Airbnb is currently worth $31 billion. If you’re unfamiliar with the concept, Airbnb is a fairly new service that allows just about anyone to rent out their properties to overnight guests for days at a time as an alternative to hotels, B&Bs, and other traditional accommodations. The appeal for consumers comes from a few different factors: there is often more privacy, a more authentic experience (these are usually people’s homes), and a better cost per day than a hotel, particularly in larger metropolitan areas.
So for real estate investors looking for alternative sources of income, is the AirBnB model worth exploring?
6 Pros and Cons of the Airbnb Rental Strategy
1) Pro: High Daily Rental Rate
One of the biggest advantages to renting out a property as an Airbnb is the rental rate. As with any short-term rental, the rental rate is going to be a lot higher than a long-term rental. Tenants will still be attracted to your property because relatively speaking, your property will be cheaper than a hotel, but you will be earning more than you would be if you were renting out the property in a more traditional rental model.
The average daily rate of renting out a private room in an Airbnb residence in the U.S. is $80.67. Even if your residence was only occupied four days a week, that’s $1,290.72 a month.
That’s on the higher end of monthly rental rates for most average markets.
2) Con: High Maintenance
As with most short-term rentals, such as vacation homes, you must be prepared for a high-maintenance situation with an Airbnb. With such high turnover, you have to have a management team that can quickly get the property back in tip-top condition after each occupant—sometimes involving repairing damages and unexpected problems.
Airbnb rentals can be high maintenance and do demand more of a hospitality mindset than your average rental.
3) Pro: Low Collection Risk
With regular tenants in a traditional rental arrangement, there is always a risk of late payments and dropped payments altogether. With short-term rentals, payment is typically received prepaid. At the very least, you will have a credit card on record. As a result, it tends to be fairly secure in terms of rent collection. By the same token, if there are damages to your property that go beyond regular wear and tear, you will be able to collect compensation for those damages more easily.
4) Con: Real Estate Market Limitations
As with vacation rentals, an Airbnb comes with some market limitations versus a traditional rental property. Where your average rental can exist and succeed in virtually any market, the same is not true for a short-term rental. An Airbnb will usually only find success in a market that has a demand for tourism: cities like New York, Los Angeles, up-and-coming hotspots like Boulder, CO, Portland, Asheville, and beachfront towns.
Because of that, the price of the properties on the outset is likely to be higher for investors. You’ll have a harder time finding deals on properties and even though the rental rates are higher, it may be tougher to see the profit margins that make it worthwhile.
5) Pro: Quickly Build Your Reputation
Vacation rentals and traditional rental properties take some time to build a reputation for you via review simply because of the length of occupancy. For an Airbnb, however, with occupants staying for mere days at a time and leaving reviews on an open forum, you can guarantee that a great property will see the reviews roll in quickly. You can build a reputation very quickly with this model.
6) Con: Marketing Demands
One of the downsides of a high-turnover property is the constant need to market it. As with any property, vacancies are expensive. You may experience a lull during certain seasons depending on your market's geography as well. There is no time to be wasted not courting new occupants, addressing concerns, and responding to questions.
There is a great demand to sell your property to public and draw in business: making it a high-maintenance endeavor in more ways than one.
For real estate investors, the Airbnb model may be worth exploring. Like any real estate investment strategy, it may not be for everyone. One can’t deny the vast success of the company and the platform, so it must be doing something right! That said, there are cons as much as there are advantages.
It is wise to populate the bulk of your investment portfolio with long-term single-family rentals where income is steady and guaranteed. If you wish to supplement that income with an alternative strategy by adding a few Airbnb properties to your portfolio, it could be a good move.
The only thing you must do is your due diligence—ensuring that it is the right move for your and your investment needs.
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