Speaker 01

  So one of the big things that people might have picked up on is that this guy's bought the property zero rated for GST because he's going to run it as an Airbnb and through a company. And so because of that, he's going to fall into the GST net. Because of that, he can buy the property net of GST. So basically take the GST off and then when he buys that property, has a lesser purchase price theoretically. However, one thing to remember when you're doing this is when you sell the property in the future, if you sell the property to a regular person, so not another company that's GST registered, you pay the GST on the sale price at that stage. Now, the numbers on this, just to put some context around what, how much we're talking,

• 3:57Speaker 01

  for a $600,000 property, that'd be almost $80,000 of GST, so $78,000. So if you buy that property, you're effectively buying it at that reduced price. But again, you still have to pay the GST in the future.

• 4:11Speaker 00

  Yeah, the classic thing that people get caught on though as well is because it sounds really good. Oh, I'm going to buy a property that's worth 600K and I'm only going to pay 520K, give or take for it, because I'm being really clever with GST. Now, if that property doubles in value and now it's worth $1.2 million, you're not paying 80K worth of GST anymore. When you sell it, you've got to pay 160K worth of GST. Now, there's this view that, you know, he's considered all of this and that's the right decision for him. The question now is, do I pay the $80,000 of GST? Or do I not buy the furniture and Airbnb it?

• 4:52Speaker 00

  And I suppose what's the risk of just continuing with his Airbnb plan?

• 4:57Speaker 01

  So I think the real reality is that the council, if they're, if they're going as far as taking Airbnb people to MB to get a ruling, they're going to be cracking down on this even more. So the council could come along and say, okay, you need to meet the building code or you can't run this as an Airbnb anymore. And of course, the downside of that is if you've got a house full of furniture that you've just paid $20,000 for, well, now you have to rent it out as a furnished unit or you have to get rid of the furniture and lose money there.

• 5:25Speaker 00

  But on the other hand, I was surprised how calm he was about switching it to a long-term rental, because that would mean shelling out an extra $80,000 for the GST as well, right? And the reason you'd have to pay that GST is that switching it to a long-term rental would be considered a tax event, right? And this is a part a lot of people don't really get. If you buy a property as a short-term rental, renting out a property on Airbnb or any sort of short-term accommodation, that's a taxable activity. You're within the GST net. Well, when it comes to renting out a property or a long-term rental, well, you're exempt from GST, right? Like your tenants don't pay GST on their rent. It just goes straight to you

• 6:06Speaker 00

  because that is one of the very, very, very few things, along with mortgage interest, which is all GST exempt. So if he decides to move it across from an Airbnb to a long-term rental, the advice that I've seen is that you may need to then just pay the GST so that you can even do that. Is that lining up with yours?

• 6:28Speaker 01

  Yeah, that's correct. Now, just bear in mind, for most people who are buying a rental property, they are generally speaking, using their equity and another property to fund their deposit or they might be, they might have some of their deposit saved. Now, the bank will lend against the reduced amount. So if you're buying it for 600,000 and you're buying it zero rated, so there's a theoretical discount, which isn't a discount at all, but people absolutely think it is sometimes, I think.

• 6:56Speaker 00

  Now, the interesting thing here though, is that this property actually does have resource consent to be Airbnb, right? So where's the issue if the council's given resource consent?

• 7:09Speaker 01

  Yeah, the development he's buying is consented for short-term rentals, which is definitely a good starting position for him. But this new ruling basically makes it harder around the facility. So it sets the bar higher in terms of what's there as far as the facility. So like accessibility and things like that. And so it could be that this development has got the consent, but because the unit doesn't comply, well, you can't Airbnb it.

• 7:34Speaker 00

  And so really the bind is this, right? Christchurch City Council have signed this property off from a resource consent perspective. But if they wanted to come after you from a building consent perspective, they potentially could. And the question is, are they going to or not? How much does Christchurch City Council want to crack down on Airbnbs? If they took you to the government's building referee, they might be able to force you to not use it, even though they signed off the resource consent. But it's because we have two types of consent in New Zealand, don't we? We've got resource consent and building consent. So the question is, does he buy the furniture and risk it or does he switch it across?

