Are Short-Term Rentals (Airbnb) a Good Investment?

airbnb risksI do not have any short-term or Airbnb rentals. However, a lot of people have asked me to write about them because they have become so popular lately. I do not have short term-rentals because I don’t have the time to manage them or have a property manager that wants to manage them either. There are also some risks that come with short-term rentals that may make a great looking investment turn into a really bad investment very quickly. I think one downfall to short-term rentals is investors cannot cash flow with regular rentals, so they make the numbers work by increasing revenue with short-term rentals. This comes with many risks, and stretching the numbers may not be worth it.

What is a short-term rental?

A typical rental property involves a landlord buying the property and renting it to a tenant for a long period of time, usually a year. In some cases, the lease may be a month-to-month lease where the tenant only has to stay for one month and can leave at any time with a certain amount of notice, usually one month. Long-term rentals usually involve leases, and the tenant is responsible for some maintenance and utilities. The tenant sends the rent every month, must abide by the lease, and with the right tenant, a long-term rental can be relatively passive, especially with property management in place.

A short-term rental is when the property is leased for less than a month. It might be leased for a week, two weeks, or even a few days. When you have a short-term rental, you can usually rent it out for more money per day than a long-term rental. This allows the landlord to increase their revenue above and beyond what the rent would be on a long-term rental. With short-term rentals, the landlord must advertise it, book stays, schedule the stays, get the property cleaned after every stay, set up different methods to take payments, keep track of deposits, and coordinate getting the keys to the tenant or some other form of entry.

Where did the name Airbnb come from?

Airbnb stands for Air bed and breakfast. That seems kind of weird, right? Well, the “air” part comes from the owners of the company. Airbnb is not a term that is used for all short-term rentals but the name of a company that rents out short term rentals.

The owners of the company first rented out air mattresses, and that is where the “air” part comes from.

Does a short-term rental make more money than a long-term rental?

A short-term rental property brings in more revenue per day than a long-term rental, but that does not mean that they always make more money. Here are some of the reasons short-term rentals may not make as much money as the landlords assume they will make.

  • There are many expenses that come with short-term rentals like cleaning, utilities, management, maintenance, and booking fees.
  • Short-term rentals are not rented out every day. There are more vacancies and there could be lower rates in certain seasons
  • Furniture, eating utensils, and basic necessities must be provided. That means more things can be broken or need to be replaced.
  • Disruptions in the economy like the coronavirus can greatly impact the demand and cause huge decreases in revenue.

If a short-term rental is managed well, it can make more money than a long-term rental, but just because the daily rent is more does not mean the profit will be more. There are more expenses and there are more risks.

What are the risks of a short-term rental?

Short-term leases

The shorter the term of the lease on a rental property, the more risk there will be. I own many commercial rentals as well as residential rentals. Commercial properties with long-term leases are often considered the least risky properties to own because the tenants should occupy the space for many years.

The shorter the term of the lease, the more risk there is because the tenant can leave without being responsible for months or years of lease payments. If something crazy happens with the economy, the short-term tenant can simply leave, and the landlord is stuck with a property that may be vacant for a while or may rent out for much less money.

On short-term rentals, the risk is even greater because the lease term is so short. First, you must actively lease it out over and over. Second, as we are seeing with the coronavirus, many people are canceling their trips or are not even allowed to take trips, and the short-term landlords have $0 in rent coming in. The long-term rentals may have some issues as well with tenants not being able to pay, but we will have to see how serious that becomes.

City rules and laws

One of the biggest reasons I do not invest in short-term rentals is that city laws can change, and they have been changing to address Airbnb properties. Short-term rentals may be legal one month and illegal the next month. We wanted to stay in an Airbnb in Florida for vacation, but we had to stay in a different town because the town we wanted to stay in did not allow rentals for less than 1 month.

We go to Disneyland quite a bit, and we used to stay in short-term rentals just outside the park in a large condo complex. One year, all the short-term rentals were gone because the city of Anaheim outlawed them. Denver does not allow short-term rentals unless the person who owns the house lives in the house and they only rent them out on occasion. Multiple landlords have been arrested for breaking this law and lying about living in the house.

Many towns already had rules against short-term leases before Airbnb became so popular. They think of short-term rentals as hotels, and they want them to abide by the same rules that hotels abide by. If you buy a property with the intention of using it for short-term rentals, make sure to check local laws to see if that use is legal, and do not be surprised if the use changes and you can no longer use it as a short-term rental in the future.

Damage

There are also many stories of landlords who have their short-term rental trashed. Most people who book a short-term rental are on vacation. They may be ready to party; they may be loud; they may stay up late. There is also very little a landlord can do to check out every guest they book. It is much easier to vet a tenant who will be living in a house for a year.

When you are renting a property to 100 different people in a year, there is a better chance one of those groups of people will not take care of the property and do some damage. There is also a chance they could piss off your neighbors or even damage their property.

Below is a video of one of my long-term rentals that was beaten up by the tenants.

What about Airbnb Arbitrage?

Another form of Airbnb investment has become popular recently or at least has become a popular strategy to teach. The basics behind Airbnb arbitrage are that you rent a property from a landlord for a year or month to month, and you as the tenant rent out the property to Airbnb guests making much more than the rent you pay.

For example: as the tenant, you rent out a house for $1,500 a month, then you rent out the house for $100 a night. If you rent out the property for 30 nights, you make $3,000 a month! Easy money, right? Well, don’t forget all the expenses we already talked about and the risks. On top of those risks, you must make sure the landlord is aware of what you are doing and that the property is zoned for what you are doing. If you can’t rent out the property to short-term guests, you are still responsible to pay the rent.

To me, this seems like a lot of work with a lot of risks. You don’t even own the property and get the advantages that come with ownership.

What is the smart way to invest in Airbnb rentals?

If you are going to invest in short-term rentals I would buy properties that would make sense as long-term rentals as well or has other uses. Do not depend on Airbnb because so many things can change and a decent rental can turn into a horrible rental! Make sure you account for your time and the extra costs that come with an Airbnb property like utilities, maintenance, cleaning, etc.

Conclusion

There are many pros to owning short-term rentals as they can make a lot of money if managed right. However, there are many risks as well. I know short-term rental property owners right now who have 100% vacancies because no one will or can rent from them. This is a unique situation with the coronavirus but something to think about. I personally am not investing in short-term rentals because those risks outweigh the rewards for me. For others, they may work great, but I prefer long-term rentals with tenants who take less maintenance.

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