I’m happy to report that the inaugural year of our Airbnb Experiment concluded in December with excellent results.
How much can you make with Airbnb? Well in our case, we made about $12,000 in net revenue for the year (revenue after expenses such as dues, utilities, taxes, maintenance, and supplies).
With a mortgage on the property (about $718 goes to the bank each month), our take-home cash for the full year was about $5,500.
From a cash-on-cash perspective, the yield was about 20%. This was the stretch goal and I figured at this time last year, a 15% cash-on-cash return on investment would’ve been enough to make this a worthwhile idea. How did the stock market do, in comparison?
The reason we were able to come across the finish line with pretty stellar results is owed in large part to one guest in particular. See, we didn’t expect to have a lot of action in months like April and November.
These “shoulder months” are pretty quiet in a summertime resort town. But thanks to a nearby cement plant that needed some seasonal help, an overseas engineer rented out the place for a little over a month in both spring and late fall. Those two bookings alone brought in about $6,000 in revenue in months that otherwise would have yielded maybe $1,000.
I’m anxious to see if my traveling engineer returns in 2019. Those two bookings propelled us from an okay year to an abundant one. It’d be great to have his repeat business.
What Is Airbnb?
From Wikipedia: Airbnb is an American company that hosts an online marketplace and hospitality service, for people to lease or rent short-term lodging including vacation rentals, apartment rentals, homestays, hostel beds, or hotel rooms. The company does not own any lodging; it is a broker that receives percentage service fees from both guests and hosts in conjunction with every booking. In January 2018 the company had over 3,000,000 lodging listings in 65,000 cities and 191 countries.
For a company that started nine years ago, that’s a pretty impressive number of lodgings. How long did it take Hilton to build that many rooms? All Airbnb’s founders had to do was harness the Internet, create the marketplace, and take their 3% cut from each booking. Genius.
As we worked through the offer process and closed on the condo, I was also digging into my research. We’d stayed at a couple of Airbnb rentals over the years and enjoyed most of our stays. In almost every case we had the opportunity to meet our host. In some cases, we even sat down for drinks after checking in. I call our early Airbnb experience “Bed and Breakfast Light”.
For my money, Airbnb beats the pants off just about any hermetically sealed hotel. What can I say? It’s just plain nice to stay in a place with windows that open to fresh air.
Our Airbnb Experiment
By 2017, the housing market had not only recovered: but it had also done a complete 180 and become overheated. The pickings were slim. Houses that once sold for $150,000 were now going for $200,000.
In my quest for our fifth rental, I kept running into proverbial windmills. Cash-on-cash returns just weren’t adding up on the overpriced dumps that were available.
One day while on vacation in Northern Michigan, I was perusing the local paper and decided to take a peek at the real estate listings on the back page. I noticed a condo for sale in the same development where my parents spent their summers. The condo was “bare bones”, with zero updates since having been built in 2005.
I figured, at the $125,000 list price, what could it hurt to have a look? This area is a great summertime destination. A new vacation rental option started to dance around in my head.
In late 2017 we closed on our new Airbnb condo. The unit had been used exclusively as a U.S. Coast Guard boarding unit. Imagine a college apartment rental from the 90s, complete with worn, stained beige carpeting and dinged-up punctured drywall. Kids these days…
After taking possession of the unit in late 2017, two long weekends with help from my mom and stepdad (and a highly-paid painter) had the place looking great. Of course, yours truly used credit card bonus air miles to fly out and back for these “buff-a-thons”. By mid-January 2018, we were ready for business, just in time for our first Airbnb guest a few weeks later in February.
How Much Our Airbnb Made in Year One
We put in a crazy amount of money to get this cozy little pad up to par. Most of the up-front costs occurred in late 2017 which helped out our 2018 tax return (as we could deduct a healthy amount of business expenses).
A total of $5,472.50 was paid to our cleaning crew this past year, which included a $100 Christmas bonus. The beauty of this is that these dollars (except for the bonus) were all effectively paid for by the guests. We include an $89 cleaning surcharge with each booking. The average hourly pay, assuming a 2.5-hour cleaning job on 1,000 square feet of living space? $35.
Utilities came in about what I had expected. We provide Netflix and PRIME streaming services to our guests, so of course, we use it at home too while deducting this feature as a business expense.
Natural gas was cheap and the high-speed Internet had an introductory year special rate. All of the ongoing expenses were fairly contained, with a 1,000-square-foot unit that was occupied about half the time.
We hosted 39 total guests from Airbnb. The average payout per booking from this platform was $512. Keep in mind, that we had one guest stay twice for a total of 9 weeks. The average booking amount would be drastically lower were it not for our “shoulder season angel” mentioned at the outset of this post.
As for VRBO, we generated 19 guests from this platform. Bookings averaged a solid $525. It would appear that VRBO guests book longer stays than those on Airbnb. The good news for us short-term vacation hosts: these two platforms complement each other quite well. Airbnb serves to fill in two and three-night vacancies between longer, typically week-long VRBO reservations.
