Should investing in an Airbnb be a part of your strategy?
We have all heard stories of people raking in huge rents through Airbnb, but is a holiday rental really a good investment?
Despite the lure of high nightly rates, there are several risks and expenses to consider before buying a property to list on Airbnb.
Income is cyclical.
While you may get $300 a night during the summer holidays, your property may be empty for most of winter.
For a holiday property to work as an investment, the peak rent has to cover all those weeks (or even months) the property is vacant.
But, don’t think you can charge an exorbitant amount. Airbnb is a competitive space – if you charge too much, you won’t get any takers.
It eats up your time.
As an “owner-letter”, you essentially take up the role of property manager.
This means you need to have enough spare time to:
- answer enquiries,
- process bookings,
- take payments,
- meet guests online,
- manage reviews,
- liaise with clients,
- organise key handovers,
- manage cleaning and maintenance requirements.
You will need to do this for dozens of different tenants every year.
While residential property investing is passive in nature (assuming you hire a property manager), holiday letting is active.
The more time you put into it, the more viable it is likely to be.
For instance, you will most likely get good reviews from tenants if you spend time making the property as comfortable as possible. Providing a list of local attractions and a good eating guide is just one thing a good host is expected to do.
There are loads of extra expenses.
Here are some regular expenses that you will incur as an Airbnb owner-letter:
- cleaning fees,
- utility bills,
- landscaping fees,
- maintenance fees,
- pool servicing and cleaning fees,
- mortgage repayments during periods of vacancies,
- 3% Airbnb service fee for each reservation,
- insurance claims.
In order to make your property stand out from the rest, you may need to invest extra money into quality bedding, air-conditioning, etc.
Obstacles to consider.
There are many things to consider when renting out a property through Airbnb or any other holiday bookings site.
The first is whether this will affect your loan.
Holiday rentals are generally seen as higher risk compared with residential rentals. This may mean you need a bigger deposit, may pay more interest, and may need a better borrowing capacity to get finance.
Local council requirements may also hinder your investment prospects. It is important to find out if the property can be rented out to holiday makers, and whether there are any restrictions on the length of time they can stay.
If run by a Body Corporate, then there are likely to be further regulations you will need to consider.
And, what about your home and contents insurance? Will this cover what you need it for? Will there be extra expenses involved?
There are a whole host of risks that come with holiday rentals.
Here are just some:
- Property damage – without a qualified property manager to screen tenants, how do you know the tenants will treat your property well?
- Negative cash flow – there is no guarantee that high nightly rates will cover your entire expenditure for the year.
- Neighbourly disputes – your neighbours may not appreciate having holiday makers living next to them. They may complain of noise, rubbish and general misconduct.
- Insurance not covering claims – You definitely need to make sure that you have the right type of insurance to cover a holiday rental. Regular home and contents insurance may not be enough.
Residential property in comparison.
When compared with residential properties, holiday lettings are much more risky and expensive to maintain. They are active investments, meaning you need to invest a lot of your own time into keeping them viable.
They are more volatile when it comes to vacancies. The lack of property manager and tenant screening puts the property at greater risk of damage. This means maintenance costs may be higher.
And lastly, for a holiday letting to be worth it, it needs to be located in a trendy or upmarket area. This means the purchase price will be much greater than that of a foundation property – making it less affordable and more difficult to attain.
So … Should investing in an Airbnb be a part of your strategy?