Renting a Home to Use as an AirBnB - Legality/Landlord Help

24 Replies

Hi, I was wandering if anyone had experience in renting a home, signing a normal lease, and then turning that home into an AirBnB. I originally heard this strategy on the BP Podcast, I think episode 229, but was wondering if anyone had taken this route yet and if you have how did you deal with the landlord. Did you tell them upfront or did you go ahead with the idea and basically look at it as you have the right to the property and you can run at as you like? 

I know some leases have sub-leasing clauses in them but I haven't seen any that talk about short term renters in the home. Also was it worth it, does the short term rental income create enough return to go through with starting up a new unit every year. I am very early in the real estate game so I am fine with smaller returns and a lot of work at this point but just wanted to see if anyone had experience doing this at the start of their career. 

Most leases have some clause in them that prevents you from subleasing the property.  If the landlord caught wind of what you are doing, he might let you do it for 6 months then do it himself when you are eliminated. 

It's like borrowing someones car and using it for Uber 12 hours a day.  Then for the next 12 hours someone else Ubers it, then it repeats.

This question comes up on this forum about once per week and it’s generally from someone who has no money and wants to get rich quick. @Paul Sandhu says it best every time.
Remember.... there is a big different between a “vacation rental” and an “airbnb” and it’s mostly due to the scenario you just described.
I do rent my “vacation rentals” ON “AirBnB” But that doesn’t make them “AirBnB’s”
Does that make any sense? Lol

If I found out any of my tenants were air bnbing my property, that would be the end of their tenancy. We prohibit any type of commercial use of the property. Anyone wants to make money on short term vacation rentals, they can buy their own property.

@Paul Sandhu @Lucas Carl @JD Martin Thanks for the responses and advice. It sounds like it is a pretty clear no on signing the lease without being upfront about it and thank you for giving me that prospective from landlords.
If someone was upfront with you though and told you before hand would that change your mind at all? There are some properties in my area that look like the landlord is having trouble finding renters for and I wanted to inquire with them about using it as an AirBnB and filling their vacancy (I had the same problem in this area before transferring into STR and now make 1.5x the rent I was asking). I would pay the full utilities, wifi, and would even possibly pay more than the asking rent if the price was right and fit the market of the AirBnB. I would also most likely make upgrades to the property, like improvements to curb appeal and interior decorating (normal AirBnB stuff). Do you think an average landlord would consider this or do you see it as a STR being a risk for the propety?

Thanks again.

I'll add that a lot of the homes seem to be listed/for rent by mom and pop investors that are struggling without in depth marketing and probably have not considered STR at this point.

Have you concidered the fact that it will cost you a good 10 grand up front to furnish a 1-2 bedroom property to get it even close to AirBnB-able? 

Read through all the posts on this forum for the past month you’ll see several people asking the same question you did. 

I admire your enthusiasm it’s just really not a good idea thats been had many times 

Wes, 

Don t let the negative comments dissuade you from STRs. There are plenty of investors who lease their property/s to people who STR. Key is having proof of business insurance to show property owner.

Check out FB and STRU university for groups of people having success leasing. As you already pointed out your success will depend on how well you market your properties better than anyone else.

Get advice from people in the STR field having great success, not the naysayers.

@Todd Goedeke you’re not likely to find anyone in the country having more STR success than @Paul Sandhu but what’s his opinion worth ;)
Not to brag but I’m no slouch. Neither one of us started by renting someone else’s house.
Save up and buy your own. Otherwise what’s the difference between this and working at the Verizon store?

If you do this “job” to save to buy your own that’s totally cool!

@Lucas Carl and I have 5 very successful VR's, and I sell real estate in a mainly VR market.  Aside from the legality of renting a property that you don't own for Airbnb purposes, most lenders will not count income made off Airbnb/VRBO properties that you don't own for future financing.  I have had several clients who Airbnb their New York City apartments (that they rent) who have financed properties in my VR market.  Each one has been told by their lender that unless they own the property, that unfortunately their short-term rental income cannot be counted.  @Parker Borofsky can elaborate more on this than I can.  So while you may be able to cash-flow depending on your market, just keep in mind that you may not be able to use that income to scale in the future.  I'm certainly not trying to dissuade you from getting into the VR market, it has brought us fantastic cash flow, I just don't want you to be unpleasantly surprised down the road.  Good luck!

