Why using Airbnb to finance a home is harder than it seems

By Shannon Lee Simmons - Published on September 26, 2016
a house with a for-sale sign on the lawn in front
An increasing number of people are hoping Airbnb is a way into the real estate market, but it all depends on regulations. (USGirl/iStock)

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Amy and Eric, 32-year-old young professionals, rent a two-bedroom apartment in downtown Toronto, but last spring they bought a country home close to the beach in trendy Prince Edward County, in southeastern Ontario.

It’s not because they were sick of the city or liked the beach or needed an escape – it was because they wanted to buy real estate and found it difficult to break into the Toronto market.

They didn’t buy the property to use as a vacation home themselves, in other words: they purchased it as an income property —  and not a traditional one. They don’t have regular tenants: for about 40 of the 52 weekends a year, they rent it out on Airbnb.

Like Uber, the car-sharing service, Airbnb hovers in a murky, grey area of the law. An increasing number of people are hoping to use it as a way into the real estate market, but their capacity to do so depends greatly on municipal bylaws and the type of property in question.

In January, Toronto city council ordered a preliminary report,  due next month, examining options for regulating Airbnb. For now, Torontonians cannot be sure that buying a property for the purpose of renting it on Airbnb is beneficial, or even legal. This is compounded by potential difficulties obtaining a mortgage and insurance.

Robert McLister, founder of mortgage rate comparison website RateSpy, says many caveats come with such an arrangement. 

Mortgage lenders “don’t like short-term rentals,” he says in an email. “They're riskier than regular rentals because there's no assurance of a long-term lease.” There's also a higher probability of wear-and-tear with short-term tenants, which theoretically puts the lender's security at risk.

Amy and Eric purchased their new home for about $325,000 with a $200,000 down payment that, had they purchased a more expensive Toronto home, would’ve left them with an $800,000 mortgage. They rent the property for about $500 a weekend — more in the peak summer season. The money doesn’t make them rich, but it does cover their mortgage, insurance, property tax and utilities. The property is paying for itself. 

While purchasers have often bought property with the intention of renting out all or part of their homes, those who are experimenting now believe Airbnb is a big advance. 

When the service first started in 2008, it functioned more as a couch-surfing website — a way for travellers to connect and stay somewhere that felt more personal than a hotel. It wasn’t long before its potential as a money-maker became apparent, and a significant pool of users shifted from “rent out my kid’s old bedroom because he went away to university” to more financially motivated listings. Some rooms are more comfortable than the ones in hotels, and are operated like them, too. Properties have become professional, from established check-in and check-out times to having cleaners freshen the place up in between guests.

But with that transition, regulators, mortgage lenders and tax authorities have taken notice.

If owners decide to keep their bank in the dark about their plans to use properties for Airbnb-style rentals, the consequences may come back to haunt them.

McLister says it’s possible a lender may allow short-term rental purchases if the borrower is honest, declares the home an income property, and shows the income on their tax return over several years, as Amy and Eric do. There is a literal cost to this honesty: the mortgages for real estate purchased for use as a rental property come with premium rates. But this isn’t new, and applies equally to short-term rentals and more traditional long-term rental properties.

There are some limits based on the type of property someone is considering. Condo bylaws, for instance, almost always forbid rentals shorter than six months. In fact, so many condo owners have listed their homes on Airbnb that condo boards have started spying on the service’s website to see if any units in their buildings are listed. 

The safest bet is a freehold property, purchased and controlled by one homeowner. 

That’s what Alice and Tom do. They bought a house three years ago in Leslieville, an east-end Toronto neighbourhood. They can afford it, but with daycare costs they’re on a tight budget. They were wary of getting a basement tenant, which would have forced them to undertake extensive renovations. Their solution was to rent the entire house on Airbnb on weekends they’d be out of town at the cottage, or visiting their parents in the suburbs. They make $4,000 to $5,000 a year — not life-changing, but enough to nicely defray their childcare costs.

Still, even a freehold property may run into legal issues. The bylaws simply aren’t clear, or don’t yet exist for this type of rental.

Things may become clearer, at least in Toronto, when the city council report comes in. Tammy Robinson, a spokesperson for the city, says the report may yield decisions to regulate, restrict and/or prohibit temporary accommodation rentals. The question many will be asking right after is whether other Ontario jurisdictions will follow suit.

Watch Shannon Lee Simmons on The Agenda with Steve Paikin tonight at 8 p.m. and 11 p.m.

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