Many investors find the idea of buying rental real estate attractive. The thought of ongoing passive income from a tangible asset like real estate can be very appealing, especially compared to the rollercoaster ride of the stock market. On top of that, many very wealthy people have become rich through real estate investing, including Robert Kiyosaki, Barbara Corcoran, and Donald Trump. Even the founder of McDonald’s is famous for claiming that he’s not really in the hamburger business; he’s in the real estate business.
While rental real estate investing is nothing new, there are now more ways than ever to hold income-producing property. As the internet and the gig-economy become ubiquitous to modern life, new ways to rent out a livable space have opened up to enterprising investors.
One new way to earn income from real estate is by using the website AirBnB. It allows homeowners to rent out their homes, or part of their homes, as much or as little as they want. As AirBnB has grown in popularity, some real estate investors have even begun looking at buying property for the express purpose of renting it out using AirBnB, or a similar home-sharing platform.
So, is investing in AirBnB property a good idea? Here’s my experience recently buying and renovating a duplex in Atlanta for that exact purpose.
What is AirBnB?
But first, a quick primer on the AirBnB platform:
For anyone not familiar, AirBnB allows homeowners to list their property, or part of their property, to potential short-term guests and vacationers. It started back in 2008 and became very popular in the aftermath of the Great Recession, as many homeowners were looking for extra income to supplement dwindling incomes.
One of the beauties of AirBnB is it’s flexibility. You can rent an entire furnished home for months at a time, or you can rent just one bedroom out for one specific night. In addition, all kinds of properties have been rented on AirBnB, from houses and condos to castles and barns. If you have a place that people sleep in, there’s a good chance you can rent it on AirBnB.
My Experience Investing in AirBnB Property
In my hometown of Atlanta, AirBnB has become a very popular trend. There are thousands of houses, rooms, and condos listed, and even this award-winning treehouse you can stay in. So when I stumbled upon a duplex for sale that had previously been rented on the AirBnB platform, I decided to look into it.
This duplex was in a historic neighborhood near the Atlanta airport, one of the busiest airports in the world. In addition, it was walking distance from an Atlanta metro station, so public transportation was convenient and accessible. It takes only five minutes to get to the airport, and 10-15 to get into the heart of the city.
Obviously, it made sense why it was previously rented on AirBnB. With its prime location, travelers from all over the world would find it an appealing place to stop over.
But if the property was such a good rental, why were the owners selling? This is always an important question to ask oneself to keep from walking into a big mistake. In this case, the answer was that they had moved overseas, and were finding managing the property difficult from a distance.
So, after doing my research, I decided to buy it, fix it up a little, and continue to rent it on the AirBnB platform. Here’s what I learned in the process:
Full-Time Renting on AirBnB is Like Running a Business
One of the most attractive things about rental real estate is the idea of passive income. You buy a property, maybe fix it up, and then rent it out indefinitely to a long-term tenant. The only time you have to actually do something is if the tenant leaves or some problem comes up. Even then, if you have a property management company helping you manage the property, then you may not ever have to lift a finger.
AirBnB, as implied by the name, is more like running a “bed and breakfast.” In other words, you’re in the hospitality business, not just simply a passive investor. Someone has to check guests in, make sure the place is cleaned between visitors, and replenish kitchen and bathroom supplies. Sometimes guests arrive late at night (as I did once arriving at 1am to a sketchy AirBnB in Paris–will never forget that one!) When that happens, they can’t find the place, or just need suggestions for a good local restaurant, they will expect someone to be available to help.
There’s just a little more hand-holding involved, even if you try to automate the process as much as possible.
Hiring a Property Manager for AirBnB Helps (But Costs More)
While AirBnB can take more work than classic rental property, there are now some legit management companies available to help. Just in the last few years as AirBnB has skyrocketed in popularity, a few management companies that specialize in AirBnB have popped up as well, so that now you can even outsource the entire process if you want.
In Atlanta, I spoke to a company that already manages over 50 AirBnB properties, and they quoted me a fee of 15-18% of revenue. For that cost, they would market the place on AirBnB and VRBO (another short-term rental site), coordinate the cleanings and restocking, and interface directly with the guests. Basically, they take care of all of the day-to-day work for you.
The good news is that, if they do their job well, an AirBnB property can become just like a long-term rental. In other words, it becomes a passive investment, instead of a small business or side hustle.
However, the downside is they charge a higher management fee than a traditional property management company. Property management fees for traditional rental real estate are usually much lower at about 6-10% of rental payments (in the Atlanta area.) On the other hand, a well-run AirBnB property can generate significantly higher monthly income as well, making it sometimes worth the extra cost.
Furniture and Decor Can Make All the Difference
With a regular rental property, it usually sits empty, without furniture, until a tenant moves in. Each tenant has unique tastes and will want to decorate their home in their own style. An AirBnB is different, however, in that you have to furnish and decorate the place for your guests. Choosing a style that will accentuate the best features of the property, appeal to the largest number of potential guests, and stay within your furniture budget are three important keys to success with AirBnB.
