Cash flow from short-term rentals is really beyond anyone’s wildest expectations, and the mathematics can be made to work in almost any market. I can freely confess that I am the proud owner of five of them and am now working on a few more.
Why then am I advising you against making the purchase?
Airbnbs are wonderful accommodations provided that all of the conditions are met. I went through 2008, thus I can speak from personal experience when I say that I have thoughts and ideas on how appropriately minimizing risk. Over the previous decade, many real estate speculators have amassed enormous fortunes and are unable to conceive the prospect of a recession.
Many younger investors have difficulty thinking that the real estate industry might be turned on its head and collapse, but it is feasible. Recessions are ugly, and many people find it difficult to believe that the market for real estate could be disrupted in this way.
Properties that are listed on Airbnb might be a fantastic investment if certain conditions are met. I’m going to tell you five different reasons why you shouldn’t invest in Airbnb rentals in this post.
Reason #1: The Calculation Only Works As An Airbnb
When I was a more experienced investor, I realized the importance of having a number of tactics to use when pivoting in different markets.
If I purchase a home for $400,000 and I can earn $6,000 per month with Airbnb but only $1,200 per month as a long-term rental, I put myself in a position where I am susceptible to some uncertainty.
When things are going well, I have a steady income stream, and I’m having the time of my life. Nevertheless, if the laws on short-term rentals are tightened in the same way that they were in Nashville and Austin, I will have to make a change. Finding a long-term renter is my great decision, but even if I get one, the rent won’t pay the costs at $1,200 or possibly $1,500 per month. If I decide to sell and the market continues to decline, or if the pressure increases because I have exhausted all of my financial reserves, I will be forced to leave the position at a loss. Some people have the perception that investing in real estate is “risky” due to the occurrence of these circumstances.
You really must plan and come up with a strategy. Even if you end up losing the sale because of this, it is preferable to lose your shirt.
This happened to me not too long ago with a lakehouse located in Arkansas. The city amazed me by denying my application for permission to own an Airbnb rental property. Fortunately, I arranged for a renter who paid more than enough to pay the mortgage and other property maintenance costs.
Reason #2: There is insufficient cash available in reserve.
As I’ve said before, when Airbnbs are successful, they are an excellent source of incoming revenue.
However, considering the costs, this is not a feasible option. The expense of renovating a house may easily go into the thousands. Simply if you acquire an already equipped property, COVID-19 or even a slowdown month is something that no one could have expected.
If you keep half of the monthly profit from a property that brings in $7,000 and put the other half in savings, you’ll have $3,500. Nevertheless, let’s say that for whatever reason nobody can figure out, one month, your total income is mere $3,500. All of a sudden, your financial situation worsens.
There are no guarantees offered with short-term rentals. The majority of people who own vacation homes are prepared for slow months due to seasonal circumstances. But in one of my personal experiences, I had a slow month at my Airbnb, which is located in a residential area, and there were no reasons that might have predicted the decline in earnings.
For example, you need to have a significant amount of cash on hand. It is very necessary to have cash on hand to pay for unexpected costs or sluggish months, particularly when dealing with high overhead costs.
If the maintenance of your house is expensive, a drop in income for a few months might make things difficult for you if you are already running out of money. In the event that you find yourself in this predicament, my advice is to find a business partner and divide the profits with them. Or, if you have sufficient equity in the property, you might sell it. I hope you will be willing to minimize or eliminate any substantial tax gains.
Reason #3: During times of economic crisis, the first thing to go is rentals in more wealthy areas
It upsets me to be the one to deliver such depressing information, but someone has to do it. The real estate business is not always a winner, and Airbnb offers riskier bets with potentially more lucrative payouts. I want to make sure that you consider these different factors.
One of the most common investment strategies is to buy a large residence and then use it as a rental property to generate substantial earnings in the short term. When the economy is weak, or there is a slow marketplace, the first thing people have stopped doing is traveling to their luxurious vacation houses.
If you are counting on the monthly income from short-term luxury rent, you may find that you are forced to sell the property at a loss because you are unable to pay your debts.
Keep in mind that when you rent a property for a short time, you are the one who is responsible for paying the cable bill, hiring a gardener, paying for the upkeep of a pool or spa, and paying the utilities. You are the one who is responsible for paying the bill, irrespective of whether or not there is a visitor currently staying at the property.
Reason #4: The Cost of Doing Business and Managing Real Estate
Even if your Airbnbs is located in other states, you won’t have any trouble managing them. Having said that, it’s possible that you won’t have enough opportunity to address the booking questions and manage the cleaners and repairs.
In this scenario, it is strongly recommended that you seek the services of a property manager. However, they perform an excellent job, many charges between 25 and 30 percent of total sales. At that time, it’s possible that your stats won’t appear all that great.
This indicates that you will need to be completely prepared to self-manage or locate agreements that will enable you to employ a property manager for the appropriate amount and yet not enough money each month. If you choose to self-manage, you will need to have a plan in place for how you will pay your tenants.
Additionally, if Airbnb is a company, you may be responsible for incidental costs.
A visitor once poured red wine all over my table, and I had to pay $300 to have it replaced. Six weeks have passed since I submitted a claim for compensation to Airbnb, and I’m still waiting for a response. Another one of the cleaners I hired failed to clean one of the bathrooms. Honestly.
Yes. I gave the visitors a complimentary night’s stay and hoped they wouldn’t share the images (to my relief, they didn’t!). My bill for the night came to $350 as a result of the event, and another day had to be kept aside to organize the new cleaning staff.
In the world of Airbnb, there is potential for a wide variety of expensive situations due to the rapid revolutions and unpredictable schedules that are commonplace. On other occasions, a significant amount of money.
Reason #5: You can’t handle a lot of stress
The experiences and motivations discussed up to this point are all part and a part of running an Airbnb.
If you believe that “life is too short,” if you hate being in charge of handling circumstances like these, or if you are someone who does not need the money all that urgently, you may want to reconsider. If so, don’t bother with it. There is much more than one way to make money off of real estate, and none of them entails the insanity that is an Airbnb.
Having said all of that, I do own Airbnb units that have never had any significant problems. The ones that are the least difficult to find often include longer rental periods, such as those required for out-of-state employees or traveling nurses. The elimination of other apparent problems may be achieved by excluding pets, but the result is a smaller pool of potential guests.
Observations to Conclude
In the event that you are still considering using Airbnb, make sure you always follow these guidelines.
- When dealing with any kind of real estate, check to see if the figures add up immediately.
- Include the cost of the furnishings in your budget as part of the money that will come out of your own pocket.
- Be careful to keep an eye on both data.rabbu.com and AirDNA to receive an accurate estimate of the monthly money you may anticipate receiving.
- Create a worst-case scenario budget assuming the lowest possible amount will work.
You’re not obligated to follow the crowd. Keep your sense of reason while still paying attention to the numbers. If running an Airbnb doesn’t sit well with you, your best bet for making money in real estate is to investigate alternative investment opportunities.
Do not, under any circumstances, give up on real estate investment completely just because one strategy does not provide the desired results for you. Everyone will eventually find their way in. You are now able to articulate the justifications for why Airbnb may not be the right investment for you.
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