According to Ashvin Sharma, Spergel’s licensed insolvency trustee in Vancouver, “the extra income earned from renting your home out as an Airbnb can be a great source of cash flow to pay off debt. However, any individual considering this pathway should make sure they are aware of the possible financial and legal risks.”
What Does It Mean to Be House Poor in Canada?
To pay off debt in modern times usually means prioritizing which debt to pay off first and mortgage payments are, typically, both the biggest and most important debts people take on in life.
Unlike being cash poor (having lots of home equity, but little cash on hand), being house poor means your mortgage payments and other property expenses take up such a large portion of your household earnings that there is little or nothing left for anything else (such as rainy day savings, family vacations, or paying off outstanding credit card balances).
In late 2019, Statistics Canada reported that for every dollar of disposable income earned, the average household had $1.76 in debt. Meaning, Canadians are spending more money than they are earning or, in other words, they’re spending more than they can afford (often relying on the equity of their family home to secure those debts).
On top of already high mortgage payments, as Canadians find themselves burdened with increased costs of living, stagnant wages, and changing interest rates, they are also taking on more credit card debt in order to pay the bills, buy groceries, make car payments, and cover school fees.
Not only is this way of living financially unsustainable in the long-term but, according to the Government of Canada, this kind of financial stress can also lead to loss of sleep, heart disease, depression (amongst other health conditions), and strain in your relationships – meaning, it’s also unsustainable for your overall health and the wellbeing of your family.
This troubling scenario isn’t limited to homeowners in major real estate hubs like Toronto and Vancouver. Across Canada, families in small towns are struggling to make ends meet. It is no surprise, then, that some homeowners are seeking debt help the DIY-way by leveraging the equity in their homes through secured lines of credit and/or renting out their homes to increase their income.
The Risks of Relying on Home Equity to Pay Down Debt
In Canada, like many other countries, owning a home is seen as a pillar of a financially stable and successful life. In a market that hasn’t experienced a crash as severe as the 2008 housing crisis in the United States, it can be difficult to imagine a better investment than real estate. However, housing markets can slow, making a once worthwhile investment not sellable at a time when you need to liquidate your assets to pay down debt.
Worse, if you have borrowed against the equity in your home to pay down other debts (such as car loans, student loans, or credit card debt) and the market slows or crashes, you may find yourself unable to separate these liabilities when you need to.
Think about it, you have a steady income, pay all your bills, and spend responsibly so that your credit card debt is manageable. Then, the bank increases your interest rate a few months before the market crashes. All of a sudden, your mortgage payments eat up more than a third of your monthly income and you become one of the house poor – a reality for 25 percent of Canadians.
You can no longer pay off debt that was once manageable, there is no market to support selling your property at a profit, the bank still wants their mortgage payments in full and on time, and your maxed out credit card is secured by the equity in the home you have been working so hard to pay for all along.
You could lose it all if you don’t keep making your payments on time.
What do you do?
Airbnb As A Credit Solution
Airbnb is a home-sharing platform that allows homeowners to rent out part (or all of) their property to guests on a temporary, short-term basis. The appeal has always been the “travel like a local” mantra that guest houses and bed and breakfasts naturally embody, in stark contrast to big chain hotels.
Over the years, the platform has become a sort of rental directory for cities around the world, making it easy for private home owners to find customers for the rooms or units they would like to rent out (minus the challenges that come with long-term tenants). So, if you already have a beautiful condo, but being house poor means you can’t make your minimum payments to your credit card companies on time, maybe a credit solution exists for you in the sharing economy.
As a Host, you can rent for as long as you want and the rules, prices, and check-in procedures are set by you (the homeowner) too. You can post your listing on the site for free, but will be charged a fee when your guests’ cash is transferred to you (which is done upfront, so that no one can stiff you on the bill after their stay).
For many, an extra $200-$1600 every month could help pay down debt significantly and, unlike dealing with long-term tenants, you don’t have to worry about making sure rent is paid on time, fixing squeaky doors, or dealing with tenant board headaches. Travellers and short-term tenants aren’t as concerned with how pristine the place is, only that it’s safe, comfortable, and meets their immediate housing needs. For some, a squeaky door adds character (because they don’t have to deal with it all year round).
It’s not all sunshine and rainbows with Airbnb, though, and there may be easier ways for you to get debt help faster – without the financial and legal risks involved with renting out your home.
Advice from a Licensed Insolvency Trustee on Renting Out Your Mortgaged Home
As we have established, renting out your home on Airbnb can be a great way to supplement your income to ease debt obligations. The platform provides an almost seamless concierge service that includes a help hotline and some protections for hosts.
In a time of financial strain, Canadians who are house poor and looking to pay off debt can certainly use house sharing as a viable way to ease the burden. But, according to Sharma, this can complicate an already complex financial situation:
“Financially, along with maintenance costs, insurance expenses and taxes that may be required to participate on any home-share platform, your mortgage lender could view your property as an investment property when you renew your mortgage and this could lead to a higher mortgage rate.”
Higher mortgage rates mean you will end up paying more for your home overall and your mortgage payments will eat up even more of your budget – which defeats the purpose of renting out your home in the first place. Also, guests can cause damage to your home and problems for you with your neighbours.
Legally speaking, in some regions it is against the law to run an Airbnb and, in the case of condo buildings, hosting strangers for money may be in conflict with the agreements you have signed with your condo board. So, to avoid legal fees, fines, or putting your relationship with the condo board at risk, be sure to check with your local municipality and condo directors before signing your home up as an Airbnb rental space.
Debt Help Options That Don’t Require You to Share Your Home
Airbnb is only one of the many debt help solutions available to homeowners in our ever-expanding gig economy.
To design a credit solution that works for you and learn different ways to pay off debt, book a FREE consultation with a licensed insolvency trustee at Spergel today.
Contact us here to find the trustee nearest you.