The Pros and Cons of Investing in Airbnb Rentals

Pros & Cons of Buying Airbnb Rental

 

Airbnb began operating in 2008 and has quickly grown to become a major force in the hospitality industry. The company’s revenues reportedly grew more than 80% last year and. Airbnb’s cash flow is projected to reach $3.5 billion by 2020, which would make it a stronger cash flow generator than two-thirds of Fortune 500 companies.

The Pros of Renting Airbnb Rentals

The success of Airbnb has many real estate investors considering the purchase of properties that can be listed as short-term rentals. A major appeal of Airbnb models is commissions much lower than traditional rentals. Airbnb typically charges property owners 3% commissions and guests 6-12% fees.

Another factor that makes the Airbnb concept appealing is reduced risk for property owners. Guests are rated on the Airbnb site and properties typically suffer less wear and tear due to shorter-term stays. The principal attraction of the Airbnb model, however, is opportunities for outsized returns. Cash returns often exceed 40%. According to Los Angeles Alliance for a New Economy (LAANE), a LA real estate investor earns more renting a property as an Airbnb for 83 nights per year than could be earned on a traditional rental for an entire year.

Where Should You Purchase an Airbnb Rental?

If you are contemplating the purchase of an Airbnb, location is a prime consideration. Demand is strongest in highly populated cities that attract plenty of tourists and are homes for major companies and universities. Rentals in these cities benefit from their ability to attract both business and recreational travelers and demand is especially high near convention centers, sports stadiums and major shopping districts.

At present, the top US Airbnb markets are Los Angeles, New York City, San Francisco, San Diego, Miami and Austin, but there are also plenty of secondary cities supporting robust Airbnb returns. The Mashvisor website provides Airbnb occupancy rates and rental rates for many cities.

With Airbnb occupancy rates estimated at 55%, Los Angeles is the country’s top Airbnb market. The strength of the LA market reflects the city’s status as a top tourist destination. LA set a tourism record for its 6th consecutive year in 2016 with more than 47 million visitors. Tourists come to shop on Rodeo Drive, tour Beverly Hills and the Hollywood Walk of Fame, and visit Universal Studios and Disneyland.

Another consideration for Airbnb owners is pricing short-term rentals. Airbnbs compete directly with hotels, especially in larger cities, and almost always charge less while still making a respectable profit. In markets where hotel occupancy rates are high such as Los Angeles, San Francisco and New York City, Airbnbs also have high occupancy rates and can price competitively. In high demand markets, price is less important than reviews in determining occupancy rates.

Guest reviews are the single most important factor affecting Airbnb occupancy rates. In San Francisco, where occupancy rates average 44%, the number of guest reviews has a 27% impact on occupancy rates, according to Mashvisor. Each additional review resulted in a 0.3% increase in occupancy rates. In San Jose, the number of reviews had a 34% impact on occupancy rates, with each additional review boosting occupancy rates by 0.5%.

Given the importance of ratings, how can Airbnb owners encourage guests to leave reviews? One approach is to post reviews of your guests as soon as the option becomes available. This increases the odds that guests will return the favor by writing reviews. Another strategy involves being pro-active in soliciting reviews. This begins with sending guests a thank-you note after checkout along with a request for a review, sending an additional reminder two weeks later, and following up with a final request before the review option expires (i.e. 30 days after checkout).

Setting up an Airbnb property requires time and attention to detail. Plan on allocating several hours per week for managing reservations, responding to inquiries and making sure the property is ready for guest arrivals. Services such as Pillow can help you manage the property and Rented.com can help you find a property manager. Owners can further reduce workload and expenses by selling weeks to a property management company. On-line businesses such as Guesty and Handy can be hired to provide cleaning services. Owners who work full-time or travel frequently may also want to invest in Lockitron, which can lock and unlock doors via a  smart phone app. Lockitron also allows owners to add or delete guests or give guests access for a limited time.

The Cons of Owning an Airbnb Rental

A major challenge to successful Airbnbs is unhappy neighbors so plan to communicate regularly with your neighbors and make sure their privacy is respected. Choose guests carefully, designate parking areas and make sure guests understand HOA rules regarding pools, gyms and other shared amenities.

Unanticipated costs are another challenge. For example, many cities tax short-term rentals.  This tax, known as the transient occupancy tax (TOT), varies by city. Los Angeles imposes a 14% transient occupancy tax based on the listing price for stays less than 30 nights.

The biggest obstacle for Airbnb owners is regulations. Some cities impose minimum rental periods or set limits on the number of days per month or per year that the property can be rented. There are also city zoning ordinances that limit short-term rentals to specific neighborhoods, prohibit short-term rental homes near other short-term rentals, or limit the number of occupants. A list of regulations for several major cities can be found on the Airbnb site at www.airbnb.com/help/responsible-hosting. Because rules are determined city-by-city, property owners frequently encounter outdated regulations neither prohibiting nor allowing listings, making it difficult to plan for the long-term. If the property is a townhome or condo, HOA rules and regulations must also be followed. Some HOAs prohibit rentals that are less than 30 days while others require the owner to furnish tenant information to the management company.

For property owners located near major tourist areas, Airbnbs can provide an attractive return on investment with the added benefit of less risk and expense than a full-time rental. However, like any other real estate investment, success depends on careful planning, due diligence and effective execution.

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