• 8:14Speaker 00

  Well, the way that I think about it is, keeping it as an Airbnb would potentially make sense if over the next couple of years, you can get enough money to pay back the furniture you're about to spend. Because the whole GST conversation is effectively a sunk cost. Like it's already happened. You are where you are, not necessarily in a bad position, right, either? If you decide to settle it and pay the GST, I imagine, Andrew, the bank is going to fund the GST as they normally would. The difficulty will be, and correct me if I'm wrong here, if he decides to settle it GST exempt and then he wants to pay the GST later on. Can he just go to the bank and lump on the extra $80,000?

• 8:55Speaker 01

  Well, he can theoretically, but then you've got an existing property rather than a new build and you can only lend 70% against that. So you'd have to have other equity and other properties to be able to do that.

• 9:06Speaker 00

  Ah, that's a niggel I hadn't thought of.

• 9:09Speaker 01

  Yeah, you'd want to get it right to begin with.

• 9:11Speaker 00

  Property has become so complicated. You'd have to, you'd have to use an advisor who really understands this, right? Understands it better than me because I wouldn't have thought about that one. That's why I'm not a financial advisor. I'm just a lowly economist who gets deep faked on Instagram. I'll tell you this little story, guys, just because this is a little, if you're not into my stories, just skip ahead. But don't worry, this one's not about cricket or anything like that. It's about more interesting things. Sorry to all the cricketers out there. Anyway, so I was catching up the other day with a guy called Brent Coleman. And he's a, he's a YouTuber in New Zealand, really good YouTuber. He talks more about general personal finance than property. And because my friend Sim from Friends That Investors moved over to New York, I thought, oh, what a new YouTube and content creator friend.

• 9:56Speaker 01

  You've got to find a new friend to steal ideas from.

• 10:01Speaker 00

  No, Sim was always good about sharing ideas. Anyway, I still like him, still talk to him, but I was like, I need a new YouTube friend. So I'm like, I'll go talk to Brent. And he was telling me about how he's been deep faked now, him and Brad Olson. So people are using AI to take their videos and create like fake videos to sell like dodgy share scams and stuff.

• 10:22Speaker 01

  Didn't Gareth Morgan get tied up in one of those?

• 10:25Speaker 00

  Did he? Did somebody? Oh, well, that's unfortunate for him. I mean, sometimes Gareth Morgan says some crazy things about cats, so you won't know whether it's a deep fake or not. Anyway, so I said to Brent, oh, I haven't been deep faked yet. I must not be famous enough. Anyway, then what happens is literally the next morning I wake up and there's an email inbox from the Financial Markets Authority saying, if somebody's deep faking you. The wonderful thing, now, by the way, it's not a wonderful thing. It's terrible, like these sorts of scams. But the most hilarious thing, just before we hit record, I played Andrew the video. And the funny thing is, no AI can defeat this thick Tarunaki accent because they were using like an American accent. No AI could copy this.

• 11:08Speaker 00

  But actually, just while we're talking about financial scams, go on, I've gone off on a tangent. What are we doing about Airbnb today? You don't think you're getting this? But do you know, there was once on TikTok, people will create fake Opes Partners TikToks, take our content and then get people to sign up. And we had one poor guy who was like, who messaged into the fake account being like, guys, I really like your podcast. They ended up selling him at like some sort of Bitcoin scheme or Bitcoin course. And obviously he lost money on it because he thought it was us.

• 11:38Speaker 01

  Oh, no.

• 11:40Speaker 00

  So you've just got to be really careful online, don't you? Yeah. Because obviously I think on TikTok, we're Opus underscore Partners. But if somebody's like, somebody creates a fake account that's Opus underscore underscore Partners, you know, it can be quite difficult to say. But coming back to this Airbnb, the way that I see it is he needs to think about his marginal cost, which is should I spend this $20,000 on the furniture or not? And so the way I've modeled it out is just thinking about how much more revenue would he get if he Airbnbs the property versus doing it as a long-term rental? And how much of that additional revenue would be needed for him to pay back the furniture?

