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The Risks and Rewards of Renting your Condo on Airbnb

The Risks and Rewards of Renting your Condo on Airbnb true condos

 

Until about 3 years ago, if you were a condo investor, you really only had 2 choices of what to do with your unit:

1) Rent it out on a standard 12-month unfurnished lease. Under this option you might get somewhere around $1600/month for a typical junior 1 bedroom downtown.  With this strategy your vacancy rate would be close to zero over the last 5 years in Toronto.

2) Furnish it, and rent it out short term for 3-6 months at a time. Under this option you might get around $2000/month for that same 1 bedroom, although your vacancy rate is typically higher.

Today you have a 3rd option: furnish the unit and rent it out by the night on Airbnb.com. Under this option your little 1 bedroom unit in a central downtown location could fetch as much as $3000-4000/month if fully occupied.

The potential rewards for using Airbnb are obvious – you can make a huge ROI on your investment.  

If you own a centrally located downtown condo, your monthly positive cash flow could be as much as $1000-$1500/month which would give you an off-the-charts ROI.

You might have heard or know someone who is making insane cash flow on their condos using Airbnb.

At first glance, this seems like a very attractive options for condo investors, but is it worth the potential risks?

You face risk primarily from 3 sources: the condo board, the CRA, and from your insurance company.

1. Risks from the condo board / property management.

This is the biggest source of risk to consider.

In 98% of all condo buildings in Toronto you will find a clause in the declaration that states that short-term leases are not permitted.

Short-term leases are usually defined as anything less than 6 months, but sometimes it can be as little as 3 month even seen 1 month.

Airbnb rentals are by the night, and most travellers usually average 3 nights or less, so by definition it is not allowed.

So what could happen to you if you decide like many have, to rent out your condo on Airbnb even though your condo’s bylaws forbid it?

1) The condo board can decide to take legal action against you. Not only that, they can also charge you for any expenses related to pursuing legal action against you. So if you lose, you will also have to pay the condo corporation for their troubles.

2) They can deactivate your key-fobs, thereby making it impossible for your Airbnb tenants to get into the building.

3) They can deny access to the building and/or your unit to anyone attempting to occupy the unit in violation of the short-term lease rule.

2. Risk from a taxation/CRA perspective

Using Airbnb is a bit of a grey area from a taxation perspective. Since you are essentially operating a hotel, then you could be expected to charge and remit taxes just like any other commercial hotel.

This means charging HST to all your tenants and remitting that HST to the CRA.

It means your yearly tax accounting could get real complicated.

Depending on your municipality and local rules, there might be local hotel taxes that go to the city that you would technically be responsible for collecting.

Or you could just not do any of this and risk fines and/or penalties if you get caught.

3. Risk from an Insurance perspective

Do you think your insurance policy on your condo allows for you to rent out your condo by the night? Yeah, probably not.

If something ever happened in the unit and you need to make a claim, or worse, if something ever happened to someone in the unit and you were being sued, your insurance company would not cover you if they found out that the occupant was from Airbnb.

Conclusion: Using Airbnb is not worth the risks for condo investors

Perusing through Airbnb.com you will quickly see there are dozens of landlords using teh website to rent out their condos downtown, however in my opinion the potential risks far outweigh the potential rewards to make this a viable long term strategy for investors.

There may come a day when someone figures out an Airbnb model that works for condo investors and addresses the risks outlined above, but for now, my advice to my clients is stick with standard 12-month leases on your properties.

PRO TIP:

If you own a condo that you are renting out on a standard 12-month lease, check to make sure your property is NOT on Airbnb.

Stories of tenants (people who do not own the property) who are subletting their unit out on Airbnb are getting more and more common.

Some people will fraudulently rent out multiple condos in their own name and sublet them all on Airbnb.

They rent out a unit for say $1600/month and then furnish it with cheap IKEA furniture and put it up on Airbnb for $100-$150/night.

They do this with 3 or 4 properties and suddenly they are rolling in cash every month like some sort of Airbnb feudal lord!

This is particularly a concern in any building that does not have front desk security/concierge as it’s easier to do this and not be caught.

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