For me, I purchased a duplex in one of the oldest neighborhoods in Atlanta, so I tried to keep a nice balance between a vintage, professional, and functional decor. This is where working with an experienced AirBnB property manager was super helpful. Ricardo Theiner and his team at Kleenerly were able to give me some wonderful pointers in decking out the place in style and within budget!
Remember to Do Your Research
The key to getting a good return on investment from your AirBnB property is hitting your targeted “average daily rate.” This is the amount you are charging guests per night to stay in your place, sort of like a hotel’s nightly rate. However, one crucial difference in AirBnB from a hotel is that cleaning fees are added onto the average daily rate to form the total cost to the guest.
Of the daily rate amount, AirBnB will take a cut of 3%, and your property manager (or “co-host” in AirBnB lingo) will take their cut as well. However, the cleaning fees are typically charged separately and you’ll use that to pay your cleaning folks directly. But if the cleaning and turnover tasks run over the cleaning fee you have listed, that’s on you.
When you start putting together your projections, it’s vital that you know whether the projected income you have set is realistic or not. I recommend running the numbers with a range of average daily rates and a range of average days rented per month. For example, if you think your place can be rented for about $100/night, run a few different scenarios such as the following:
|Example of Income Estimates||Low End||High End|
|Low End||15 nights rented||$1200/mo||$1500/mo|
|High End||20 nights rented||$1600/mo||$2000/mo|
Then you can build your projections around these estimates to see if your investment is going to payoff or not.
Once you’ve got some ideas of potential income down, the next step is to do your research to see if those estimates are realistic. There are a couple of sources of information to check: first, you can go straight to AirBnB, open up a hosting account, and walk thru the AirBnB hosting wizard. They will give you a basic projection of the income you can earn. This is based on AirBnB’s internal estimates of rental rates in your area using an analysis of similar properties to yours.
However, this method is fairly rudimentary — it doesn’t give you a lot of helpful information. If you really want to do your research well, I suggest purchasing some market research from a company called AirDNA. I used them before buying my first property, and it gave me a lot of piece of mind that the numbers I was looking at were reasonable. Their AirBnB market reports cost anywhere from $19.99-199.99/month, but you can cancel anytime. For a report of the local area where my property is, they charged me $19.99/month, and I just canceled after the first month.
What Kinds of Returns Can You Make with AirBnB?
Being in finance, for me it’s all about the numbers at the end of the day. If you’re going to invest your hard-earned cash in something, you want to get the best return with the least amount of risk. Obviously, that goes just as much for real estate as it does for stocks, bonds or cash. (For more on the returns you can make in stocks, check out my recent article.)
That being said, there are also other goals investors sometimes have in mind. Some investors focus more on income and cash-flow than appreciation, for example. The good news in this case is that potentially both can be good, if you do things right.
The long-term returns of stocks in the U.S. since the 1920s has been about 10-12%/year. (That assumes that dividends are reinvested.) For bonds (generally considered much safer than stocks), the long-term average returns are much lower, at around 4-6%/year. However, with a lower interest rate environment since 2008, they have earned much less than that in recent years.
For the added headache of an AirBnB property, I would hope to achieve returns that are higher than one can get in either of those options. Otherwise, it wouldn’t really seem worth it. (For more on how to look at risk in investing, check out why stocks are not as risky as they seem.) The good news is that even though real estate can be considered, in many ways, safer than an investment in stocks, the use of mortgage debt (i.e. “leverage”) can amplify your return. In fact, I would argue that leverage is one of the main advantages you have in real estate. The fact that you can borrow money for 30 years at a low, fixed interest rate can turn a mediocre return into a pretty decent one.
However, we shouldn’t kid ourselves. Any time you borrow money to invest, you increase your risk as well. What if no one rents your property? You still have to make those mortgage payments regardless. A healthy dose of realism will protect you from “worst case” scenarios.
How to Calculate Your Return on An AirBnB Investment
So what kind of return can I make on my new AirBnB property? Well, the jury is still out, but I would be very happy with a mid-teens rate-of-return at the end of the day. That kind of return is hard to find in today’s investing world, and also adds a nice diversification benefit to my current portfolio.
Here’s a breakdown of how to calculate your return on investment for an AirBnB rental investment. I’ll be using a simple cash-on-cash calculation, which will isolate the percentage of net income (“net” simply means “after expenses”) divided by your total investment in the property.
For example, if you make $500/month net of all your expenses, and your total cash investment (not including the mortgage) was $40,000, then your return is 15%.
$500/mo x 12 = $6000/year
$6,000/$40,000 = 15%
However, to get to that simple calculation, you would need a more detailed analysis. Here is my AirBnB investment spreadsheet that I used to analyze the duplex that I purchased. To edit and use for your own property, simple click the link above to open the spreadsheet in Google Sheets, and then go to the File Menu to make a copy or download it to your favorite spreadsheet software.
There’s much more to talk about on this topic, but I’ll save that for future posts. For now, let me just summarize that AirBnB investing is becoming more popular, and can be a good way to make some extra income. Just make sure you do your research, decorate in a professional and welcoming style, and hire a good property manager for your AirBnB property, and you should do fine.
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