Why Airbnb Just Can't Deliver On Passive Income.
Why Airbnb Just Can’t Deliver On Passive Income
Airbnb has captured a lot of attention in the past few years. While the concept may be alluring to some real estate investors, it may be far less passive or profitable than many see on the surface. What’s the reality? What are the alternatives?
Airbnb is the hot startup which has become a highly popular booking platform for vacation rentals. Hosts (landlords) can offer anything from a couch to trailer to a spare room or entire home or apartment. Tenants can lease by the night, week or month, pretty much like a hotel. They don’t have to worry about credit or background checks or big deposits. For these reasons, it has become an appealing housing solution for a variety of types of people. However, while the original concept was supposed to offer less expensive alternatives to hotels, its popularity has meant dramatically increasing the pricing of housing in many areas. So much so that some landlords have stopped offering annual rentals, and property prices have begun to be traded based on their potential Airbnb rents. So, why isn’t this a great idea for all real estate investors and apartment building owners?
It’s Not Passive
Airbnb style short-term rentals are not really passive. The same goes for those promoting their rentals for short-term use on VRBO, Booking.com and through Expedia.
Short term rentals are far more management intensive than annual rentals where tenants may stay 2, 3, 5 years or more. Short-term tenants mean constant cleaning, meeting new tenants, and dealing with high expectations of service. These tenants are not going to have the care for your property as someone who wants to stay long term. So think about all the work done on turning over a regular tenant, and multiply that by as many days or weekends you lease your unit for. That’s a serious full-time job.
Sustainability & Net Operating Income Challenges
Even if all the property management is delegated, there can be reliability and sustainability questions.
Professional property management, which is smart can add to the costs as extra taxes for short-term rentals and the level of service expected by hotel type guests.
While vacation type rentals in good locations can fetch many times the monthly rent of an annual tenant, this focus can be highly dependent on tourism. What happens when there are security scares, gas prices go up, the economy tightens, or the most fashionable vacation destinations change? Vacancies can get really high, and those prices may not be sustainable.
Airbnb appears to be trying to position itself as an app or tech service in order to get around real estate licensing laws. Airbnb is still technically illegal in many parts of the US. Breaking these laws can come with extreme daily fines that can far exceed the upside from rents. If you are going to try it, you had better know the rules, the licenses you need, and any additional taxes due.
Alternative Income Investment Strategies
So, if Airbnb is not for you, what are some alternatives to more passive income and better cash flow?
● Higher end annual rentals
● Student housing
● Corporate housing
If you do acquire properties to Airbnb, make sure your pricing and numbers make sense for annual rentals or condo conversions so you’ll never be caught short.