Airbnb’s are all the rage in investing right now. For a good reason too.
Short-term rentals cash flow beyond belief and make the numbers work in just about any market. I’ll admit that I own five myself and have a few in the works.
So why am I telling you not to buy them?
Airbnb’s are fantastic as long as all the variables work. I have opinions about properly mitigating risk and lived through 2008, so I speak from experience. Many real estate investors have become extremely wealthy over the past 10 years and cannot fathom a recession.
Recessions aren’t pretty, and many newer investors have a hard time believing that the real estate market could be upended and crash, but it’s possible.
Airbnb properties are an excellent investment given the right circumstances. In this article, I’ll give you five reasons not to invest in Airbnb properties.
Reason #1: The Numbers Only Work As An Airbnb
As a seasoned investor, I’m a huge fan of having various strategies to pivot in every market.
If I buy a property for $400K and can make $6,000 per month with Airbnb but only $1,200 per month as a long-term renter, I open myself up to some risk.
When times are great, I’m cash-flowing and loving life. However, if the regulations on short-term rentals become restricted as they did in Nashville and Austin, I need to pivot. My best option is to find a long-term tenant, but $1,200 or even $1,500 each month won’t cover the bills. If I decide to sell and the market goes down, or the pressure mounts because I am out of cash reserves, I’ll need to exit at a loss. These scenarios give real estate investing the reputation with some folks as being “risky”.
You need to strategize ahead of time. If that means you lose a deal, it is better than losing your shirt.
I recently had this situation occur with a lakehouse in Arkansas. I was denied the right to own an Airbnb rental unexpectedly by the city. Luckily, I planned well and was able to place a tenant that more than covered the mortgage and expenses.
Reason #2: Not Enough Cash In Reserve
Like I’ve said, when Airbnb’s are good, they are perfect for cash flow!
It’s an expensive proposition, though. Furnishing a home can cost thousands. Even if you buy a furnished house, no one could have predicted COVID-19 or even a slow month!
If you earn $7K per month on a property and pocket half, you have $3,500. Say, however, you only gross $3,500 one month for no apparent reason. Suddenly, you’re not making money.
Short-term rentals offer no guarantees. Most vacation rental owners anticipate slow months based on seasonal conditions. But, in one of my own cases, my Airbnb in a residential neighborhood saw a slow month, and there were no factors to predict the decline in revenue.
Case in point, you need ample cash reserves. Having cash on hand to pay for unforeseen expenses or slow months is a must, especially when playing with high overhead.
If your home is costly to run, a decline in revenue for a few months could create a hardship if you are running lean on cash. If you get caught in this situation, I recommend taking on a partner and cutting them into the profit. Or, if you have enough equity, sell the property. Hopefully, you can offset any sizeable tax gains.
Reason #3: Luxury Rentals Are The First Sacrifice During Poor Economies
It feels like I’m that bearer of bad news, but someone has to say it. Real estate is not always a winning game and Airbnb has higher stakes for higher rewards. I want to make sure you are considering these variables.
These days, a very popular strategy is buying a huge home and renting it out for sizeable short-term profits. Luxury vacation homes are the first thing people stop going to in a slow market or a recession.
If you are banking on luxury short-term rent payments every month, you might have to sell at a loss because you simply cannot cover the bills.
Remember, with short-term rentals, you are responsible for the cable bill, gardener, pool or spa maintenance, utilities, and water. You are responsible for that bill regardless of whether or not a guest is occupying the place.
Reason #4: Overhead Expenses and Property Management
You can easily manage your Airbnbs even if they are out of state. However, you may not have time to handle the booking inquiries and manage the cleaners and repairs.
In this case, you’ll want to hire a property manager. Many do a great job but charge 25-30% of gross revenue. At that point, your numbers might not look too good.
This means you’ll have to be fully prepared to self-manage or find deals that will allow you to hire a property manager for the right price and still net enough income each month.
Also, because your Airbnb is a business, you may have incidental expenses.
I once had a guest spill red wine on my table, a $300 replacement. I filed a claim for reimbursement with Airbnb, and I’m still waiting six weeks later. I also had a cleaner forget to clean a bathroom. Seriously.
Yes. I offered the guests a free night and prayed they did not post the photos (they didn’t!). The incident set me back $350 for the night, and getting the new cleaning crew set up was another day that needed to be blocked out.
With quick turnovers and wacky schedules, the world of Airbnb leaves room for all sorts of scenarios that cost money. Sometimes, a lot of money.
Reason #5: You Don’t Have High Stress Tolerance
The stories and reasons above are all part of being an Airbnb owner.
If you fall into the category of “life is too short,” or you despise managing these sorts of situations, or don’t need the money that badly. Then pass on it. There are many other ways to make money in real estate that doesn’t involve the madness of an Airbnb.
All that said, I do have Airbnb properties that have never had any major issues. The easiest ones tend to be for longer rental terms, such as out-of-state workers or traveling nurses. Not allowing pets alleviates other obvious issues but does lessen the booking pool.
If you still think Airbnb is for you, always do the following.
- Make sure the numbers work straight out of the gate with all real estate.
- Budget the furniture expense as part of the money out of pocket.
- Make sure you track AirDNA and data.rabbu.com to get a realistic amount of income you can expect monthly.
- Estimate the lowest amount to ensure my worst-case scenario works.
Don’t feel like you have to follow the herd. Follow the numbers and your sanity. If Airbnb doesn’t feel right to you, find another strategy in real estate to make money.
Whatever you do, don’t walk away from real estate investing altogether if one course of action does not work for you. There is a way in for everyone. Airbnb may not be the investment for you, and now you can justify the reasons why.
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