Maybe you purchased a fix and flip property that has struggled to find a buyer and want to temporarily rent it out to offset holding costs. Or maybe you’re motivated to enter the sharing economy using Airbnb as a primary source of income. Whatever the circumstance may be, Airbnb has evolved into a viable option to accommodate multiple investment strategies.
Airbnb is a new avenue for most investors and the learning curve is steep. It’s important to realize that Airbnb is different than most traditional styles of real estate investing. We’ll go over some of these differences and simplify the process of investing with Airbnb in this article.
Why Short Term Rentals?
Sometimes, long term rentals cause more problems than they are worth. Short term rentals, like those on Airbnb, have a few inherent advantages.
When long term tenants stop paying rent, the eviction process is long and arduous. Not only will your property earn no money during an eviction, but disgruntled tenants often cause additional damage on the way out costing you more in repairs.
Short term rentals don’t have these problems. Airbnb guests prepay their entire stay at the time of booking. This means no chasing down guests for rent money. Also, on the off chance that guests cause a mess or damage a property, hosts are at will to charge a mandatory cleaning fee or withhold a guest’s security deposit.
Short term rentals flip the script on tenant law; the power is in the property owner’s hands.
Become a Guest Before you Become a Host!
It’s difficult to invest in something you don’t totally understand. We reached out to Airbnb expert, Jasper Ribbers of Getpaidforyourpad.com, to weigh in on this problem.
As with any business structure, understanding the customer is crucial for success. Click To Tweet
Follow this advice and stay a night as a guest. By doing so, you’ll gain an understanding of the expectations and responsibilities of a host. Knowing this will make it easier to decide if it’s the right job for you.
Mind the Fees
Like any long term property, Airbnb properties incur the same costs associated with buy and holds. As a host, you are responsible for insurance, property tax, landscaping, and maintenance costs.
Additional Costs & Considerations
When a guest books an apartment on Airbnb, it is considered a sublease. Subletting may impact your insurance and property tax rates.
Also, Airbnb hosts may need to classify their properties as rentals for tax purposes. A property rented out for more than 14 days requires the owner to pay income tax.
Airbnb’s also incur cleaning expenses. Hosts are expected to maintain a clean property between guests. Many Airbnb hosts hire a cleaner on a recurring basis to maintain the cleanliness and order of their property. By using the same cleaner regularly, the host maintains peace of mind and knows that the property is in good hands.
Unlike traditional rentals, you must account for Airbnb’s business model which takes a cut of your earnings. The site charges a 3% service fee per guest booking.
Your local HOA (Homeowner’s Association) may have a policy against using your home on Airbnb. Some HOAs mandate a minimum 30 day rental period for properties in their jurisdiction. Listing a property with a 30 day minimum stay eliminates the majority of Airbnb users who use the site for daily or weekly rentals.
Make sure to seek out this information before purchasing an Airbnb property. Also, regulations vary city by city, so don’t assume that a set of rules in Philadelphia are the same as those in New York City.
Are the numbers right?
Finding what your property rents for
Before investing into an Airbnb property, you must know its value. Dany Papineau, host of Airbnbsecrets.com, agrees, stating:
If you don’t know what your property is worth to guests, you’re not ready to make that investment Click To Tweet
There is plenty of data to help find comparable rents on Airbnb. Sites like Airdna breakdown rents, occupancy levels and property information specific to each neighborhood. Alternatively, you can manually search Airbnb’s listings to find similar statistics.
Understand vacancy rates
Airdna also allows you to measure vacancy rates by neighborhood. It’s important to know this; owning a property in a highly vacant area is not a smart investment strategy. The property will likely sit unoccupied because of the lack of consistent visitors.
Along with Airdna data, all listings on the site allow you to check when they are occupied or vacant. You can find which properties are most desirable by checking their rate of occupancy. When you know what sells on the site, you can model your investment after them.
Time to break even
By understanding rents and occupancy rates in a neighborhood, you should be able to estimate the monthly revenue of your own investment property.
Once you’ve estimated monthly revenue, subtract the cost of utilities and services to get an idea of your monthly profit. Using monthly profit, you can estimate how long it will take to break even.
For example: If monthly profit estimates to be $3,000, that property will earn $36,000 per year. If a property’s break even point is $230,000, it should take 6 years to get there.
Make your money on the purchase
Your goal should be to break even as quickly as possible. The easiest way to do this is by finding a great deal on an investment property.
Begin by looking for value-add properties in popular Airbnb locations.
Find properties priced well below market value that can be brought up to market level through cost effective renovations. Resist the urge to overspend on rehab. For example, if the highest earning properties don’t have granite counter tops, your property shouldn’t have them either. Match what other successful properties are doing to keep costs down and to position correctly in the market.
Location, Location, Location
Property location is the most important factor on Airbnb. The site is dependent on tourists and business travelers. This means that both vacation destination homes and those in or near major cities are the most popular.
Catering to tourists and business travelers is a surefire way to have a steady flow of guests booking your property and to avoid high vacancy rates.
Run your Property Like a Business
Use high quality photos
Professional photos are vital to showcasing your property in Airbnb listings. The site provides professional photography services for hosts who know the value of a good picture.
Airbnb’s photographers are experienced and understand how to promote a property through pictures. They know which ones garner the most attention from guests, and which ones can be left out.
Systems are important
Make sure to dictate clear check in and check out times for your guests. This is important to assure adequate turnover time between guests. When your property is booked back to back, make sure the second guest doesn’t walk in on the first person’s mess! Designate specific times for entry and exit to avoid this problem. This window of time will ensure adequate time for cleaning to take place.
It’s also helpful to have the capability to operate your property remotely. By being able to control your investment from a distance, you’ll save time and money that can be invested elsewhere to continue growing your portfolio of investment properties. While you must be intimately involved in your investment, there are more efficient ways of handling the day to day processes of Airbnb properties.
Consider setting up an auto away feature on your air conditioning unit to avoid unnecessary A/C costs on an unoccupied property, or even installing remote controllable locks. This eliminates the need for an in person transaction to exchange keys. Remote controllable locks allow an owner to grant guest access via smartphone for the duration of their stay. A good system worth checking out is The Lockitron.
Reviews make or break you
Airbnb is popular and the number of listings on the site increases daily. This means your home will have to contend with many others on the site. One way to distinguish yourself is through reviews.
Reviews are prominently displayed on each and every listing. Guests can see a property’s star rating from the onset. Even if you have the best home on the site, a less than stellar review can dissuade guests from ever clicking on your listing. Keep this in mind and remember that you’re in the hospitality business now.
Make sure to stock your home with toiletries and working light bulbs to promote a positive guest experience. Also, be weary of misadvertising your listing. Be very clear on what guests can expect from you and your property and never over promise; doing so can hurt you in the long run.
Succeed with Airbnb
Airbnb can be lucrative if you purchase the right type of property in a popular location. Analyze the market to make sure it’s appropriate for an Airbnb investment. Know all the costs and regulations, and be cognizant of guest experience. When you’re diligent about these things, you have a good chance of succeeding as an Airbnb investor!