Higher interest rates combined with stricter regulations have some Canadians beginning to second-guess the wisdom of investing in a short-term rental property.
Deana Steele says she has never seen as many condo and vacation homes for sale as there are in Kelowna, B.C. right now.
The founder of Keys to Kelowna Properties Inc., a luxury vacation rental management agency, said the lake-front city'sreal estate market is currently "saturated" by properties zoned for short-term rental use. Some of the sellers are people who bought not that long ago and arealready trying to get out.
"We had all these first-timers flood the market — they were late adopters," said Steele.
"They thought they were going to make a mint because they saw what was happening in the gold rush. And now they're realizing, 'Oh, big mistake.'"
The "gold rush" Steele is referring to is the investor stampede to short-term rentals that Kelowna and many other Canadian cities saw at the start of the COVID-19 pandemic.
Work-from-home mandates coupled with a plunge in international travel drove renewed interest among Canadians in domestic destinations. For a while, people listing cottages and condos for rent on Airbnb, Vrbo and other online marketplaces were making more money than they had in years.
But as more and more people tried to get in on the action, the balance shifted. By the summer of this year, Steele said, the number of Airbnb and similar listings in the city was outstripping demand.
As the glut of short-term rentals grew, nightly average occupancy rates fell, and so did the amount of revenue investors were able to generate.
"Our occupancy just bombed, just because of the number of new listings," Steele said.
"So now those who aren't seasoned investors, or aren't interested in subsidizing their property, are looking to sell."
Airbnb, Vrbo and other similar online rental platforms have long been tempting opportunities for Canadians with enough cash for a down payment and the willingness to become short-term landlords or "hosts."
According to Statistics Canada, between 2015 and 2018 alone, the amount of revenue earned by the owners of private, short-term rental homes in this country rose to $2.2 billion — a nearly tenfold jump in just a three-year period.
But in 2023, some of the shine has worn off short-term rentals as an investment strategy.It's partly because various levels of government are increasingly imposing restrictions aimed at curbing the practice, such as banning short-term rentals where the owner doesn't reside in the property.
In addition to tougher regulations, the financial side of the equation has also changed dramatically. Interest rates are much higher than they were a few years ago, meaning property owners interested in the short-term rental market need to be able to generate more income just to cover their mortgage costs.
It's also no longer safe to assume, as many people once did, that property values will continue to rise in the long term.
"In the past, some people may have cared less about the income they were generating and more about the potential price appreciation of their property," said Jason Heath, managing director of Objective Financial Partners Inc.
"But with higher interest rates and (a) weaker housing market, prices might not go up by nearly as much as they once did. They might even go down."
Heath added that anyone buying an investment property in Canada is required to make a minimum 20 per cent down payment before being approved for a loan.
He said that factor, combined with today's higher borrowing costs, means potential investors really need to do some number crunching.
"The big question is, 'Is it a viable business model?' Can you make more money running an Airbnb property than having a regular rental property or just investing in stocks and bonds, for example?" Heath said.
"And remember that with stocks and bonds, you can buy them and there's not much work involved. Owning an Airbnb property is a business, it's a job, and you also need to factor in the cost of your time."
Avery Birch, founder of 365 Experience Inc., a rental property management company in Halifax, acknowledged the short-term rental market has been in flux recently.
But Birch, who was just 21 when he first started earning short-term rental income by offering up a spare bedroom in his apartment, said he still believes it can be more lucrative than other forms of real estate investing.
He said that's in part because short-term rentals give property owners more flexibility to adapt to supply and demand changes.
"I think it's actually a safer bet for the property, especially in times of craziness, because we're not locked into any pricing," Birch said.
"We can throttle it up and down as much as we wish."
Steele said she believes Kelowna will always be a desirable destination, and good investments can be made by those who have the up-front cash and are smart about their strategy.
For example, she said some savvy investors are currently switching from the short-term rental market to mid-length stays, catering not to tourists but to those in the city temporarily for work or medical treatments.
"I think anybody who's interested in this industry needs to understand that it's volatile ... it is a higher-risk, but higher-reward industry," she said.
"But I've done it with my own personal properties, and I would never not look at it. I just love the furnished rental space because it gives you that opportunity to pivot."
This report by The Canadian Press was first published Nov. 9 2023.
Amanda Stephenson, The Canadian Press