Everybody’s talking about AirBnB. And much of the chatter comes from people who’ve jumped in. So it’s tough not to get caught in the excitement of a side hustle that introduces you to globe-trotting travelers while also putting cash in your pocket. But as a real estate investment, is AirBnB truly worth the fuss? One might consider staying safe with a traditional rental set-up. But a rental property has its own set of expenses and issues, and doesn’t offer the same amount of personal flexibility. So how does a property investor select between the two? In order to avoid settling it with a coin toss, take a look at how things break down.
First, consider what sort of budget you’ll need in order to set up an AirBnB rental. As with most property builds, renovations or redesigns, the sky’s the limit. You could purchase a home to flip, or to hold onto and use as a dedicated rental investment. Whatever you’re leaning toward, the size and scope of the property, along with a few other factors, will determine your ultimate income.
As with any property investment, the location will play a factor in what you can charge. If you want to make a quick initial assessment of what you might gain by renting on AirBnB, you can start with the site’s own estimator. But that doesn’t factor in the details. Real estate agent James Carlson, co-owner of James Carlson Real Estate in Denver, notes, “You also want to be aware of your city’s demand. You can do market research on AirBnB to determine that. You can also use tools like AirDNA. Be aware of any seasonality in demand. The number of tourists will obviously fluctuate in some markets.”
Next, break it down by what you’ll absolutely need to take in a paying guest. There are a few elements you might have overlooked regarding AirBnB expenses.
What will you be offering? A one-bedroom apartment? Or an entire house? And can you afford to expand what you’ve got? Consider the cost of renovation vs. redecorating.
Maintenance & Supplies
Of course you’ll provide clean linens and towels to guests. But how many sets will you have? More per bed can mean fewer launderings, but a larger investment up front. The quicker your guests turn over, the more time and money it will take to upkeep the rental. Will you hire a cleaning service, or spend time doing this yourself? Add in that cost, regardless of whether you plan to use it.
There are a few essentials that a host might take for granted, but a person staying in the space may require. Your AirBnB host rating could suffer if you don’t provide proper lighting, smooth pillows, and a quiet place to sleep. Even a box of soft tissues and bottle of water by the bed can show guests that you care. Make a budget line that includes these things.
AirBnB charges hosts at least a 3% reservation processing fee for each booking. It can be higher based on policies that the host selects.
If you choose to turn your flip into a rental, you’ll most likely plan on having guests for more than 14 days of the year which will require you to pay taxes, so be prepared. If you’re trying to be sneaky, just because you didn’t file it doesn’t mean the IRS didn’t get the information. AirBnB delivers the info on income you made straight to the big guys.
There’s no sidestepping the need for good coverage. If the AirBnB is in your personal residence, check what your home insurance policy covers; short-term rentals may already be included. As this will most likely just be a rental property you own, you may be required to purchase business insurance.
It’s absolutely essential that you know your city’s laws. According to Carlson, “Not only do you need to know your city’s current stance; you need to know where they’re headed. Call the planning department and ask them about the laws for short-term rentals and whether there are any plans to add further regulations.” This could deal break your choice for setting up AirBnB vs. a traditional rental vs. a flip.
Knowing these costs will help you establish the potential of developing an AirBnB rental. Investigate your own investment resources for growing the space you’ve got.
Now take a moment to compare some of the rental property operating expenses of a traditional rental, beyond what your AirBnB expenses would be.
Whenever you need a new tenant, you will probably have to advertise. This expense does qualify as a deductible, but you’ll still need to budget for that out-of-pocket cost.
Depending on the types of tenants you land, you could be lucky or unlucky when it comes to maintenance costs. If you have high turnover and boisterous tenants, repainting the place could be an annual event. You also may need to call in plumbers or electricians with regularity.
You may not start out requiring a building manager for your property, but this need could creep in as your rental property ages, and perhaps even expands.
When you put your expenses side-by-side, it may be that the AirBnB is a bit more upfront, but less in the long run. However your long-term rental may be the perfect fallback, offering dedicated, month-to-month income without speculation. Some final advice from Carlson, “I’d also recommend buyers run their investment numbers based on a long-term rental. Make sure you can cover yourself with a long-term tenant so that if the laws change, you have a plan B.”