Should I Turn My Rental Property Into An Airbnb

Nikka Sulton

Should I Turn My Rental Property Into An Airbnb

Should you turn your rental property into an Airbnb? Numerous investors have observed short-term rental (STR) investing from the periphery. Yes, there are success stories and high returns from people, but we often come back to the following questions:

Are the risks justifiable?

Is the effort of setup and management worthwhile?

What’s the tangible increase in earnings?

Airbnb as a passive income:

Based on data from AirDNA, short-term rental hosts achieved their highest average yearly earnings in 2021, reaching £56,000. While a slight 5% decline is projected for this year due to increased supply and reduced rates, stability is anticipated, followed by further growth in 2023. Despite inflation and soaring fuel costs, recent surveys indicate minimal impact on American travel plans, indicating the resilience of these forecasts against economic challenges.

If you’ve been hesitant about venturing into short-term rental investment due to its complexity, your concerns are valid. Managing a vacation rental involves multiple intricacies, from guest satisfaction to maintaining positive reviews. This is where an experienced and reputable vacation rental property manager proves invaluable, justifying their fees.

If you possess or discover a property with potential as a splendid vacation rental, consider the financials and assess whether engaging a property manager could make vacation rental hosting a viable pursuit. You might realize that becoming an Airbnb host can be a pleasant and profitable experience.

Things to consider before turning your property into an Airbnb:

1. Laws and Regulations

Before embarking on the short-term rental journey, ensure legality. If using your property for this purpose is prohibited, it’s best to avoid. To determine if your property qualifies, consult your local regulations. Check your city or county website, search keywords like “short-term rentals,” and contact planning departments. Some areas demand primary residence status or impose rental day limits. Remember that regulations might evolve with Airbnb growth. If your property aligns and complies, you’re ready to proceed.

2. Risk Tolerance

Have you ever conversed with a financial consultant? They often ask, “On a scale of 1-10, what’s your risk tolerance?” How should you respond? “I adore risk! The more, the merrier!” But you don’t want to seem overly cautious either. You grasp that riskier investments offer higher returns potential. “I’d say I’m a 4-6 in risk tolerance,” you reply.

“I believe you’d suit our moderately aggressive index fund,” the advisor suggests, highlighting “aggressive” to boost your confidence.

This quirky tangent underscores how tricky it is to measure risk tolerance. Investments, particularly real estate, entail risk. Those with bigger rewards typically carry greater risks. When contemplating your first short-term rental, uncertainty is natural due to inexperience. Investors eye two key risks in short-term rentals:

Property damage potential
Financial uncertainty

Damage Risks

This initial point sparks vigorous debate. Many investors (myself included) contest the notion that short-term rentals pose higher property damage risks compared to long-term investment properties. A long-term tenant can inadvertently cause damage as easily as a short-term guest. In fact, you exert more control over guests’ stays in short-term rentals. If issues arise, you possess greater authority to deny access and face fewer bureaucratic hurdles compared to lengthy eviction processes.

Certainly, horror stories exist. Guests might smoke despite “no smoking” signs, host damaging parties, overuse amenities like hot tubs, or break appliances. Yet, similar incidents can transpire in long-term rentals. Early in your real estate investment journey, you likely heard warnings that tenants often neglect properties.

Amid risks, short-term rentals boast compensatory benefits. You can enforce rigorous guest screening criteria, such as age limits, valid IDs, and group sizes. You can even bar poorly reviewed guests from viewing your property. Furthermore, your property receives regular cleaning and post-check-out inspections to address potential issues.

Financial Risks

Naturally, financial risks merit consideration too. Your short-term rental may fall short on bookings, leading to an off-target occupancy rate. Projected daily rates might prove inaccurate.

Yet, the prospect of doubling, tripling, or quadrupling returns by transitioning a long-term rental into short-term is viable. Similar to any long-term investment, confidence in numbers and projections is vital. Leverage market knowledge or seek guidance from Airbnb-experienced experts for calculated risks aligned with long-term objectives.

Remember, if your short-term rental venture falters, you can revert to a successful long-term model to mitigate risks. Most real estate investors embrace transient challenges for eventual gains. As showcased, Airbnb’s don’t inherently carry greater risk than other real estate investments. Check the risk tolerance box and consider embracing a short-term rental venture!

3. Net Operating Income

In most scenarios, converting a rental to short-term can yield higher monthly income. However, income isn’t the sole performance gauge, as short-term rentals bear added expenses not found in traditional leases. Owners now cover costs usually borne by long-term tenants.

Operating expenses should encompass:

Taxes
Insurance
Maintenance
Supplies/inventory
Utilities (power/electricity/gas)
Water
Internet
Landscaping
Property-specific features (e.g., pool/hot tub maintenance, pest control, security)
Management fees (if self-management isn’t intended)

Considering this, net operating income (NOI) is a superior performance indicator, factoring in income post operating expenses.

4. Cash Flow

Are you seeking to enhance cash flow from your rental investments? With rising interest rates and recent appreciation trends, generating cash flow has become more challenging.

Your current property might be achieving a break-even point. While a prudent long-term strategy with projected rent and value growth, it may lack immediate impact. Your property could yield minimal monthly cash flow, covering annual maintenance. Alternatively, your property might be cash-flowing well, but you aspire for lifestyle changes or accelerated capital growth. If prioritizing cash flow, consider short-term rentals (STRs).

5. Time

The following aspects, time and management, are closely intertwined. To consider an Airbnb, one or both of these elements must be addressed.

Can you dedicate the time to establish and oversee an Airbnb? It entails a learning curve, furnishing the property, and navigating platforms like Airbnb or VRBO. Since short-term renting is hospitality-oriented, timely and considerate guest communication is essential. Managing guest schedules and cleaning is a constant task.

Various automation tools exist, such as Guesty, HostAway, and Lodgify for channel management, as well as TurnoverBNB for calendar automation. Setting up automated messages within platforms is also possible.

Managing an Airbnb alongside a full-time job is feasible, though not without challenges. Assess your readiness for the added workload involved in effective short-term rental management.

If you possess the time and determination, check the decision grid box!

6. Management

If time is a constraint, don’t dismiss STRs! Property management is an option, distinct from traditional services. Short-term rental managers handle every aspect:

Property setup, furnishing, and onboarding
Online presence and pricing
Guest interactions and inquiries
Scheduling cleaning, maintenance, landscaping
Inventory and supplies management
Financial tasks: payments, invoices, reports

Given their comprehensive role, STR managers charge more, usually 15%-30% of gross income. Evaluate if this aligns with your financial objectives.

Reliable managers and vendors are crucial. If unfamiliar with a market, finding trustworthy cleaners, technicians, and managers may require trial and error. Building a reliable team beforehand is essential for STR success.

If good management, vendors, and finances align, tick the box on your decision grid!