Hey there, fine readers! You ever get nervous sometimes about a decision you made, and start to second guess yourself? Like that time you ate at Taco Bell and were somehow surprised by the aftershocks? I’m starting to get that “Taco Bell feeling” with our Airbnb Return on Investment…
Paranoia might be too heavy a term to throw at this. But I’m downright nervous. Even though I’ve run all the numbers and chatted with other vacation rental owners in the area, I’m anxious for this investment to prove its value.
There isn’t much to complain about. I closed on the sale this Tuesday. It was a pretty easy process. I had to scoot over to our bank branch in the morning to wire $26K for the down payment plus closing costs to the title company in Michigan.
Later in the afternoon, a mobile closer stopped by work and I got to sign all the closing docs down in our lobby. Done in 10 minutes. So yeah, things are moving right along. No hiccups.
Then I started to run the numbers in my head and look outside at the first snow flurries of the season. My inside voice says, “I can’t rent this thing for a long long time.” And like a robot from a futuristic television show, I start to short-circuit. “Does not compute! Does not compute! Error!” I blue screen, shut down, and head back to my cube, with a little smoke coming out of both ears.
Airbnb Return on Investment: Lessons in Patience
This is all planned paranoia. I knew what I was getting into when I first made an offer on this place back in late August. It’s a seasonal rental and the high season, May through September, would be just in the rear view mirror right around closing time. By the numbers, I’ll probably wind up with six months of vacancy before someone wants to jump in the chilly waters of Lake Michigan, next spring.
Each month of vacancy costs $718 in PITI (monthly principal, interest, taxes, and insurance.) Pronounced like “pity.” The one small bonus is that first payment isn’t due until December 1.
Even if on paper it’s not “free”, I’m still calling November a free month. When financing a property with the bank’s money, I’d be happy to get any time up front without payments, since I’m using out-of-pocket funds to make the necessary improvements.
- Calculating the PITI @ 5 months x $718 = $3,590. Gulp.
Let’s also remember that this is a condo. That means I have association dues to pay, each and every quarter. The association isn’t about to give me any “free months” like U.S. Bank is.
- Calculating the association fees @ 6 months x $133 = $798. Sigh.
There are some other costs involved that are fairly minor but worth mentioning. I can winterize the property to keep utility costs low, but I expect some base level costs nevertheless.
- Calculating the utilities @ 6 months x $50 = $300. Damn.
And then there’s the upgrades and furnishing costs
I’ve already plunked down some serious money to get this place ready, and that was before I’d even CLOSED. In fairness, a couple of our long-term rentals needed upfront repairs that rang up quite a bill. Typically though, you want to keep those costs contained, under $10K or so, to keep your Cash on Cash Returns solid.
With the Airbnb, I intend to keep those pesky upfront costs right at that $10K ceiling, if possible. Nearly half of that amount is just to repaint and replace the carpeting with Pergo. Here’s what it looks like now; like a place you might have rented your senior year of college:
As you can see, without a healthy face-lift, this place won’t fetch a good rent. Or worse, the condo could go vacant through much of the high season. That carpeting is the original nasty from 2005. The walls and trim are abused and dull.
Normally I’d do all the painting myself and save a big wad of cash. But there’s a couple of factors compelling me to hire out this job:
- I have one long weekend of PTO left to fly to Michigan and get sh*t done this fall. The choice is either hire-out the flooring job, or hire out the painting. Both cost about the same, but I prefer to do the flooring and avoid a weekend of paint fumes.
- Vaulted ceilings.
The total cost to repaint with nicer earth tones, including the ceilings (job and materials): $2,500.
The total cost to DIY the Pergo install (materials only): $1,600.
While I’m out there, I hope to find creases of time during my four-day stretch to install a new kitchen faucet, kitchen cabinet hardware, a NEST thermostat, and a Schlage Sense door lock. Those last two items I expect will be quite useful, as both can be operated over the Internet. The NEST allows me to keep an eye out for wasteful energy consumption. The Schlage Sense will help us dole out new entry codes for each new guest.
Throw in a Roku Box, a Google Wifi Station, and some alarm clocks, and there’s another $700 already plunked down. I haven’t even looked at furniture yet! Holy sh*t!
Calming down, with the aid of numbers
When you add it all up, I’ll be in for $9,500 before I’ve even gone shopping for beds, sofas, and dinner plates. There are some tactics I’m using to mitigate the upfront costs. A very handy Home Depot credit card offer allowed me to defer the Pergo, Faucet, and Lock expense of $2,000 for 24 months at zero interest. I figure I can spread that over the next two years as part of a general maintenance expense.
Second, and this is huge: My parents still have a lot of stuff from their recent downsizing. The Airbnb will benefit from a rarely used toaster oven, coffee maker, and other kitchen essentials. All this adds up.
Not to mention, my mom and step-dad are willing and able to help me this weekend with the many projects I have crammed into a tight schedule. Love ’em! Dinner is on me!
Finally, I have to remember to look at those cash on cash returns and realize that once this place is spiffed-up and furnished, a typical summer month could generate over $4,000 in net returns. Given a decent five month stretch from May to September, the Airbnb could yield $20,000 before even considering the low-season months.
So, take a deep breath, Cubert. Nothing ventured, nothing gained. The calculated risks and hard work will come out to reward soon enough. In the meantime, remember that pretty, little lake view you get, if you stand on your tip toes at the living room window?
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For the comprehensive “how to” guide on vacation rentals, free of paranoia, check out the post: