Top 5 Things to Consider Before Investing In An Airbnb Property

5 Things To Consider Before Investing In Airbnb

airbnb rentals

I have friends that have committed to buying up cheap Real estate and converting them into Airbnb properties. The opportunity to turn profits without finding a tenant and committing to a multiple year lease is drawing him in like a magnet. As his rental portfolio has grown, so have his concerns for sustainability. There have been some amazing months where he has made the mortgage payment and then money beyond that, and of course there have been times where the properties have sat vacant for weeks with him wondering if he would be able to cover all the mortgages. He’s smart enough that he has now tucked away a nest egg for future rental droughts, but there is still a lingering concern and questions about whether or not to purchase more properties. We caught up for a beer the other night and I asked him as an investor to share with me the Top 5 Things To Consider Before Investing In An Airbnb Property. Three beers later he had this to say.

 

  1. Barrier To Entry

 

Like any business, there is always a barrier to entry. That can be something that is easy to overcome, or it could be so complex that it could take years to get to where you need to be just to start. With Airbnb rentals, he suggested that there were obstacles beyond the purchase of the property. That caught me off guard, I assumed that once you owned the property you could just start renting it out, after all, it’s yours! Not the case though, there is an application process you must go through before being accepted. From city to city laws can be different in regards to rental properties, there may be time restraints on how long you can rent the property out for (never heard of that), or laws about you renting the property out while not being in-state (if you were out of state), taxes, setting up the rental as a business, LLC, state laws and regulations from state to state, HOA, legalities with the mortgage company, legalities with the homeowners insurance, and many other details he mentioned but I couldn’t write fast enough to catch them all.

 

  1. Don’t Go Into It Broke

 

In fact, he even suggested not going into it unless you had 50k lying around in a savings account or trust. The expenses really add up quickly, and if you are doing it right and running it like a business you will be paying lawyers and a property management company a pretty penny to help manage contracts and the property. You will need to furnish the property if it isn’t your permanent residence. Power, water, cable, and internet are all amenities that people look for when searching for an Airbnb. If you want your property to rent out, then you must offer competitive rates and have the furnishing and amenities that will attract business. This all costs money up front. Then there are post-rental requirements you will need to fulfill. You will need a cleaning company to clean the interior and exterior of the property, laundry, dishes, pest control, and monthly yard maintenance. If you own a pool or a hot tub you will need those serviced, gas grills will need to be refilled, light bulbs changed, and appliances maintained or replaced. If the property ends up sitting for a long duration of time, can you still afford those primary expenses? You can always jump in and mow your lawn, clean your pool, and tidy. But you have to pay the mortgage, water, and power. What if the property gets vandalized, a tenant is injured in the pool, or the place becomes subject to burglary? Take all that into consideration in addition to the fact that Airbnb has a 3% service charge that comes off the top. All those things will add up quickly, especially if you are managing multiple rentals.

 

  1. Competitive Market

 

Hotels and Motels have all had to lower rates and adjust to the new world of technology that we live in. No longer are they the gatekeepers for the traveling kind. We were once held hostage to their prices if we wanted to travel anywhere and stay in a comfortable environment that was safe and secure. Now with Airbnb, anyone with a condo or home can rent out the property or even an individual room at an extremely affordable rate. Take that into consideration when you are listing your property, people are renting out their primary living quarters for cheaper than you can rent out your rental property. They already live in the space, they just rent it out for a weekend and stay the night at a friend or family members. This has made it difficult for him to rent out his property at times. With Airbnb having more than 3 million property listings, you will need to do everything you can to stand out from the competition. Quality images and timely communications are required to get noticed. After the property starts renting, you will begin to rely on reviews to boost the listing. This will require you to cater to the tenants, be responsive, provide the amenities you advertise, and even offer “freebies”. Having some printed material accessible for local suggestions would also help with that. Like with anything else in business (especially customer service), if you go above and beyond for your clients you can expect to be rewarded with quality reviews and repeat business.

rental property interior

  1. Start With A Single Listing

 

Ambition is required if you want to be an entrepreneur, and it never hurts to have and apply it anywhere else in life you can. With this new venture however, my buddy aggressively suggested to start with a single listing. Thinking back on our conversation it makes complete sense. With all of the potential expenses that can really throw a wrench in things, it would be wise to get your feet wet first with a single listing. Learn more about the process, expectations people have, what the true costs of operation are, seasonal spikes in business, and seasonal drops. Once you have a true understanding about what it will really take for you to own and operate and Airbnb, you can consider the purchase of another rental property. The purchase of a new property may have financial setbacks of it’s own. The property will need to be appraised, who covers that? If there are structural issues with the home, who is responsible for repairing them? What if the repair is done but there are still construction defects? Who pays for that? Will it go to court? Will you need to hire a construction expert witness to testify that the construction done on the property is flawed? Between your time and expenses you will be able to extrapolate how many of these properties can be purchased and managed over the course of a year. If you have never had any experience managing a property, or catering to people, you will definitely want to go at this at a pace that will allow you to get a handle on everything before you are inundated with calls and requests. The other option for starting out slow is to rent a room or guest house on the property you occupy on a permanent basis. The barrier to entry is virtually nonexistent and you will get a first hand feel for what to expect.

 

  1. Reach Out To Other Investors In Your City

 

You may find that you get little feedback from the people trying to make money in your market, I mean who wants to share trade secrets with the competition? It still doesn’t hurt to reach out and touch base. Most people are pretty cool, and if they are renting out a room or a guest house on their primary property they are probably doing it for some side cash. Those people will be willing to help you out. The guys that are renting out 10 homes in a market will be less likely to give you any valuable advice. Reach out though, make that call, and get first hand feedback from people that are living it.

Some of these things may seem obvious and I guess they could be applied to any rental situation, but for me it was interesting since I have recently considered doing it. There are things here that I had not thought of yet that have me reconsidering the timeline and how I will approach this. I was thankful that he shared this info with me and figured I would pass it along to anyone considering something similar. The rental business seems overwhelming to me, a guy that has lived most of his twenties behind a computer, but I am up fo the challenge and will start this journey before the year ends. Good luck to anyone else considering the same.

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