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You are here: Home / Hosting on Airbnb / Is Airbnb Profitable for Hosts?

Is Airbnb Profitable for Hosts?

April 20, 2020 by Cubert

sheep and girl

The COVID-19 outbreak has presented a big challenge for Airbnb and its legion of hosts. We’re now in year 3 as hosts and despite the pandemic, we remain cautiously optimistic. At this point in 2020, our Airbnb is profitable by a micron. We’re encouraged that Airbnb has set up a program that allows us to offer a steep discount for first responders and medical staff. Without hesitation, we signed up to do our part. 

This cornerstone post answers the basics of whether or not Airbnb is profitable for hosts. There are several factors, from choosing the right location to financing, and understanding how to attract bookings as a new kid on the block.

Real estate investing can be a lucrative way to help you reach your very own financial independence, and/or early retirement goals. Long-term rentals have been a winning wealth-builder for us. It felt like going out on a limb at first, but we had an experienced mentor to help us get started. This gave us enough confidence to buy our very first rental: a short-sale single-family house.

We were far from being flush with cash. I had to take out a home equity line of credit on our primary residence to afford the down payment. Once we closed, the list of improvements grew to a tally of almost $5,000. What had we gotten ourselves into??

Long story short – that first rental had its first leased tenants within two months of closing. Rent checks started flowing in. We closed on our second rental just six months later, right around the time we welcomed our twins into the world. Rentals three and four followed in 2015 and 2016.

Each of our four long-term rentals has, over time, paid off handsomely. Thanks to a strong rental market here in Minneapolis, we can command good rents. Plus, the tenants we attract have been great to work with. Never a late payment, and often they’ll put their own money into small improvements.

 

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 closing on the condo, I was also digging into my research. We’d stayed at a couple of Airbnbs, but we sure as heck hadn’t hosted any. Pinterest and a very helpful book Get Paid for Your Pad by Jasper Ribbers and Huzefa Kapadia were vital references.

By 2017, the housing market had not only recovered, but it had also 180’ed 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.

About ready to give up, we visited my folks in Charlevoix, 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 spend their summers. The condo was “bare bones”, with zero updates since having been built in 2005.

I figured, at $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.

A profitable vacation rental carries more risk and more reward than a similar long-term rental. You’re not locking-in rent for up to a year or more, as you would with a long-term rental lease. Instead, you’re relying on market demand to fill a vacation property week after week, particularly during “high season”.

The thrust behind this is our own AirBNB experience as guests. We’ve stayed at AirBNBs only a couple of times, but in each instance, we enjoyed our stay and felt welcomed by our hosts.

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.

 

Why Vacation Rentals Are a Smart Investment

Our Airbnb condo is the fifth rental in our portfolio and the first vacation rental. The intent is for all of these properties to position us well for early retirement (or at least, financial independence).

Using my handy rental property evaluation spreadsheet, I’m projecting a return on investment of about 20%, year over year. That projection assumes minimal use and lower rates in the low seasons (winter, early spring, and late fall).

The key thing to recognize is that the forecast return on investment (ROI) does not factor in the tax advantages of rentals. With those bonuses added in (depreciation, business expense write-offs, and the new small business 20% deduction), overall ROI (or “cash on cash”) rises to a very healthy yield of about 33%.

Airbnb Cash on Cash Return:

are vacation rentals profitable
Investing in Vacation Rentals 101: Note the CAP rate of 12.27%. Typically any residential CAP over 8% is a worthy investment. CAP rate is the net operating income/sale price.

 

How to Finance an Airbnb Vacation Rental

Historically, 4.75% is a very good rate for a 30-year fixed mortgage on a rental property. Keep in mind: if you’re new to rental investments, there’s a half a point premium added to your rate. As of the writing of this post, I’d be looking at a rate of 5.25% on a property closed in late 2018.

