Rental Arbitrage in Auckland | What You Should Know!

Rental Arbitrage in Auckland | What You Should Know!

What is Rental Arbitrage?

As it gets harder and harder to afford a house or a tent cabin, it gets more difficult for would-be vacation rental entrepreneurs to enter the short term rental market. Rental arbitrage is a low risk business model that offers easier entry into the space. Rental arbitrage involves renting for the short term a vacation rental property that you are renting for the long-term.

Is Rental Arbitrage Legal in Auckland?

Rental Arbitrage is legal in Auckland as long as the tenancy agreement between the vacation rental operator and the property owner does not forbid subletting. In New Zealand, “A tenant is not allowed to sublet the house they’re renting if their tenancy agreement has a clause that forbids them from doing so. If the tenancy agreement doesn’t forbid them from subletting, the tenant must still have the landlord’s written consent to sublet the house, or part of it, to someone else.”

Auckland as a Tourist Destination

Tamaki Makaurau Auckland is full of sights to see, attractions to experience, and activities to engage in. In 2019, it was visited by over 1.8 million international visitors alone, accounting for the highest international tourist numbers in the country.

Known as the ‘City of Sails’, Auckland has an ingrained sailing culture. It has one of the largest ports in New Zealand and is the home turf of America’s Cup, making it also a destination for sports tourism. It is also the ideal point from which to explore the North Island, from the beautiful Bay of Islands to the Coromandel peninsula, Rotorua, Hobbiton, and Waitomo Caves which are only a few hours’ drive away,

According to the Auckland Visitor Survey Insights Report 2019, 57% of international visitors stayed in Auckland two or more times on their trip while 25% visited Auckland only on their trip and rated their overall experience in the city 7.8 out of 10. Meanwhile, 71% of domestic visitors visited Auckland only on their trip. Domestic visitors rated their overall experience in Auckland 7.2 out of 10.

Other types of accommodation such as vacation rentals and Airbnb are quite popular among visitors to Auckland, particularly those staying in North, East, South, and West Auckland where they exceed traditional commercial accommodation. According to the report, the most popular destinations in Auckland for visitors are the cultural gem of Queen Street; the iconic Sky Tower; the heritage and fine activities of the Downtown Waterfront and Viaduct; the Auckland Museum which tells the story of New Zealand, its place in the Pacific, and its people; the 9 blocks of dining, shopping, community, accommodation, art, architecture, park, and sustainability that is Britomart; the Auckland Art Gallery which houses New Zealand’s largest collection of over 15,000 works; the upscale fashion, shopping and entertainment precinct Newmarket; Mount Eden, the highest natural point in Auckland; and wealthy heritage city Parnell.

Rental Arbitrage Opportunity in Auckland

Rental Arbitrage Opportunity in Auckland

According to AirDNA, the leading provider of data and analytics for the global short term rental industry, in Auckland

  • Average Daily Rate (ADR) is NZ$ 200 (Sep 2021)
  • Occupancy rate is 65% (July 2021)
  • Average Monthly Revenue is NZ$ 2,800 (July 2021)

Despite a recent rise in rent, the median rent (Nov 2021) in Auckland is still $600.

Rental Arbitrage Rules in Auckland

While Auckland has taken some steps to regulate short term vacation rentals within its borders, the lack of explicitly state rules on many areas can cause confusion and sometimes even lead to issues arising. It is recommended that you check with the Auckland Council on any matters you are not clear on or have doubts about.

Ownership

In New Zealand, you can own short term vacation rentals on your own, as joint tenants, tenants in common, or in a partnership as defined in the Partnerships Act 1908.

Taxes

State taxes are set by the central government and apply to short term vacation rentals across the nation of New Zealand.

Income Tax

Short term vacation rental income is taxable under the Income Tax Act 2007 and is administered through the Inland Revenue Department.

To understand what tax you need to pay, you have to work out income and expenses for your property and these depend on the type of property you are renting. IRD recognizes the following categories:

New Zealand tax residents with an overseas rental property are also required to pay tax on the rental income from it to New Zealand.

GST (Goods & Services Tax)

The Goods & Services Tax is a tax of 15% added to the price of goods and services including when you are selling goods or services that are taxable. In New Zealand, short term renting is considered a taxable activity.

If the turnover of your short term vacation rental exceeds NZ$ 60,000 from all GST activities, you have to register for and file GST returns.

To work out your turnover, you add up the turnover from all of your taxable activities. These include:

  • Total gross short term rental income
  • Business income
  • Income from working as a contractor (self-employed)
  • Tents from an associated person (at full market value, i.e. the rent you usually charge)

When working out your turnover, don’t include

  • Rental income if the property is joint-owned
  • Your salary or wages

You can also claim GST on expenses, i.e. goods and services used or available for usez, when you are renting out short term. This depends on how you use your property for short term renting.

These include:

You may also be able to get a GST input tax deduction for the purchase of your property (or claim some GST if you owned the property before you registered for GST and started short-term renting).

Auckland Tax

Auckland Tax

Auckland Council charges an Accommodation Provider Targeted Rate (APTR) on those who rent out their property for the short term for more than 28 nights each year.

This applies to those who list on an online peer-to-peer accommodation platform such as Airbnb or Bookabach and rent a separate area of their property such as a studio, annex, etc. APTR does not apply if you are only listing a room, for example.

APTR depends on

  • The number of nights your property is booked
  • The local board your property is in
  • The capital value of your property

If you do not declare your accommodation to the Council, you could be charged a general rate based on the average rating level.

The Auckland Council however has suspended APTR at present until 30 June 2022.

Health & Safety

While there aren’t explicitly stated health and safety requirements mandated of short term vacation rentals as yet, it is always better to check with the Auckland Council beforehand and/or use the Healthy Home Standards governing long term rentals as a guide.

  • General health and safety regulations include:
  • Smoke detectors throughout the property with a check conducted every 3 months to ensure they are in working order
  • Fencing any deck over 1m high
  • Fencing any pool deeper than 400mm
  • Properly storing any hazardous chemicals and poisons
  • Ensuring any kayaks or boats provided are seaworthy and life jackets are provided

Zoning

Make sure to check with the Auckland Council beforehand that operating a short term rental in your location does not go against the council’s district plan requirements.

You may also be expected to provide written notice if you intend to change the use of your property and/or obtain building consent under the Building Act 2004.

Other Considerations

Insurance

Standard home and /or contents insurance does not cover short term vacation rentals. Make sure you upgrade or switch to short term vacation rental insurance.

Loans

Banks and other lenders don’t generally consider short term rental income the same as long term rental. You may have to prove income over an extended period of time.

Host Protection

When you rent your vacation rental property in the short term, you are not covered by the Residential Tenancies Act. While some OTAs include booking terms and conditions, it is always safe to utilize a short term rental agreement that protects your property and business.

Conclusion

Rental arbitrage is an easier, lower risk, and highly scalable business model for vacation rentals. Auckland is not only a great tourist destination but together with low rents, minimal regulations, and clear taxes, offers great rental arbitrage opportunity.

If you are looking at other markets around the world to invest in, check out our lists of top markets in the UK, US, Australia, Spain, and Mexico.

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