I was optimistic about generating a 15% – 20% cash-on-cash return. Without using both Airbnb and VRBO, we wouldn’t have reached our goals. Here’s a look at the numbers, in detail:
Now, we didn’t win the lottery with our year one cash flow, but we came out SOLIDLY in the black. $5,537 in net profit is nothing to sneeze at, especially when you’ve been paying over $20 grand each of the last five years in childcare expenses.
When I first estimated the setup costs of our vacation rental, I estimated a start-up cost of $12,000. The final tab? $14,696.13. That’s an increase of 22% over the forecast.
The main areas I didn’t account for were travel, meals, gratitude gifts for helpers, and the professional painter’s bill. My advice is to add 25% to whatever estimate you come up with when figuring out your forecast returns. This will give you a more realistic indicator of cash-on-cash return.
Don’t get disheartened if your target ROI suddenly gets flattened. Year one is always the hardest. Is Airbnb lucrative after all? Yes, but the returns could take a few months, or even a year to offset the setup costs.
Is Airbnb Profitable for Hosts? Yes, If You Do Your Homework
The big unknown with any long-term rental is how quickly you can sign up a tenant and start getting cash flow. With an Airbnb, particularly one located in a popular vacation zone, you’re often competing with other Airbnb, VRBOs, traditional B&Bs, and hotels — all in the same general area.
For our vacation rental in northern Michigan, the high season runs from June through September, with a bit of action in May and October. November through April could see some snow-shoeing types or cross-country skiers, but I’m not counting on them as much.
Market research is VITAL. Use your Airbnb traveler account to scout out a location of interest and analyze other rentals. You’ll find many hosts simply “fire and forget”, i.e., they set a high season rate and leave it locked all year round. Or, they only rent out during the high season.
In our case, we wanted to be able to maximize the return on our vacation rental, and that means year-round guests. Sure, the pricing is lower during those cold, snowy months. But people like weekend retreats all year round. Why not make money vs. leaving the place shut down and empty?
Keep track of your projected returns and vacancies in a spreadsheet. After your first full year, you’ll be able to tweak projections and get a feel for seasonality. Your ability to predict bookings (profits!) will increase as you go.
Configure Your Booking Settings in the Airbnb App Carefully!
Setting up your vacation rental, whether it’s a spare room in your house or the entire dwelling, is pretty straightforward on Airbnb’s interface. However, there are a lot of variables that come with hosting. You don’t just set your nightly price, upload a bunch of pics, and wait (and hope!) You’ve got to figure out the check-in and check-out times.
There are house rules to set and amenities to list. Tax and payment information is required. And there’s more. Do you want to set a strict or flexible cancellation policy? Do you want to include a security deposit? How much will you charge guests for cleaning?
(To help answer these questions, I highly recommend the book Get Paid for Your Pad – Reviewed here.)
For anyone just starting, it’s important to be flexible with your booking policies. Remember, you don’t have a reputation yet. Without reviews, your listing won’t catch many eyes from the start. Being flexible with the following variables helped us generate bookings at the outset.
- Keep prices well below your competition. We went as low as 50% below the going area rate. (e.g., $50 per night, v. $100)
- Offer 2 or even 1-night minimum stays.
- Don’t require a damage deposit. Airbnb has a $1M host protection policy, so you’re ultimately covered.
- Be willing to accept booking requests from new Airbnb or VRBO guests.
- Offer a flexible cancellation policy. You can make your policy more strict after 5 or more reviews have been attained.
Once you do get everything all set up, there’s a certain amount of apprehension that sets in. You have ZERO ratings. Who in their right mind would rent from you? This is why it’s super important to channel your inner marketing skills.
Study your target market and see what other successful, similar rentals have posted. Use the best photos you possibly can. Make sure your prices are fair and account for seasonality and local events.
Even then, be prepared to wait a bit for that first booking. It WILL happen!
The good news is that Airbnb is an easy outfit to work with. Signing up to be a host was a breeze. It reminded me of Turbo Tax, with its friendly step-by-step flow.
Having a system to manage the reservation calendar is very convenient. The platform is built on trust between traveler and host. You can certainly turn down guests, but because Airbnb sets the bar fairly high, rarely, you’d ever had to turn anyone away.
Airbnb offers a Smart Pricing feature that adjusts nightly pricing based on seasonal, market competition, and other factors (events, for example). However, I’ve found that BeyondPricing is more in tune with the local market and does a better job of ensuring top-dollar for our rates.
Airbnb Year One: What Worked and What Hurt
Worked: The SCHLAGE Sense Lock
The SCHLAGE Sense entry lock worked almost flawlessly. With an add-on device plugged into the wall, I can manage entry codes from anywhere on the globe where there’s the Internet.
This comes in handy when you live over 500 miles away from your rental property.
Worked: Applying best practices and achieving SuperHost status
I bought exactly one book in 2018 that helped immensely. For a host with very few reviews trying to capture market share, Get Paid for Your Pad was like gold in my pocket.
We watched our ratings come in with eager anticipation after each guest. 5-star. 5-star. 5-star. 4-star. 5-star again… With such a strong showing, we were able to achieve SuperHost status about mid-year.
