Higher interest rates and tighter regulations have some Canadians doubting the opportunity to invest in a short-term rental property.
Deana Steele says she’s never seen so many condos and vacation homes for sale in Kelowna, British Columbia, as she does right now.
The founder of Keys to Kelowna Properties, a luxury vacation rental management agency, points out that the city’s lakefront real estate market is currently “saturated” with properties zoned for short-term rentals. Some sellers are people who bought properties not too long ago, and are already trying to get out of that market.
“All these new entrants have flooded the market — they were late entrants into this market,” says Ms.me Steele.
“They thought they were going to make a lot of money because they saw what happened in the gold rush. And now they’re like, “Oh, big mistake.” »
The “gold rush” to which Mme What Steele is referring to is the investor craze for short-term rentals that Kelowna and many other Canadian cities experienced at the start of the COVID-19 pandemic.
The arrival of teleworking and the drop in international travel have fueled a renewed interest among Canadians in domestic destinations. For a while, people listing cabins and apartments for rent on Airbnb, Vrbo and other online marketplaces made more money than in the past.
But as more people tried to take advantage of this situation, the scales shifted. This summer, says Mme Steele, the number of Airbnb-style listings in the city was outstripping demand.
As the glut of short-term rentals grew, average occupancy rates per night fell, as did the amount of income investors were able to obtain.
“Our occupancy rate has plunged, simply because of the number of new registrations,” explains M.me Steele.
“So now those who aren’t seasoned investors or don’t want to subsidize their property are looking to sell. »
Growth hampered by regulation
Airbnb, Vrbo and other similar online rental platforms have long been tempting opportunities for Canadians who have enough money to make a down payment and are willing to become owners or “hosts” in the short term.
According to Statistics Canada, between 2015 and 2018 alone, the amount of income earned by owners of private short-term rental housing in the country reached $2.2 billion, recording a ten-fold increase in just three years.
But in 2023, short-term rental as an investment strategy has lost some of its luster. This is partly because various levels of government are increasingly imposing restrictions aimed at curbing the practice, such as banning short-term rentals when the owner does not reside in the property.
In addition to stricter regulations, the financial side of the equation has also changed dramatically. Interest rates are much higher than they were a few years ago, meaning homeowners interested in the short-term rental market need to be able to generate more income just to cover their mortgage costs .
It is also no longer prudent to assume, as many once did, that property values will continue to increase in the long term.
“In the past, some people may have been less concerned about the income they generated than the potential appreciation in the price of their property,” notes Jason Heath, managing director of Objective Financial Partners.
“But with higher interest rates and a weaker housing market, prices may not rise as much as before. They could even go down. »
Mr. Heath adds that anyone embarking on a real estate investment in Canada must make a minimum down payment of 20% before being approved for a loan.
He says this factor, combined with today’s higher borrowing costs, means potential investors really have to do some math.
“The big question is: “is this a viable economic model”? Can you make more money running an Airbnb property than owning a traditional rental property or simply investing in stocks and bonds, for example? » asks Mr. Heath.
“And you have to remember that in the case of stocks and bonds, you can buy them and it doesn’t take a lot of work. Owning an Airbnb property is a business, it’s work, and there’s also the time cost to consider. »
A capacity to adapt
Avery Birch, founder of 365 Experience, a rental property management company in Halifax, acknowledges that the short-term rental market has evolved recently.
But Mr. Birch, who was just 21 when he began earning short-term rental income by offering a spare room in his apartment, says he still believes it can still be more lucrative than renting. other forms of real estate investment.
He explains that this is due, in part, to the fact that short-term rentals give landlords more flexibility to adapt to changes in supply and demand.
“I think it’s actually a safer value for the property, especially when the market is hot, because we’re not constrained by any price,” notes Birch. We can raise or lower them as much as we want. »
Mme Steele believes Kelowna will remain a popular destination and that good investments can be made by those who have the required upfront cash and are smart in their strategy.
For example, she notes that some savvy investors are currently turning away from the short-term rental market and toward mid-term stays, catering not to tourists, but to those staying in town temporarily for work or to receive medical treatment.
“I think anyone who is interested in this industry needs to understand that it is volatile. […] It’s a higher risk industry, which can offer a better reward,” she believes.
“I’ve done it with my personal properties, and I would never refuse to consider it. »