Short-term rentals now proliferate in every major U.S. city thanks to popular home sharing apps like Airbnb and VRBO, and buying homes and turning them into investment properties has become a popular tactic for generating additional income.
However, the housing market has reached new heights of competitive offers, with plenty of homes closing for 15%, 25%, or even 50% over asking.
With this much competition, does it even make sense to buy for the sake of investing – or is there too much risk involved?
Buying A Home for Airbnb – Is It Worth It?
Home prices have reached a fever pitch. In 2020 alone, the U.S. median home price increased 12.8%. In Washington, DC – an ever-popular tourist area – homes are selling for a median price of $655K, with some neighborhoods passing the $1 million median sale price for the first time.
While historically low mortgage rates have boosted buying power, the lack of available homes has led to fierce competition among buyers. Winning bids have been as high as 50% over asking for homes in good condition and in desirable areas. Pushed to the limits of what they can afford, many buyers are doing the unheard of: waiving inspection contingencies and writing “love letters” to win over sellers.
This dynamic has played out to varying degrees in all the markets Houwzer operates in across the Northeast and Florida. People who successfully buy a home are almost always getting it for over asking, and frequently the buyer is making up the difference between the selling price and the appraised value in cash.
The average Airbnb rental home generates more profit per year than the average same-size home on the long-term rental market, and short-term rental income can be very lucrative (on average hosts make $924 a month, but this includes part-time rentals and single rooms). It’s possible to do this as a side hustle for many years, allowing owners to pay off mortgages quicker and generate a little extra income.
That sounds like a great set up: but what happens when things go wrong?
When COVID-19 hit, it caused massive disruption to the travel industry. Overnight, Airbnb hosts who previously made thousands of dollars in revenue each month saw their listings for the entire year disappear. Airbnb went back and forth on its policies, ultimately allowing many guests to cancel at the last minute. Hundreds of hosts–representing over 10,000 listings–are now pursuing legal action against Airbnb.
Although COVID-19 was a once in a lifetime event, it underscored the potential dangers of relying on tourism and an online platform for renting out a home. If homeowners run into problems, Airbnb will likely be of limited assistance, while claiming limited liability as well. And past success is no guarantee of future bookings.
Anyone now entering the market with the intent to rent out their property has to ask themselves: how many months can they cover the mortgage, insurance, and fees for a second property, without receiving any additional income from it? And with so many homes selling for far over their listing price or appraisal, how much cash are the willing to tie up in this investment?
Problems with Airbnb Pre-dated COVID-19
Although COVID-19 made some of Airbnb’s biggest drawbacks more obvious, plenty of issues had already been simmering in the background.
Partying has been a consistent issue for neighbors of Airbnb rentals in Philadelphia – and the platform removed or suspended dozens of listings for violating party policies in November alone, according to The Philadelphia Inquirer. The problem is difficult to avoid since most guests won’t tell their host that they’re going to have a ton of raucous guests. Property owners may find that out the hard way when their account is suspended and they lose several weeks’ worth of income.
Regulations have also been catching up to Airbnb, and something to consider is whether future legislation could hamper your ability to generate income. The topic of affordable housing is becoming as hot as the correspondingly hot real estate market, and as long as there is a housing shortage, major cities are going to face more and more pressure to regulate the short-term rental industry.
In Philadelphia, a City Council bill introduced this February aims to further regulate rentals in the city, requiring operators to get commercial activity licenses as well as limited lodging operator licenses for $150 per year. And this May, New York City introduced a bill that could dramatically cut down on the number of short-term rentals operating there.
If future regulations–especially zoning regulations–end up making a property unsuitable for short-term rentals, homeowners will be left with little recourse except to shift to more traditional long-term tenants, or sell. So the question here is: if for some reason an investment property stops being profitable and the owner needs to sell it, are they going to lose money upon a sale?
If this is a second home, it’s especially important that owners crunch the numbers and make rational decisions about what they can offer for an investment property. Before potential buyers get into a bidding war, they need to understand the financial cushion they’ll need to reserve in case of emergencies. Anyone should make sure their anticipated cash flow is enough to justify the well-above-asking price that they will probably need to pay in today’s hyper-competitive market.
It’s Not All Doom and Gloom
This may not have painted the rosiest picture of Airbnb hosting – and there are a lot of unknowns in the future.
But there are emerging trends that bode well for savvy hosts. For example, the surge in remote work has also given many people flexibility to book longer trips or take “workcations”. And after a year cooped up at home, Americans are itching to travel – even if it’s not abroad. There has been a huge need for that during COVID-19 with people searching for a way to leave their crowded cities and homes, whether that was for a weekend or even a month.
As restrictions ease, Airbnb is seeing a surge in demand for “remote destinations” and “off-the-beaten path locations” among travelers. Vacation properties outside of the city could be a more promising entry point for those looking to get into the rental property business. Buying properties in more remote areas is often easier and can save buyers from the regulatory headaches that are more common in cities.
Many former Airbnb hosts have also been moving towards building their own direct booking sites in order to cut out the middleman and have more control over their listing policies.
Ultimately, any investment in real estate comes with risk, and potential buyers will need to run the numbers to figure out whether the risk is worth the potential reward.
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