BOO-YAH! This positioned us well for increased bookings for the rest of the year and into the future. You can’t beat having a five-star rating with dozens of reviews under your belt. This is the secret to any successful short-term rental. As your excellent ratings solidify, you can then begin to charge higher rates as a premium for being the best of the best.
Worked: Hosting on VRBO (surprising!)
VRBO took some heat back in May. Some of that rant is still justified. Their clunky non-intuitive interface could be so much better. I have hopes they’ll continue to refine and improve or at least copy as much of Airbnb’s interface without getting into legal trouble. And I’m still irked by their insistence on charging hosts for guest credit card processing fees.
But over time, I started to rethink “the BO”. More and more of my guests were coming through them vs. Airbnb as the summer went on. And even though I had to fork over $499 for my annual VRBO “subscription”, that chunk of dough wound up amounting to just a 5% take on all of our VRBO bookings. That’s only 2 points more than Airbnb’s 3% take. I can live with that.
As far as guest differences between the two platforms? I had no major problems with either. The only observed difference was the guest’s age. VRBO guests tend to be older (families, middle-aged, retirees). Airbnb guests run the spectrum, but many are younger. We had several young couples stay via Airbnb, for their wedding preparations or honeymoons.
Hurt: The Cleaning Lady Quit!
Just before the summer season was about to kick off, my cleaning lady quit. This was a not-so-happy surprise. Thankfully, she didn’t leave me high and dry. I got referred to her friend, who brought along a seasoned crew of cleaners to help during the busiest weeks of summer.
PRAISE THE LORD. I’ll tell you, there’s nothing more nerve-wracking for an Airbnb host than the prospect of an uncleaned unit with a new guest about to walk in the door. That did not happen in 2018, and hopefully won’t this year or ever. A good cleaning crew is the most vital component of a successful Airbnb operation. Take my word.
Hurt: Some Guests Can Be Completely Oblivious
As I’ve mentioned, our guests were decent. There were a few head-scratchers though. One guest left all the lights on and the fireplace going last winter swiped an entire bulk container of makeup remover wipes and left without locking the door. So glad I rated her a 5-star guest BEFORE getting a report from my cleaning lady (there’s a tip for you…)
We had a central air conditioner with a clogged condensate drain. This meant a few of our guests had no AC while we tried to figure out what the heck was going on. When we did get to the bottom of it, our neighbor below had discovered a soaked furnace room of their own, thanks to all the water spilling over from our AC drip pan down into their domicile.
Whoopsie. And to top off the climate control woes, the NEST lost its battery charge a few times, again, leaving guests without a means to kick in the AC during the heat of late summer.
Adding insult to injury, it wasn’t until deep into year 2 of the Airbnb Experiment that I learned the NEST was set up as if it was in a separate room in our house in Minnesota. It turns out there’s a way to set up a separate residence in the app and that solved a LOT of problems going forward.
Hurt: Airbnb Can Be a Nuisance for Neighbors
Apart from these headaches, nothing kept us from rolling along with our bookings. Granted, we have permanent neighbors who are a little unnerved about people always coming and going. I’ve found out second-hand that weekly summertime rentals don’t get people’s panties in a bunch as much as a year-round Airbnb setup like ours.
Now, if I’m in their shoes, I get it. You like knowing who your neighbors are. All the coming and going with unfamiliar faces would get a little bothersome. Many communities are starting to put up restrictions on short-term rentals precisely because of the come-and-go annoyance of Airbnb. And not just in the U.S. either.
A couple of things I’m going to try this year to mitigate the fury: Buying flowers/planters for the complex commons and limiting the peak season bookings to a minimum of 6 six-night stays. We could lose a little return, but I want to ensure goodwill to keep this enterprise sustainable.
Conclusion: A Successful Experiment
We don’t expect to spend over $4,500 in maintenance, travel, and setup expenses this year. I’m hoping for something short of $1,000 total in operating costs, going forward.
Time will tell, but if we can generate more bookings (based on our solid ratings and SuperHost merits), our “take-home” cash return could reach $900 per month on average in 2019. That factors in our ability to raise night rates too – based again on the accumulation of strong reviews.
I didn’t touch on it in this post, but the tax treatment for our Airbnb will be interesting. There are some similarities with long-term rentals, but this is a hospitality business we’re running, like a true blue bed and breakfast.
Sure, we can deduct business expenses, but some tax treatments are not quite as favorable as with our “LTRs”. Glad we have an accountant to help us sort it all out. Our household has two W2s, and now three distinct businesses to process in our novel of a 1040 return. Joy.
As the saying goes: Nothing ventured, nothing gained. Just make sure that the venture is an informed one and not some lazy-crazy get-rich-quick scam like BitCoin. The lesson here is that with a little bit of informed risk-taking, some hard work upfront, attention to detail, and basic spreadsheet skills, YOU TOO can pull off a winning side business like this.
I didn’t have a clue about hosting when we kicked this off over a year ago.
Anyhow, we’ll keep an eye on how all of this short-term rental business stuff turns out, as the year progresses. Year 2 could be full of unknowns worth writing about. Stay tuned!
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