Since the start of the pandemic, I’ve been a bit reluctant to stay at hotels when I have to travel, and I assume that a lot of other people are in the same boat. So, I’ve been using rental services like Airbnb and Vrbo more frequently to avoid the crowds. During my last stay, I started to wonder about the economics of a strategy focusing on real estate investing through Airbnb.
At first glance, using Airbnb looks like an investor’s dream. In my home town of Boston, prices are perpetually high, room availability is low, and most places listed on Airbnb seem like they fly off the proverbial shelf. So, what’s not to like about commanding hotel room rates for a unit that would rent out for much less on a monthly basis?
In short, the short-term rental market is quite complicated, and you’re far from guaranteed to make a profit from Airbnb rentals. If you want to understand why that’s the case and become a smarter real estate investor, read on.
Using An Airbnb Approach
There are a few ways to make money by monetizing your real estate investing with Airbnb.
The easiest way is to buy properties in favorable locations, furnish them, and list them for rental on Airbnb and similar websites. Then, when people rent out your unit, you’ll get revenue, some of which you’ll need to spend on platform fees, cleaning, and the occasional maintenance work. You’ll also need to spend time responding to requests and reviews from your guests to maintain a high rating on the platform.
Some people also opt to act as wholesalers for Airbnb listings, using their connections with a network of landlords to eke out a profit by matching open listings with short-term renters to maximize the occupancy rate of properties. But, wholesaling is a much harder route to take with Airbnbs than it is for traditional properties.
Why Airbnbs Might Be Attractive
It’s easy to see why new investors are interested in learning more about using Airbnb.
Real estate investing with Airbnb has a few upsides, including:
- The ability to charge high nightly rates compared to rental units
- Automated and configurable payment and return processing
- No risks of unpaid rent
- Systematized pre-vetting of renters by prior hosts
- The potential for seasonality of pricing and booking
And, while it isn’t a benefit for everyone, Airbnb does offer the chance to interact with a wide variety of people as they are passing through your properties. On the other hand, it’s also possible to heavily automate and outsource the responsibilities of running an Airbnb property if you prefer not to meet your customers.
Finally, raking in a healthy profit margin while real estate investing with Airbnbs is highly location-dependent. If you own a hot property near a tourist destination, you’ll be able to price your units just below that of local hotels. That’s appealing, especially because the expectations for recent renovations and room quality will be lower than that of hotels.
The Risks Of Airbnb Investing
As rosy as real estate investing via Airbnb may sound, it’s actually a minefield of risks and headaches which you shouldn’t discount.
In particular, Airbnb investors face hard issues like:
- Low occupancy rates
- High platform fees
- High startup costs due to purchasing of furniture, bedding, decorations, kitchen equipment, and other household goods
- Difficulty finding appropriately priced housekeeping and management staff
- Airbnb resistance from municipal authorities and ordinances
- Rambunctious or disrespectful guests
- High maintenance costs
- Constant requests or unreasonable expectations from guests
- Disgruntled neighbors
- Keeping up with reviewing and responding to reviews from guests
Nearly all of the above can cut into your profit margin at every turn. And while it’s possible to comprehensively solve a few of these challenges, many of them will be ongoing or intermittent no matter what you do.
To make matters even more complicated, if you don’t have some of these issues, you almost certainly have others even worse. For example, if you own an Airbnb property in a high-traffic year-round vacation spot, you’ll rarely struggle to find renters, but your chances of having troublesome guests skyrocket, as will your maintenance costs and your administrative burdens from keeping up with guests.
In contrast, if your Airbnb property is in the middle of nowhere, it’ll sit unoccupied most of the time. When it does get rented out, you’ll have a hard time finding staff to take care of the place afterward. And you’ll be paying a similar platform fee as you would be with the vacation property, so your margin will be under even more pressure.
Then there’s the issue of unhappy neighbors and municipal ordinances restricting Airbnb units, which tend to go hand-in-hand. Your guests don’t necessarily need to do anything wrong for people in the neighborhood to be unsettled by a constant stream of new faces and luggage-bearing strangers trying to figure out how to enter the key code to get in the front door.
Other Options Are More Lucrative
Given how difficult it can be to operate an Airbnb investment property, most investors would be better served by picking another paradigm to be the focus of their strategy.
In particular, buying and rehabbing distressed homes is more likely to be profitable than operating an Airbnb unit. It’s also significantly less of a headache because investors don’t need to deal with renters, finding cleaning staff, placating annoyed neighbors, or constant municipal pushback. And, for those who prefer to deal with market analysis and financial valuation of properties rather than with members of the public, there’s simply no comparison.
Unlike with real estate investing for Airbnb, your focus will be on identifying attractive properties to buy, and then calculating how much value to add with improvements before putting it back on the market for a higher price than when you bought it. In general, this process will mean that your cash flows are significantly larger than rental income, though they’ll also be less frequent. Importantly, you’ll be much more like a genuine real estate investor than a hotel manager.
If you’re not sure how to get started with real estate investing outside the Airbnb framework, you should consider investing in a HomeVestors® independently owned and operated franchise. When you work with HomeVestors to grow your business, you can get ongoing mentorship, leads, help with valuation, and access to financing for qualifying purchases and repairs that can increase your chances of success. So, you’ll have a great catalogue of resources to make the process of buying, renovating, and selling homes more efficient.
If you’re considering starting a real estate investing business, request information about becoming a franchisee today.
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