@Wes Short What you're running into here is most of the people active on this forum own properties in vacation rental markets.  @Lucas Carl is right that there's a difference in listing your VR on AirBNB and "having an AirBNB" (e.g. a place in an urban market that isn't so oriented towards vacationers).  It sounds like you're looking into the latter, and most of the people here (including me) aren't in that particular niche.  @Paul Sandhu is not in a vacation rental setting but his market is VERY unique!  (I do find it hilarious that someone with almost no posts will jump in and say they aren't successful)

My perspective on the matter is what you're proposing is possible, but not as simple as it sounds on paper.  Finding landlords who are willing to let you sublet for short-term purposes will be difficult, but not impossible - I found one in LA, but ultimately the property wasn't worth the financial investment involved.  I think you're on the right track to target mom-and-pops - professional property managers and corporate rental companies won't even consider such a proposition.  DEFINITELY make sure you look into the local regulations, are able to talk intelligently about business insurance (and obtain it when you get a unit), and otherwise generally operate in a wise and lawful manner.  

And look really closely at your market - what sort of rates and occupancy can you reasonably expect in the neighborhood you're looking in?  (then assume you'll get less)  What's realistic for your recurring expenses?  Lucas is right that you're looking at a significant cash outlay to furnish the place - and don't forget that means linens, kitchen supplies, and decor, as well as beds and sofas.  

I had no idea that STR income wouldn't count for financing purposes unless you owned the property! Learned something new from @Avery Carl .  Definitely worth keeping in mind when thinking about scaling long-term.

Anyway, it sounds like you've got a pretty decent idea of how to approach things - just make sure you know your numbers, and be prepared for lots and lots of "no"s.  Like any good deal, it requires some hunting.

Wes....My opinion is that if you have a desire to  rent a property and then Airbnb it for a profit is that you can definitely do that.  Not something that I would do, but I'm sure it can and has been done both successfully and unsuccessfully many times in the past.  I would definitely be up front with your intentions with the owner.  Many, probably most will say no.  but if you meet with 10 and you have a good presentation and business plan to show him/her, I would be surprised if you didn't get at least 1 yes.  I would consider renting one of my properties to the right person under the circumstances.  I have a couple of my units that I rent out as Airbnb units.  They are always my best, cleanest and most well taken care of units.  We are in them cleaning them 2 x per week and fixing/replacing anything that is not up to 5 star standards, that Airbnb demand you get or they fire you.  (And when I say we, I mean my wonderful hourly part times that work with/for me.)  :-)

As far as getting an owner to "buy off" on the idea...You could offer a number of things for instance: Long term 4-5 year lease.  Pay 1st month, Last month and Security deposit up front.  Pay for 3 months up front.  Offer a small percentage of the profits back to him/her.   Offer a hire per month rental amount.  Offer to show them how to run an Airbnb and make more monthly income from their properties if they are interested.  Offer to give them all the furniture and the Airbnb business that you build up over the next 3-5 years. And on and on. There are literately dozens and dozens of ways to skin this cat.  If you want it bad enough you can make it happen.  Good luck and let us know how much money your making in 3 years!  :-)

As some of the other people noted there is a decent up side cost to getting everything set up, which I am sure you have calculated into your plan.  But I think you could definitely do this with the right property, and the right owner.  If anyone wants to rent one of my units long term and try this just let me know.

What you propose is how my partner and I are ramping up our AirBnB business. I JV on 2 houses with him and helped financially on 7 other places he controls. He is up front with all the landlords, which unlike @Paul Sandhu experience, are way less energetic and can't be bothered.  We have leases, but you can also propose a 50/50 split with them.  Also, you can get your funding from people that trust you (Mom and Dad, friends).  The $10K startup is a pretty accurate number.  If I were investing with you, I'd want a proven track record however.  You having the energy and vision, coupled with someone else's money, can be beneficial to both.  Half of a good deal is better than none of a great deal.  You will do much better when dealing directly with Mom and Pop, versus a property management company that claims they will ask the owner and get back to you.  Once you get the first one going, it is way easier to convince others you know what you are doing.  Oh, and don't sign a lease right before slow season.  :)

It depends on the lease.  The Chicago lease put out by our local realtor association added a provision this year where the landlord needs to designate if Airbnb is allowed or not 

@Wes Short Many individuals are going that route. I also know a few startups that are strictly leasing properties so they can furnish and advertise as a short-term rental.

If you are able to get some investment funds and acquire multiple homes from your inner circle (friends/family/co-workers/associates) it can be worth your while. That way you have a portfolio of homes under your management which any landlord you pitch to will want to know/see before they hand over the keys.

Just know most landlords in this model request above market rent so you have to be really confident you can cover that cost plus some or you'll easily drain all your money.

@Wes Short , this was mentioned on The BiggerPockets Podcast Episode  229,  but not as a recommended way to get started. That show's guest had started out that way, but was afraid her landlord would catch her. She has long since learned that this isn't the route to go. 

That isn't to say you can't do this, just be upfront and honest with your landlord. I know a guy who is renting his apartment to a friend who will be AirBnBing it with the landlord's consent. 100% of the proceeds goes to pay the rent, then they split the remaining income 90-10. 

