Running an AirBNB is all about avoiding risk. With the cash on cash and cap rates of short term rentals far exceeding long term rentals, the only impediment to you growing your wealth is sidestepping the inherent risks built into short term lending.
When it comes to making money through investing, there's generally a correlation with risk and reward. Completely risk-free assets like T-bills offer returns that are on par with inflation. You can buy an index fund, take a little more risk, and get a little bit more return (7% annually). But what if I told you that with short term rentals, you can make a massive amount of upside AND limit your downside?
This article will focus on the de-risking your investment.
1) Sidestep legal and regulatory risk by avoiding owning in cities.
By far the biggest risk of becoming a profitable host is that the government shuts you down. From Barcelona to New York to San Francisco, cities have started to treat short term rentals as a nuisance at best and as an easy scapegoat for rising rental prices at worst.
Why are cities, which can make revenue taxing short term rentals, focusing instead on regulations and outright bans? First of all, it's very easy to blame short term rental hosts for rising inequality as housing inventory that "should" be used for long term rentals is utilized for short term rentals. Instead of admitting and addressing structural issues with inequality, it's much easier to references analogies.
There is also regulatory capture at play in any city. This is the theory that says regulatory bodies become dominated by the industries they are trying to regulate. A recent example is in Jersey City, where the mayor had originally passed legislation allowing short term rentals as long as they were taxed. Then a few years later, and reportedly when the hotel lobbies stepped up their contributions to this same mayor, a city ordinance was introduced that imposed restrictions on short term rentals that include registration fees, inspections, a limit of 60 nights if an owner doesn't live in the property and a whole host of other restrictions.
The simple solution is to simply avoid investing in a short term rental in a city. Buy in a location that depends on vacation rentals as a large share of its economy.
Whereas if you own a vacation home that doubles as a short term rental, you are likely going to be in an area that has historically been friendly to weekenders and short term guests. Look at locations where traditional bed and breakfasts are popular. In addition to avoiding regulation risk, your return on investment will likely be higher in a vacation area as there's far less competition driving down the per-night rates. Of course, you have to make sure the vacancy rate is low and do your research on the local area. As in everything in real estate, it's all about location, location, location.
2) Limit Vacancies and Off Seasons
For max occupancy, a property in a good location with multiple attractions around the year is key.
Why are they looking to rent your property in the first place? Sure, the pictures are fantastic and reviews overwhelmingly positive, but first of all, people are location to satisfy the utility of staying for a short event. Look for proximity to a destination such as a ski resort, beaches and wedding venues. These are your primary attractions. The ski and snowboarding groups will keep your vacation rental full during winter while the wedding crowd will fill up between spring and summer.
Get inside the mind of your guests. You should know that your wedding guest renters will have different expectations than the ski and snowboard renters. Make sure there's a nice ironing board for the wedding guests and an area where your skiers can store their equipment without it sitting in the living room. Universally, your guests probably don't want to travel too far for a decent meal, and if you're renting out a 5 bedroom, they will likely be in a big group with children. Your job is to anticipate their needs and place yourself in their shoes.
Prices fluctuate in the off-season. Not only must you know when your off-season is, but how to price adjust accordingly to the market so that you don't price yourself out of your guests' range.
3) If it's breakable, your guests will break it
It is a truth, that sooner or later, anything breakable will be broken. Make sure that the wine glasses you buy are resistant to shatter and not a $200 set from William-Sonoma. I'm partial to the cheap but sturdy glasses from IKEA.
To keep cash flows at optimal levels, don't spend too much on upgrades that will likely need maintenance and repair. However, this doesn't mean you should cheap out. When guests browse a listing, AirBNB showcases the amenities that a host ticks as available. So while you should cover the basics like towels, bedsheets, and WiFi, make sure you also check the boxes on cheap but easy to satisfy amnesties such as a tea kettle, coffee maker, large screen TV with Netflix and other streaming services, basically everything that AirBNB makes optional. The last thing you want is an irate guest calling you about not finding the coffee maker at 7 am (it's happened to me)
Know that if they ask to bring a dog, or if they have kids, the chances of something breaking goes up exponentially. Always include a security deposit. Not only will a security deposit give you protection, but it's also a great screening mechanism. I estimate that only 1 out of 30 guests will I ever have an item break that's large enough that I have to go into the deposit. However, it does happen from time to time and having the security deposit helps
4) Screen tenants without actively screening them.
Dealing with guests can be pleasant or stressful, but you can limit stressful encounters. The first step is to make sure you price above market. You do not want to give guests a "great deal" as many bargain hunters are a nightmare with never-ending requests. Preemptively fire your worst customers by pricing your property only for respectful guests.
In addition to pricing appropriately, never accept any guests who ask for a discount. There may be many legitimate reasons somebody wants a discount, but in my experience, the discount seekers will not appreciate your generosity. Instead, These are the guests who have generally left me with the most problems during their stay. Anybody who wants to haggle over price will likely continue haggling during the stay, and leverage the threat of a negative review to drive down your price. These are the type of people who are never satisfied in life, it's best to avoid them in your professional and personal life.
5) Not having the right team in place: Airbnb takes more work than a normal long term rental.
Issues will arise, be they small or large. How you deal with them depends not only on you but on your help. There will be situations where you will not be on the property. What if an appliance breaks or the electricity goes out? Having a great person help manage the property is essential to keeping things humming. I do not use a property manager, but pay my housekeeper above the standard rate to make sure she has our listing as top of mind. We also have a general contractor that we've used to improve the interior as well as build out a better front porch and a separate local handyman to help around with the smaller tasks. Finally, we use the same real estate agent to help us find deals as we look to expand.