Renting properties short-term on platforms like Airbnb was one of the “trending” Real Estate strategies last year. Hundreds of “gurus” have emerged online, selling courses, claiming to teach newbies this approach. They marketed it as a “lucrative” & “passive” Real Estate strategy that anybody could do. But is investing in short-term rentals and becoming as easy as they make it sound?
People should be careful before jumping in! Short term rentals have several “hidden issues” that might not make it the right “fit” for you.
Don’t get me wrong, I agree that short-term rentals have several amazing benefits. For starters, you are margins/profits are very high. They can be a very lucrative venture indeed. You also leverage the power of technology in your favor. You get access to unlimited clients by advertising on these innovative online platforms.
But you should consider these two key concepts before investing in short-term rentals:
- More reward implicates more risk. This is a fundamental law that applies to ANY investment. This is why all those gurus went “radio silent” over the Coronavirus pandemic. They were LOSING money, not making money. This a high-risk high reward approach.
- Renting properties short-term is certainly not passive. This strategy should be seen as an entrepreneurial venture, not an investment. Think of it as a “side hustle” or “part-time job”. You can make more money, but you’re going to have to put in more work. This is particularly true when the approach is done at scale. If you’re trying to rent out several properties simultaneously get ready to put in the work. Being a short-term rental host will become a “Real Estate Career.”
Any “guru” that tells you differently is lying to you! He or she is trying to sweep the dust under the carpet, attempting to hide the 2 points above.
If you are after TRUE passive Real Estate investments learn about REITs. REITs are completely “hands-off”. Also, read my article on “Buying and holding long-term rental properties” or “The BRRRR Strategy”. Tho latter strategies are a little more “active” than REITs. However, they are considerably more “passive” than being a short-term host on Airbnb.
Let’s analyze the short-term rentals business model.
Let’s dive into the good, the bad, and the ugly so you can draw your own conclusions. Essentially, short term rentals consist of renting a property for a couple of days. This implies you’re competing with nearby hotels for short-term customers. Conceptually, short term rentals belong more in the “Commercial” category than the “Residential” category. You’re in the hotel and tourism business.
A lot of people don’t look at it this way, which proves who ignorant they are about this model. Look at who you’re serving, your customers aren’t long-term tenants.
Commercial Real Estate tends to be more lucrative than Residential. This is one of the key advantages! The yearly income generated by a short-term rental is generally higher than the yearly income generated by a long-term rental. Renting a property to one tenant on a 12-month lease will have lower yields. However, higher rewards are always associated with higher risks.
This is a fact that many short-term rental advocates tend to overlook!
Just to name a few “risks” associated with short-term rentals:
- You have to be constantly locking in new tenants, which depending on the market could not be an easy task. Extended periods of vacancy could occur which could eat your margins.
- Governments or HOAs rules could change. The regulation on Short Term rentals could become more stringent, and prohibit you from renting your property short term. Just because you can currently rent out a property short-term, doesn’t mean you will be able to do this in a year from now.
- Municipalities are constantly changing their rules regarding this matter. It is also possible that Home Owner Associations change their rules and prevent leases that are shorter than 12 months. There is a high degree of uncertainty revolving around this matter. Uncertainty implicates risk.
- You have higher operational costs that need to be executed consistently and reliably. For example: Cleaning after every tenant, providing keys for new tenants, dealing with cancellations, adjusting the booking calendar for correct availability. There is also more “wear and tear” on the property, so there are higher chances that repairs are needed. People are more careless when they are renting short term.
- Short term rentals are heavily influenced by tourism. Tourism is heavily influenced by seasonality. Extended periods of vacancy could occur which could eat your profits.
- Finally, the possibility of negative, unforeseen events, that are extremely hard to predict. These events might affect your bookings. The Coronavirus pandemic is an example of such “black swan” events.
Aside from the risks involved, renting out properties short-term requires a lot of work.
This is not a passive investment. You could certainly embrace the hustle, and have the possibility of making a lot of money. I know a lot of people that make very lucrative earnings from short term rentals! But, investors should know that there is a lot of work involved if this is to be done consistently.
Indeed, a lot of the “work” can be outsourced. Many short-term rental investors hire virtual assistants to take care of customer service. They also hire cleaning services, and they hire property managers to oversee their portfolio of properties.
However, outsourcing the work will eat your margins. In certain locations, property managers will charge up to 30% of the rent collected. That is considerably higher than long term property management fees that range between 6% and 12%. There is simply more “churn” involved with short-term rentals. That results in more hours of work, which represents more money.
What are the best platforms to list your short-term rentals?
Everybody knows Airbnb, but the short-term rental market is certainly not a monopoly in 2020. I believe it is in the best interest of anybody thinking of renting out their properties to be aware of Airbnb’s main competitors. My favorite platforms to both book and list short-term rentals are HomeAway & VRBO (both owned by Expedia), as well as Corporate Housing By Owner (CRBO).
Evaluating those potential alternatives could yield higher returns. Economics 101 taught us that competition between businesses is always favorable for consumers/customers. That is the primary principle behind anti-trust laws that break up monopolies.
When it comes to short term rentals, not all platforms are created equal. For example, the fees and terms vary greatly. Let’s run some quick numbers.