We were fortunate to have my parents living in the same complex where our vacation rental is located. They know the drill. For instance, how the utilities are billed, seasonal factors, disposition of neighbors, association nuances, awareness of existing vacation rentals and how they’re performing, etc.

All of this inside information helped immensely. I’m not certain it’s required for a profitable vacation rental, but having trusted, knowledgeable people nearby is an asset that’s a huge plus.

Profitable Airbnb 101: Unless you’re buying auction properties or distressed properties for cash, be sure to use bank financing to fund your vacation rental.

I’m reading more and more about folks in some kind of death race to pay off the mortgage on their rentals. DON’T DO IT. Let the bank hold the risk, while you reap the cash flow reward.

The idea behind “other people’s money” (i.e., the bank’s money) is leverage. Your money will work harder for you if you conserve your cash for more important things like Airbnb improvements (or other rentals!) If you buy a property outright, your cash is suddenly tied up in that single asset. Leverage is the name of the game – especially when interest rates are low.

 

Is Airbnb Profitable for Hosts?

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 Airbnbs, 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.

 

is airbnb profitable for hosts
A conservative forecast of our very first year operating. Things have turned out about 25% more profitable than planned.

 

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 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 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. After that, it’s all (mostly) gravy.

 

The Importance of Getting Bookings FAST

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.

  1. Keep prices well below your competition. We went as low as 50% below the going area rate. (e.g., $50 per night, v. $100)
  2. Offer 2 or even 1-night minimum stays.
  3. Don’t require a damage deposit. Airbnb has a $1M host protection policy, so you’re ultimately covered.
  4. Be willing to accept booking requests from new Airbnb or VRBO guests.
  5. 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.

 

investing in vacation rentals
The Airbnb hosting interface is just as friendly as the guest side of the shop. I just wouldn’t recommend using Smart Pricing as this image depicts. Go with BeyondPricing!

 

Why It’s Important to Move Quickly

There was a ton of work that went into getting our place ready to shine. Heck, it was a decent deal ($120K) because it was worn. The carpet had to go. The walls, ceilings, and doors needed patching and painting.

And of course, any vacation rental needs to be FURNISHED.

That’s right, vacation rental investor. You’re on the hook for beds, bedding, chairs, couches, TV, kitchen utensils, toilet paper, lamps, towels, etc. Your shopping list will be longer than any list you’ve ever seen before.

In the case of our new vacation rental, since we closed in late October, we knew there wouldn’t be much action for several months. That is ulcer territory right there!

Each month of vacancy costs $718 in PITI (monthly principal, interest, taxes, and insurance.) The moral of the story is to be prepared to get your new property ready as soon as possible.

Our opportunity cost of not getting the vacation rental until three months after closing:

  • PITI @ 2 months x $718 = $1,436. Since we started booking in February, and the bank doesn’t start billing until after the first full month of financing, we only lost two months of PITI. Whew!

We also had association dues to pay, every quarter. The condo association isn’t about to give us the first month free, like the bank did.

  • Condo association dues @ 2 months x $133 = $266.

And utilities:

  • Gas, Electrical. Not much @ 2 months x $65 = $130.

 

Some Final Thoughts

Much like a house flip, the clock is ticking. Each month that passes without rent is sunk cost and a big fat ding against your return on investment.

For us, there wasn’t all that much opportunity cost at play. The high season was over. But with a few long weekends of hard work in November and the following January, we had our first Airbnb ready for skiers, snowmobilers, and folks simply yearning for a weekend retreat.

If you’re looking to make some extra cash, sign up here to start your journey as an Airbnb host today!

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Comments

  1. Scott @ Costa Rica FIRE says

    April 23, 2020 at 3:42 pm

    You have to be careful making prices too low. I’ve heard horror stories trying to collect from the host protection policy, and it does you no good if your place gets trashed, or even slightly damaged, and you have a guest checking in the same day!

