This time, an investigation into Airbnb and the property market, and looking for hopeful signs in the virus outbreak.
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Rent or Buy
Seemingly, people, property and leverage don’t always mix.
Borrow from the bank, buy property, rent it out, generally fine.
What if you cannot borrow from the bank, but want to get in on the Airbnb boom? Tough.
Perhaps not. Some clever UK entrepreneurs have found a way to get in on the action, with a thing I’m calling rent-to-let.
While following the story of UK and Irish long term rental markets being flooded as Airbnb demand disappears, I came across a few interesting stories that look like an interesting trend*:
I stayed in a flat in North London for an extended period during an internship. The AirBnB owner had listings for and rented out about 20 rooms.
Over a glass a wine, he told me his business of rental arbitrage. He takes out year-long tenancies of entire homes from landlords and converts them into short term lets to rent out individual rooms at profit.
I asked him if his long-term rental liabilities kept him up at night, especially if his income was so unreliable. I asked him whether he was aware of local legislation that limits AirBnB lettings. He ignored me. I asked him whether his scheme would be profitable if he declared all his earnings and paid his fair share of taxes. He ignored me.
I expect he now has rent to pay on 10 freehold houses with no income coming in. I think he’s screwed now. link
and another:
one of our tenants turned out to be also renting 50 apartments and running them all as AIRBNB, he has now broken the lease on them all and left us holding the bag. link
*2 points of anecdata straight out of Reddit do not make a trend. This seems possible anywhere where rent is high and Airbnb is not strictly policed. However:
Through further digging, I discovered that this is actually a thing, astoundingly (call me risk-averse):
What is Airbnb Rental Arbitrage?
‘Rental arbitrage’ is the act of renting a property long-term and then re-renting it on a short-term basis on platforms like Airbnb and HomeAway. Rental arbitrage is a business model that requires little investment, provides positive cash flow, and poses far less risk — and yes, it’s entirely legal.
Legality aside, although I doubt it legal, this is just the best lesson in financial leverage. Rent long, Airbnb short, pure profit. Repeat for as many leases as you can get. Wow.
I get the appeal and see how you could carefully supplement income. Taking on multiple leases though, I suppose obviously, feels like a serious gamble.
This is straight out of the “how to make money in bull markets” aka WeWork business model; take out long term leases on office buildings and rent desk space per hour, which as WeWork demonstrated, has unit economics that don’t always work.
Airbnb crash
And so the risk of those leases comes calling. Initial impacts of the crash in Airbnb rentals will likely increase long term rental volume:
There has been an increase in properties for rent due to the crash in tourist numbers, prompting hopes of a fall in rental costs.
It is thought a number of landlords have withdrawn their rentals from short-term listing sites like Airbnb and are putting them on the market instead.
Generally, Airbnb has had negative effects on city living, through Airbnb listings increasing the supply of short-term rental units and decreasing the supply of long-term rental units. Perhaps some unwinding is a good outcome. That before mentioning the messy scams that have spawned through the platform.
Rent-To-Let
Our rent-to-let “landlords” are now caught with rent coming due, no short term guests, and flooded rental markets. They appropriately, disappear.
And so we may be witnessing The 2020 Airbnb rent-to-let crash … (or maybe not).
More severe impacts are hopefully unlikely at this stage. This is different to the 2008 financial crisis, where people with volatile income held multiple mortgages. In this case, the risk is with a year-long lease, worth ~£20k (x10?). The shaky pre-2008 mortgage industry mostly corrected itself, but as always, people find ever more creative ways to increase their property leverage.
Could this ripple through to the mortgage holders who depended on rental yield to pay their mortgages? Depending on how widespread this stunt turns out to be, it could impact the buy-to-let market, which has seen massive popularity up until very recently when the tax incentives turned sour (at least in the UK), and is clearly under immense pressure due to lockdowns.
This all points to some failing of the housing market ecosystem:
Airbnb hosts make leveraged returns
Buy-to-let landlords have tenants who pay premium rent
Airbnb plays tech marketplace and claims no responsibility for bad actors in the system (though with an imminent IPO, this may add some flavour to the mix)
Cities wonder what to do, and not much else
The tide of the business cycle is going out. This is a great example of getting caught swimming naked. (I didn’t make up the tide thing)
Step back
On the macro property front, I am very curious to see how this plays out. As a renter-now-remote-worker overpaying to live in London, I am going to be watching very closely, with the following in mind:
buy-to-let being the #1 way for wealth to generate further wealth (I guess)
mass-WFH experiment reducing the need for work-related travel (surely)
a potential migration out of cities (see 2, cities are bearable, not desirable)
a severely extended price-to-rent ratio in most tourist/business hubs, leaving renting as the smart option, certainly more so with a flood to the rental market
Very interesting times.
Coronadata
No one needs another reason to dig through covid19 news (says everyone), but this is great. A US digital thermometer is tracking temperatures, and with scientific robustness, claims that occurrences of regular disease may be dropping due to social distancing.
According to their chart, the US is currently trending towards zero influenza-like illnesses by 31 March (not really, but still).
I wouldn’t draw the same conclusions just yet, but this level of isolation has never happened, so the impact and outcomes are entirely unpredictable. XKCD once hypothesised the following completely bogus scenario:
If we separated every individual on the planet for a few weeks, we could eliminate the common cold entirely, but it’s not worth it. Source
Not worth it. Sure.
Links
Short: Airbnb data to find your neighbours’ (old) occupancy, estimate new occupancy with this analysis
Medium: Just the flu
Long: Election fraud and other fascinating discontinuities
Who is Matt Arderne