Airbnb has revolutionized the hospitality industry, enabling guests to rent the couches, rooms, or entire apartments of locals while they are traveling. Over 500,000 Airbnbs are rented each night. This simple idea has made the founders billionaires—but you don’t have to own the stock to reap the benefits.
People across the world are not only renting out their spare rooms for a few extra bucks, some real estate investors are purchasing properties to rent solely as Airbnbs. Should you take the plunge? Let’s take a look at the facts.
There are several case studies documenting the economics of buying a property solely to use as an Airbnb. One man purchased an apartment in Las Vegas for $40,000, spent $10,000 renovating it, and then put it on the market.
In its first year on the site, he made revenues of nearly $20,000, and a profit of $13,608. That is a return on investment (ROI) of around 27%. At that rate, his apartment will be fully paid for in around 4 years, while he earns a ROI that would be the envy of many hedge funds. Even better, he left the day-to-day issues of cleaning the apartment to a contractor he hired, making this investment much less time intensive.
Another owner paid $450,000 for an apartment in San Francisco, and makes gross revenues of $4375 per month—but the high cost of his mortgage and other fees take his yearly profit down to $13,800, a ROI of around 3%. This is certainly a decent return, but it is far from a money machine. Although both of these investors made roughly the same profit, the owner in San Francisco will take much longer to pay off his mortgage.
Although these two investors are in different markets making different profit margins, they are both consistently making money on a real, tangible asset. While apartments are not particularly liquid assets, if Airbnb becomes less attractive, these investors can simply sell their apartment, rent it out to a tenant, or live in it themselves.
Others have a different profit plan that does not involve ownership. They simply rent an apartment long term, while subletting to travelers—at a higher price—as a short-term Airbnb. It is rental arbitrage, pure and simple. If your landlord allows this, this can be an attractive way to get into the game without the strings of a mortgage or total ownership.
Websites such as Airdna have analysis and data showing which U.S. cities are most profitable for Airbnb investment or rental arbitrage. Surprisingly, some of the best places to invest are second-tier cities where the rent is cheap, but there is still a steady stream of visitors. Sunny cities also do well, as tourists can visit year round.
The economics of Airbnb are compelling—so compelling that a number of New Yorkers have created apartment empires, sometimes comprising over 100 listings. The state attorney general released a report noting that a mere 6% of the individuals listing apartments in the city accounted for 36% of all rentals listed. This small group of individuals renting out large numbers of apartments brought in $168 million in the 4 years from January 1, 2010 to June 2, 2014. Yet the popularity of Airbnb as an investment has also created a backlash.
Regulatory Risks Abound
Although profits can be lucrative, regulatory risks are unpredictable.
A recent ballot measure in San Francisco known as Proposition F would have made it illegal to host guests in the city for more than 75 days per year. While the measure was defeated, Airbnb faces a cloudy legal outlook in cities around the globe.
Airbnb has drawn fire in other places such as New York, where the state attorney general released a report claiming that 72% of rentals appeared to violate State or local laws. Although these laws are sometimes not enforced, many localities prohibit individuals from operating their own property as guesthouses.
Most investments in developed countries are not subject to political risk—but this one is. The rising chorus of worldwide anger over income inequality and gentrification means that Airbnb owners—especially those who operate dwellings as an investment—could find themselves in the crosshairs of new regulations.
If you decide to operate an Airbnb, you are opening yourself up to a complicated web of local and national laws that can have ramifications on your investment. It is vitally important that you understand the laws of your local jurisdiction.
One Airbnb host in California got involved in a months long legal battle to evict a guest who had rented her apartment for 30 days. The issue? People who rent an apartment for 30 days or more in California are considered month-to-month tenants. This legal technicality forced the owner to undergo an expensive and time-consuming eviction process.
Sometimes, even following the letter of the law isn’t enough. Even in jurisdictions where Airbnb is accepted and popular, homeowners associations or apartment rules can forbid hosting short-term guests for profit.
Likewise, getting a mortgage can be a problem. Mortgage terms and interest rates often differ substantially when a property is purchased for investment, and taking out a personal mortgage when the real intent is to operate a commercial enterprise can result in large legal issues—including the mortgage company making the loan due immediately.
Should You Invest?
As with most investments, the answer to whether an Airbnb is a good investment is “it depends.” Investors who are able to find a property in a good area—and are willing to wade through the sometimes complicated regulatory issues—can find some truly great investment opportunities.
Markets with famous tourist attractions or rock-bottom prices can deliver large returns. The use of rental arbitrage may also be an attractive way to test the waters.
With globalization accelerating and populations growing, the long-term outlook for tourism and real estate is good.
Airbnb can deliver great returns as an investment—but don’t let that blind you to the fact that maintaining a property is an expensive and complicated proposition. As with all revolutions, there will be winners and losers. Smart investors who understand the risks and regulations will be able to reap the rewards.