Airbnb Fees:
Hosting Fees:
Hosting fees equal 3% of the cost of the rental. So, what does this amount to in practical terms? Well, Airbnb costs vary greatly but the average current listing at Airbnb is $160 per night. The average length is currently 4.5 nights, bringing the total cost of the average Airbnb stay to $720.
This means AirBNB collects $21.6 per that stay ($720 x 3%).
If a host plans on renting their property once per week, the yearly Airbnb fees will amount to $1,123 on average ($21.6 x 52 weeks a year). If a host plans on renting every other week, or half of the year, they will pay $561.
Guest Fees:
Guest fees vary greatly depending on different factors specific to each reservation, but they could be as high as 20% on Airbnb. Guests pay for Airbnb’s fees and taxes. This is why guests booking on this platform see a considerable “price jump” from the advertised once they book the reservation and check out.
Some could consider this a “bait-and-switch” marketing tactic. The advertised price the customers see at first glance is not what they end up paying.
HomeAway & VRBO (both owned by Expedia – same terms/fees apply):
Hosting Fees:
Here a host has the possibility of paying a flat $499 annual fee, for unlimited bookings. This annual fee could represent a big commitment for some. But if you’re serious about consistently renting out a property, this option could end up being better than the Airbnb 3% fee per booking.
On average, if someone was going to book their property every other week, they will be saving money. If they were to book their property more frequently, they will start saving considerably.
Guest Fees:
Guest fees also vary greatly depending on different factors specific to each reservation. On average the typical fees paid by guests tend to be 6 – 12% of the booking total. This means that it is generally cheaper for your guests to book through this platform than Airbnb. This could motivate guests to book your property through HomeAway or VRBO.
Corporate Housing By Owner (CHBO):
Hosting Fees:
The company offers four annual packages, that enable investors to list their properties on the platform. All four annual packages consist of a flat fee. Their most affordable option named the “Bronze” package is priced at $339. This is considerably cheaper than the other alternative platforms (Airbnb or Homeaway/VRBO).
Corporate Housing by Owner offers other annual “premium” packages. Packages are named “Silver” ($399), “Gold”($499), and “Platinum”($975). All premium packages include several extra perks that you might consider helpful when listing your short-term rental properties.
Guest Fees:
GUESTS AREN’T CHARGED ANY FEES WHATSOEVER! This is a massive incentive for guests to use this platform when shopping around for their next short-term rental.
Additionally, fewer people are advertising on this platform compared to Airbnb. This means it is a less saturated marketplace since you’re competing with fewer “hosts” for customers.
Investing in Short-term rentals Conclusion:
Are short term rentals a feasible path to generating money? Absolutely! However, executing this strategy entails both higher risk and higher effort. I believe this strategy should be approached as an “entrepreneurial” venture, not an “investment” venture.
You could certainly make a lot of money. But you will be certainly working for it. If not, a large amount of outsourcing work will be required. You will need to hire the right people to take care of that workload. (Again, an entrepreneurial approach, you’re hiring staff to delegate work.)
When deciding which platform to use take into consideration who are going to be your guests.
While all these platforms are diverse, the demographics of Airbnb users tend to be younger. Additionally, Airbnb appears to be more focused on recreational tourism.
Don’t get me wrong, younger tourists looking for recreation can be great “tenants.” But, there is a reason why car insurance is higher for individuals under 25. Actually, many car rental businesses won’t even rent their vehicles to younger customers. Think about factors such as “wear & tear”, last-minute cancellations, clean-up duties, etc.
This matter is speculative since there are no guarantees on who exactly will your guests be. But ask yourself who is your “ideal” customer and where are you more likely to attract it? Is it a group of spring breakers looking to party, or a working professional recently relocated for a new corporate job?
My ACTIONABLE Tips for Short-Term Rentals:
If you’re serious about taking advantage of Short Term rentals, I invite you to take a closer look at the following platforms. They could be a better alternative than Airbnb.
Corporate Housing By Owner (CHBO)
This is an excellent alternative to Airbnb. “CHBO” is an advertising platform that can be easily used by rental property owners as well as property managers. It is a great place to market rental properties to traveling professionals and companies. With the platform, you can advertise to a worldwide audience of travelers looking for short-term housing.
Additionally, CHBO guarantees that you will rent your property within 30 days from the time you list it. If not, they will extend your annual listing term an additional six months completely FREE.
CHBO could be a great platform for Real Estate agents looking to rent out their client’s properties. Real Estate agents could also find properties for their clients coming in from out of town.
Click HERE to visit Corporate Housing By Owner!
HomeAway
This is perhaps my favorite platform to book as well as list short-term rentals.
HomeAway is one of the most established platforms for vacation rentals with an inventory of more than 2 million properties. They currently have properties listed in 190 countries. HomeAway operates through 50 websites in 23 languages. This is certainly an industry leader on the short-term rental space with worldwide reach.
HomeAway is owned by the Expedia group and has a very impressive platform that is extremely user friendly. I am sure you can find your next vacation rental, or use the platform to rent out an investment property you currently have.
You can find any type of short-term rental you could possibly need. Their listings include Cabins, Condos, Castles, Luxury Villas, Barns, and Farmhouses.
Click HERE to visit HomeAway!
VRBO
VRBO is a sister company of HomeAway. They are also owned by the Expedia group. Their terms and conditions for listing a property are the same as HomeAway. Just check out their platform and see which one you like most. The pricing and availability between the two platforms may vary since each platform contains their own listings.