    You did mention it, but I think the MOST important factor (besides not having bad reviews) in getting bookings is nice photos. We have 2 similar units in Costa Rica in the same condo complex, and one rents much better because it has nice photos. We were considering a kitchen upgrade of the one that doesn’t rent as well, specifically because we’ll get nice photos out of the upgrade.

    Also, pricing can be tough to manage, especially pricing properly for seasonality, special events and holidays. I’ve been happy using pricelabs to help with that.

    • Cubert says

      April 24, 2020 at 6:24 am

      Hey Scott! Great point. In fact, just yesterday, I bumped my prices back up again with pent-up demand starting to kick in for summer.

      Beyond Pricing has been a solid tool for automating our pricing and their integrations with key listing services keep getting better over time. I’ll still check into Price Labs – can’t hurt!

  2. [email protected] says

    April 21, 2020 at 8:23 am

    I purchased another property near my existing AirBnb because the first one did so well. I closed on it right around the time the lockdowns began. So I decided to pivot and just make it a long term rental. All my bookings at my existing AirBnb have been cancelled. Hopefully the summer will bring some revenue but many stay to go to nearby concerts, football games etc and I don’t know if those will be affected. I considered a recession when making the decision but never thought a pandemic would occur! What do you think will happen in the short term and long term with AirBnb?

    • Cubert says

      April 21, 2020 at 9:54 am

      I’m sorry to hear about all your cancellations, Andrew! I think the only saving grace for my place is folks should still be able to enjoy boating and some restricted beach time this summer, along with extensive bike trails.

      What will happen? I think we’ll be back to normal by this time next year. I say that not as simply a hopeful optimist, but I believe there’s a collective will to solve for rapid testing, therapies, etc. even before a vaccine. We should all support those efforts as much as possible!

      Good luck to you!

  3. OthalaFehu says

    April 20, 2020 at 10:58 am

    Are you guys going to be able to carry on without revenues into the summer? I am in the same spot, VRBO on Crystal Lake. Good luck

    • Cubert says

      April 20, 2020 at 1:14 pm

      Othala! Is this the same Crystal Lake near Frankfurt, MI? I grew up spending summer weeks there. It is my favorite nostalgic summer getaway.

      I expect we’ll break-even or a little better this year – down from expected $600 – $800 monthly cashflow. Much depends on when and how severe the second wave of the pandemic unfolds. Good luck to you as well! Are your revenues taking a major hit too??

    • Rick says

      April 20, 2020 at 4:15 pm

      Like Cubert said I’m hoping for a break even situation or a little better this year now. We haven’t had any cancellations for June yet but am guessing we will. If all goes well in July and August we will cover the costs. If nothing else, I’ll look at the bright side and we’ll be able to use the home much more than normal. I also love the Crystal Lake, Frankfort area but especially have a soft spot for Elberta. Good luck to you Othala.

      • Cubert says

        April 21, 2020 at 6:24 am

        Elberta is a neat story. I think there’s still a lot of potential after a history of being a hard-scrabble town. I don’t believe it needs to be gentrified, but swapping out the tank yards for some recreation areas, and better upkeep of the neighborhoods. It’s getting there?

      • Rick says

        April 21, 2020 at 2:04 pm

        I just flipped a house in Elberta. It was too small says the wife but hard for me personally to give up. It ended up being the right decision with the pandemic and all. I say all this to say yes, I see Elberta coming around one house or 5 houses at a time (and there aren’t that many houses).

      • Cubert says

        April 22, 2020 at 6:18 am

        I’m with you. That whole coastal region of Michigan is prime territory.

  4. Rick says

    April 20, 2020 at 8:14 am

    Always a great read when you get into the vacation rentals. After a couple outstanding summers with our rental I am hoping we can be close to normal in Charlevoix by July.

    • Cubert says

      April 20, 2020 at 1:11 pm

      Hey there Rick! I am optimistic as well. I had the good fortune of being able to host a nurse who’d been on the front-lines in NYC for several days. He simply needed a place to quarantine before rejoining his family.

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