What To Consider Before Purchasing a home for AirBnb
The year 2021 is projected to see an overall recovery in many businesses buoyed by the easing Covid-19 infections and rollout of the vaccines. Revival of the travel and tourism industry has helped shore up demand for short term rentals projected to hit a high of 61% by September 2021. Many investors burned their fingers thanks to the pandemic but there is a new breed of speculative investors who are willing to risk and ride the recovery wave as it starts to build. The option of converting your own property or using part of it for short term rental is the most cost effective and easy to manage but there are those who want to opt for completely new property. With a new property, an investor is able to offer more space and run the business professionally unlike having to work with a room or two in your home. However, there are new challenges that come with buying a new short term rental that you need to bear in mind before you sign the deal.
Cost of property
Short term rentals can be both lucrative and unprofitable depending on factors affecting the business. Buying a new house involves a huge capital outlay that will either be from a bank loan or personal savings. If the capital is from a bank loan, you will need to make enough money to sustain the mortgage premiums. Low seasons can be stressful for bank loans and you will need to either set aside funds in the high season or risk losing your property to foreclosures. The other option of investing your savings to buy the rental house means that you will depend on the business to fill the gaps left by the capital outlay. This also has a risk because you might not have a sustainable flow of cash throughout the year or you depend on your other sources of income.
The definition of profit is the money that remains after expenditure. There are several cost aspects that investors need to consider as they think and plan on profitability of short term rentals. One of the most basic is taxes. Many states and towns require payment of one form or the other for businesses and short term rentals are not an exception. Maintenance is another major cost of property ownership. There will be wear and tear that adds to the cost of running the property. Every changeover comes with a requirement to clean the property and replenish consumables and this also has an effect on your profit margins.
Management and Insurance
A dedicated short term rental will in most cases be managed offsite by a management company. These charge management fees which vary from company to another. There is also insurance that is needed for the property and guests. Short term rental companies like Airbnb and others charge their fees for doing business on their site.
As an investor, you need to do your calculations well and ensure your buy your property in a unique environment where you can charge premium rates and get more bookings than the competition. You need to get affordable sources of funds and a management company that will not take all your profits.
Difference between Normal and Short Term Rental
The rise of Short term rental businesses was based on the fact that you can rent out any room in your home for a night or two and make money unlike the normal long term arrangement where money comes monthly or quarterly. Short term rentals are different from normal rentals in the following ways.
Potential of higher returns
Rental income is basically fixed upon a lease period and it is not easy to adjust before expiry of the period. Short term rentals don’t follow that pattern and prices are set by the owner and can be changed every time a new guest arrives. This makes it possible to adjust upwards in times of high demand raking in more money. This has the potential of high returns if the property is well positioned and demand is consistent.
Owner is always in charge
Short term rentals by their definition thrive on multiple short visits by same or different clients. At the end of every stay, the property reverts to the owner to clean up and replenish consumables in readiness of another guest. In this way the owner is able to maintain the property and take care of anything that would damage the structure or the fittings inside. It is to so with long term rentals where after signing the lease, the owner releases occupancy to the tenant for the lease period. Some renters are not keen on maintenance and there is a risk of breakdowns and damages that would lower the value of the property or cost a hefty amount to correct. The problems is, the owner usually notices when it is too late and at this time repairs could prove quite expensive.
Ease of moving in and out
Unlike normal rentals, short term rental service providers offer everything that is needed for a guest to stay in the property. In most long term rentals, a tenant comes with their own property which can be quite a lot sometimes. Moving in and out of long term rental needs time and much cleanup unlike short term rentals. With short term rentals, changeover is possible in 24 hours. Guest can leave within a short notice and there is not much of cleaning required after this and owners are able to take advantage of a surge in demand to make extra dollars.
Despite the above advantages of short term rentals over normal rentals, there are some setbacks that investors need to consider. These include, commissions by bookings companies like Airbnb and others, management and running costs like electricity, water and cleaning and cost and maintenance of appliances. Moreover, the income is not predictable unlike long term rentals and so you cannot really rely on this income if you are not well established in the business.