Airbnb…worth the investment?
Airbnb

By GUNAPRASATH BUPALAN

Airbnb (as in “Air Bed and Breakfast”) is a service that lets property owners rent out their spaces to travelers looking for a place to stay. People can rent a space for multiple people to share, a shared space with private rooms, or the entire property for themselves.

Airbnb was started in 2008 by Brian Chesky and Joe Gebbia, two industrial designers who had recently moved to San Francisco. Unable to afford the rent for their loft at the time, the pair decided to make up the money they needed by renting out their apartment to people who couldn’t find hotels to stay at while attending nearby trade shows.

Joined by architect Nathan Blecharczyk, Chesky and Gebbia set up airbeds in the apartment’s living room for their guests to sleep on, and cooked their guest’s homemade breakfast in the morning.

Since then, Airbnb has become one of the trailblazers of peer-to- peer property rental. It is now available in over 190 countries and over 34,000 cities worldwide, accounting for over 2.5 million property listings. Over 100 million people have used Airbnb to book a property rental at some point.

Its popularity stems from the fact that not everyone who is travelling can afford to stay in a hotel, much less find a hotel room at all in a busy urban area. Airbnb provides them with a simple, and often less expensive alternative.

Question: Does it make financial sense to buy a property for the exclusive use of renting out through Airbnb?

To answer this question bluntly, yes it does make sense to buy a property for the exclusive use of renting through Airbnb, but nothing is as simple as it sounds. It depends upon a certain number of factors which if ignored can ruin your business. Here are some factors that you need to consider so that you don’t get burned.

Location:

The most obvious but still somewhat intricate part is choosing your location. Not only do you have to ensure that it’s a city that attracts a lot of tourism with high occupancy rates and average rent prices, but you also need to match it with the prices of utilities and services in the area. The profit you make does not only depend on how much your place is rented for but also on how much you spend on the upkeep.

Crunching the Numbers:

You need to perform calculations to estimate and compare your investment and revenue. For example:

Purchase Price: RM450,000
20 per cent down payment: RM90K Loan: RM360K (30 year term)

Payment: RM2,000 per month (includes taxes, insurance interest, etc)

Maintenance dues: RM500 per month

TOTAL: RM2,500 per month

So, based on the above example, the owner will need to make at least RM2500 per month to break even on this AirBnB property.

Here is what kind of income the above landlord could potentially see.

A typical month

Number of bookings: 7 Nights rented: 25

Average nights per booking (3.7)

Average cost per night: RM175

Gross Revenue: RM4,375

Costs:

Cleaning: RM350 (RM50 per booking x7)

Supplies: RM175 (RM25 per booking for wine, chocolate, TP, coffee, etc)

Utilities: RM200 (internet, power, cable tv)
TOTAL: RM725

NET
Gross Revenue: RM4,375
Costs: -RM725
Mortgage and Maintenance: – RM2,500
Net: RM1,150

So breaking it all down, the above investor should net over RM1,000 each month while building equity in the property. However, the owner would need to be aware that the above figure may be attainable on certain months and less on low months but on average should be over RM1,000 net per month.

Be Smart About it:

If you intend to treat renting on Airbnb as a business, then there is a high probability that you are going to do it remotely which means you won’t be there to clean the place nor escort your guests.

You should consider hiring a manager or a cleaner so there is someone to look after the place. Ensure that the person you hire is responsible, otherwise you might end up getting a bad review and reviews can either make or break you on Airbnb.

People are always afraid to booking a place that has no reviews, so you might want to consider dropping your rates initially which

would encourage your customers to book your place and after you have gotten some good reviews, you can increase your rates.

Some might say comparing an Airbnb listing and a traditional property are poles apart since one is a service and the other is a product. But it is a hot question right now among interested investors, which real estate investing strategy is better? Which is more profitable?

Check with the law

Airbnb: You may not be in check with the law. Avoid violations by understanding your city’s laws and restrictions on short-term renting. If you’re renting out a property and then subletting it on Airbnb travellers, you could be breaking the law and get evicted. Many cities require you to register or get a permit or license for short-term leasing. Of course if you own the property, this doesn’t apply to you, but you could still be required to pay taxes. Know the law and your city’s regulations and about legalizing Airbnb rentals.

Traditional leasing: With traditional leasing, you don’t have to worry about the legal issues as much.

Hospitality

Airbnb: You need to provide your guests with certain hospitality such as fresh towels, body wash, shampoo, toiletries, pantry perishables, cooking utensils and so on.

Traditional leasing: You don’t need to worry about all of this. The property will be leased at an as-see- as-is basis.

Competition

Airbnb: You have competition with those who are not investors. There are some hosts who list their own home temporarily. They’re not looking to pay a mortgage, but may just need extra cash for rent or other reasons. In other words, they are not really engaging in real estate investing; so they lower their prices and attract short-term lodgers.

For this reason, it’s important to make your property stand out and offer excellent service. Do not higher your prices unless you have a lot of reviews and have established a name for yourself. Of course if you have a 100 per cent Airbnb occupancy rate, then you should raise your prices.

Traditional leasing: This doesn’t quite apply to traditional landlords, because rental properties in the same neighbourhood will have similar rates. Maybe vacationers have the option to splurge or not, but when it comes to finding a place to live, people stick to a budget. You’re also not competing on a single platform.

Socializing

Airbnb: Meet new and different people. Getting to know people from different parts of the world and country can be so exciting and enlightening. You can meet people from all over the world at your very doorstep or coffee table. This could also give you an idea of who’d you like to stay with when you’re vacationing.

Traditional leasing: You don’t interact with tenants as much. In fact, you might avoid each other. They may be fascinating tenants but you shouldn’t be getting new tenants every month, depending on the lease and number of properties you own.

Fun

Airbnb: Airbnb as a business is not a boring job. You come to understand the fundamentals of customer service and hospitality. The customer is happy and you get rewarded through their reviews, which generate bookings. You stay interactive with your property and make constant improvements.

Traditional leasing: Landlords don’t benefit from titles like “Superhost” from having great reviews and a high response rate. Landlords don’t get to stay in touch with their properties. They also don’t have the opportunity to build a reputation for themselves as easily as Airbnb hosts do.

Raising prices

Airbnb: You are able to play with your prices. As an Airbnb host, you can take advantage of the weekends and high seasons by raising your price due to high demand and limited options.

Traditional leasing: Can’t raise your rent randomly on weekends or high season. There are other things you should know about becoming a landlord.

Conclusion

As mentioned above, Airbnb is a viable business option, but you cannot just invest money and expect to earn back. You must put in a lot of effort and look out for a lot of things. Like with any real estate investing, the single biggest lever you can pull is what you pay for the property. Get the property at a good price, and everything else just kind of falls into place.