Originally posted by @Wes Short :

@Paul Sandhu @Lucas Carl @JD Martin Thanks for the responses and advice. It sounds like it is a pretty clear no on signing the lease without being upfront about it and thank you for giving me that prospective from landlords.
If someone was upfront with you though and told you before hand would that change your mind at all? There are some properties in my area that look like the landlord is having trouble finding renters for and I wanted to inquire with them about using it as an AirBnB and filling their vacancy (I had the same problem in this area before transferring into STR and now make 1.5x the rent I was asking). I would pay the full utilities, wifi, and would even possibly pay more than the asking rent if the price was right and fit the market of the AirBnB. I would also most likely make upgrades to the property, like improvements to curb appeal and interior decorating (normal AirBnB stuff). Do you think an average landlord would consider this or do you see it as a STR being a risk for the propety?

Thanks again.

 You can always ask but this is definitely one of those cases where I'd recommend asking for permission, not for forgiveness after the fact.

@Wes Short , it is definitely possible to structure an STR that way, however investing in and owning your own property might be a better long term strategy since you would also be building equity and not paying someone else's.

If you purchase a 1-unit investment property the required down payment is typically 15%.  If you happen to find a vacation home you would use as a second home and rent it out while you are not using it - the required down payment is typically 10% which is less than a lot of people realize.  Also, depending on where you purchase - you may be able to find one that is already furnished. 

@Avery Carl also has a point about using the income you earn from this type of STR set-up for future financed purchases. Fannie Mae/Freddie Mac do not allow income reported on Schedule E from property you do not own to be counted as income. As a lender, I have thoroughly exhausted attempting to use this for a couple clients in this situation. If anything, you would have to claim it on a schedule C as self-employment and have a two year history of receiving the income before it could be considered. However, if you have income from rental property that is reported on schedule E, this can be counted after receiving it for only one year. If it is income from a LTR then we can usually use 75% of the monthly rent on an existing lease even if you haven't had it for a year. Hope some of this info helps!

It sounds like you may want to do property management? Airbnb and STRs would be a way to manage properties. I could see someone going to landlords and offering to manage their property AND pay them more rent.

@Wes Short Sounds like you want to arbitrage. Which is hands down the best way to get into the Airbnb market. I've used this strategy to acquire over 400+ Airbnb's in under 12 months. You need to target apartment complex owners. If you can show them that they can significantly increase their cash flow by working with you they will start throwing units at you. For example you have an apartment complex owner that has 50 units and you tell him you will give him $200 extra a month and guarantee him rent on time and every time he would be happy to give you a unit for this purpose. You just gave him an increased cash flow of $10k/mo by leasing to you. The pros to this are they are too busy to look to Airbnb themselves and they don't want to pay hotel occupancy taxes so if you arbitrage it the occupancy falls upon you and they are in the clear. You also don't have to worry about them wanting to Airbnb it themselves and cutting you out. Also if something breaks its upon the apartment complex to fix it. Apartment complex owners are getting rich by giving their units to Airbnb arbitragers. Owning is cool but your risk goes up as well. If something breaks in the house it's up to the owner to fix it. An arbitragers cash flow is higher and risks are way lower than an owners but you do want to own to generate your own wealth. Create a portfolio of properties you own and arbitrage properties. Good luck on your venture. A suit, tie, and business cards go a long way in this business.

As a landlord, I would be open to it, but I would expect the rent to reflect the potential of greater wear and tear in the apartment.  I would also have to think about the security of my other tenants a little more.

This post has been removed.

@Lucas Carl , I disagree with you. A 1-2 bedroom can be furnished for around 4K, using Craigslist and nice quality used items. 

It is definitely a viable idea in some markets, I just say marketing it to landlords with your clear intentions is the way to go. I also suggest making sure it is legal in the city you are in. 

@Wes Short  just another tip.
You will be acting as a property manager so do not approach the landlord asking to sub-lease their unit. Instead, rephrase it as a "guaranteed income" owner agreement as in essence, you will be purchasing X amount of months to use their home for profit as a vacation rental.

Personally, I have never offered this to my clients because it's risky in my location(hurricanes) but it's a great concept that I intend to try soon for my own research.

Hey @Wes Short   @Myka Artis @Dave Homyak have great points.  I'm of the opinion that its a very viable option, although you will obviously need to make sure the landlord is fine with it.  

It can be a great strategy that brings in way more cash flow and less risk vs. owning it outright.  It doesn't work in every market, and isn't for everyone depending on their financial goals. 

If your goal is to start a vacation rental business with little startup cost, risk, and barrier to entry - arbitrage is great.  If your goal is to build passive long term wealth and cash flow producing assets you can retire on, probably not the way to go.  

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here