To Airbnb or Not to Airbnb?

Nashville had the largest increase in Airbnb bookings of all U.S. cities in the summer of 2014. The increase of 365% since 2013 further proves that Music City has quickly become a huge player in the online booking giant. Airbnb’s website encourages visitors to “rent unique places to stay from local hosts in 190+ countries.” Greater Nashville has responded with over 1,000 places for short-term visitors to choose from. Is this a market for real estate investors to get involved in? Is there potential for greater returns through Airbnb than traditional rentals?

Available listings on Airbnb in the Nashville area range from a room in a “Luxe Historic Home in East Nashville,”for $99 a night to “An Entire Downtown Loft near Everything” for $205 a night. The website has a tab to “list your space,” if you are interested in making a room, guesthouse, or entire home available to visitors. Online reviews are posted for the rental hosts and the guests. It is a system built on community-driven hospitality and feedback that raises the profiles of the best rental spots.

One of my friends recently listed his detached one bedroom guesthouse ($85 a night) and his two bedroom cottage ($190 a night) on Airbnb’s website. He has steadily booked the less expensive guesthouse, and received excellent reviews. The positive words have quickly translated into more bookings. His enthusiasm was infectious during a recent conversation in which he told me, “You should do this.” I was noncommittal in my response, as I wanted to think it through.

I am interested in the idea, but I am concerned it would require too much time. I typically rent out my investment houses for twelve month lease agreements. I may have two or three repair requests in that duration. Frequently, months go by when receiving rent is the only correspondence I deal with, while Airbnb would require regular emails and leaving feedback.

For a long term tenant, the house must be clean one time before move in, but Airbnb demands a clean unit before every check-in. Even though the guest typically pays the add-on cleaning fee (which I would simply pay to a cleaning service), it is still something else to manage and be sure gets done. Another consideration is that the owner is responsible for the lawn care and utility bills for an Airbnb rental, while the tenant assumes those costs in a traditional rental. Overall, an Airbnb property would need more of my time, but I’m open to that trade off if the increased profits are worth it.

Let’s take a look at potential income. For example, I can easily rent a two bedroom East Nashville house through a conventional twelve month lease for $1100 a month, equaling $13,200 a year. In order to equal that amount, I would need to rent the same house through Airbnb at $100 a night for 132 nights. That averages out to eleven nights a month. With some guests reserving two or three nights at a time, that number could come easily. But surely all months are not created equally, as January and February are certainly harder to fill than May and June. Perhaps I could raise the rate to $132 a night and only need to fill 100 nights. But there are more places joining Airbnb every month competing for the same visitors, and some travelers would simply elect to stay at a nearby hotel if the price gets too high. Free continental breakfast and a heated indoor pool never hurts the hotel market. I haven’t seen any Airbnb listings with those options. Maybe the better strategy is a cheaper rate, say $79 a night? Surely that would attract plenty of reservations, but it would require 167 nights to equal the gross rents of a twelve month lease. That is an Airbnb guest nearly every other day for a year.

I am not ready to take the Airbnb route with any of the rental houses that I already own. Quality, long-term tenants are the simplest source of rental income, and I don’t see enough of an increase in profit to make it worth the switch. Nor do I think I would purchase a property with the sole intention of renting it through Airbnb.

However, I do think that there are times when a “flawed” property could be beneficial to list on Airbnb. If regular market rates for such a rental are not achievable, it could be more profitable on Airbnb where there is more potential for an unconventional dwelling. Perhaps a large house is too big to earn the appropriate rents per square foot in the traditional market, but it could be divided into several individual units for Airbnb. Or maybe instead of building one single family house on a vacant lot, several cottages with carriage houses on a single property would make the numbers work (although finding a property with appropriate zoning could be a challenge).

I own a vacant parcel of land in East Nashville that has a large stormwater conveyance that runs through it, creating a small, off-center building envelope. It is unlikely that a typical-size house would be permitted by the city. But it would be the ideal setting for a tiny house (about 300 square feet). The tiny house would be less appealing for long-term tenants due to lack of storage, but that would only minimally impact visiting guests. In fact the average hotel room in the U.S. is about 325 square feet. Overall, I think this type of dwelling, with its novelty, can be more profitable to rent through Airbnb. It is a project I am strongly considering and hoping to begin in the first quarter of 2015.

There is a well-known saying that, “all real estate is local.” Investors who own property in a healthy local economy are somewhat insulated to outside factors. Meanwhile, investors who list a property on Airbnb are suddenly more subject to the volatility of the travel and tourism markets and the national economy as a whole, which is another risk to consider.

More than 11 million guests have traveled with Airbnb since it was founded in 2008 and now a guest checks in every two seconds worldwide. Travelers wanting a unique experience are driving the business, and more of those travelers are coming to Nashville. I think there are opportunities for the innovative investor to find greater profitability using Airbnb. It may just take extra time and creative use of property to get there.