• 12:24Speaker 00

  So if I look at a standard property at that development, at my Airbnb at 240 bucks a night, 65% average property in Christchurch is filled 65% of the year. If it's Airbnb's, bang on, you know, 15% for management. Compare it to a long-term rental. I think the Airbnb wins by about 14,800 bucks a year. It's actually quite difficult to compare them because you've got to think about GST and not GST and all of this stuff. And there's going to be some extra costs in there like internet power, linen fees. But let's say that he's $10,000 a year better off Airbnb-ing than as a long-term rental, right? So to get a return on that 20K of furniture that he's thinking

• 13:07Speaker 00

  about buying, roughly how long is he going to need to rent it out for?

• 13:11Speaker 01

  Well, if it were me, I'd probably want at least four years worth of revenue coming in to recoup that cost of the 20K outlay. But you know, two years is your kind of break even point.

• 13:21Speaker 00

  And that's before you even think about any of that stuff breaking within two years, right? You know, because there might be forks missing and replacing stained duvets or whatever it happens to be if you're doing that. I mean, I don't know what you're doing at Airbnb's, Andrew, but I know what other people do.

• 13:38Speaker 01

  Eating food in bed, obviously.

• 13:41Speaker 00

  So thinking about that, would you take the punt? If you were in this situation, speaking as Andrew Nichol, rather than advising this guy, what would you do?

• 13:50Speaker 01

  I'd probably put this on as a, as a normal rental property. I think the Airbnb market is going to have a lot of challenges over the next couple of years. And I'd be wanting to get ahead of people putting properties back onto the market as long-term rentals as the council's crackdown.

• 14:05Speaker 00

  Oh, really? Maybe, maybe I'm just a bit more risk-seeking, but I was like, oh, I might take the punt and just see. Though the GST thing.

• 14:13Speaker 01

  It's a real trap.

• 14:15Speaker 00

  Around the banking side, because if this is a, let's say it was a $600,000 property, we've got about 80K worth of GST. If you then do it later as an existing property, right? Based on those numbers, the bank might lend you an extra 20K. You would have to come up with $60,000 yourself in order to do it. And that's actually the thing that would concern me, not necessarily the 20K on furniture.

• 14:40Speaker 01

  I actually met with an investor only a few weeks ago, just to give him a review of his portfolio. Now, he had done the same sort of thing where he'd bought some properties excluding GST as zero-rated. And when we actually did the numbers, if everything got sold up, because the GST is a liability that people don't think about, it actually worked out that like across his three properties, he had very little equity himself. And so I do think this is dangerous territory for people. They don't understand that that liability exists into the future. I think there'll be a lot of investors caught out by it.

• 15:13Speaker 00

  I think the other thing there is that it's so easy to get sucked into it. Oh, yeah, buy the 600K property and you're only going to have to pay 520K for it. But I always think the IRD ain't stupid. They're going to get their money back either way, right? And even if you sell it to somebody who is GST exempt and buy it zero-rated, they're going to want a lower price to compensate for it, right? They're not going to come and pay you $600,000 for it tomorrow. They'd pay you 520, whatever you paid for it. The other thing that I'm really taking from this though is especially when it comes to GST and Airbnb, it becomes real complicated. And I understand why, why some developers are selling Airbnbs and talking about GST exempt and, you know, it kind of dressing it

• 15:56Speaker 00

  up. But I really encourage people to talk to a financial advisor before you buy a property like the zero-rated, if you're going to Airbnb it. And like, just make sure that you're actually talking to a financial advisor who can understand this as opposed to somebody who's a real estate agent or just working for a developer. You really want to get some financial advice around this. Of course, Opes Partners is one financial advisor who can help you, but there are others too. So I don't want you to think that I'm just saying, hey, you need, you have to come and talk to us. But please go talk to a financial advisor. And over the last 15 minutes, you've learned, should you give up on your Airbnb after the government's major decision, the real list scenario and what he should do and what he'd sacrifice if he changes course now. Right, let's wrap it up there. But please don't forget to rate, review and subscribe to the podcast. Really does help us get the message out to more people.

• 16:48Speaker 00

  Thanks for listening to the Prop Economy Podcast. I'm your host, Steve Atknight.

• 16:51Speaker 01

  I'm Andrew Nichol.

• 16:51Speaker 00

  We're going to be back here to work with you with more daily strategies, tactics and insights to help you get the most out of the useful on the property market. Until next time.