At this weeks real estate investors meetup, we talked about the some of differences between airBnB and standard long term rentals with respect the amount of income you can generate and about the advantages that short rentals have to offer. Before going too much into it, I wanted to discuss a little about how airBnB works. Surprisingly, the company has grown so much and expanded it's influence so much , that when I asked how many people had heard of it – everyone raised their hand. This might not seem like a big deal but when I gave a similar discussion last year – only ONE person raised their hand. Fast forward to a year later and we have all seen laws being created specifically to challenge the growing behemoth that it has become.

It all started several years when two college kids decided to rent out a couple of air mattresses when attendees of a local convention ran out of hotel rooms. Recognizing an opportunity – they purchased a few air mattresses , created a small website and rented them out for $60 a piece. airBnB was born.

 

Fast forward 10 years and airBnB has grown by leaps and bounds. Here are some interesting facts about the company:

• They have 150 Million Users
• There are over 640,000 Hosts
• They have 3 Million listings
• Located in 65,000 cities
• Operating in 191 countries

 

Clearly they are longer tiny startup. airBnB have established themselves as legitimate players in the real estate field and have so much influence that local governments have partnered wit hotels to create laws to stifle the business that airBnB is taking from these multi million dollar conglomerates.

 

In case you've been under a rock and don't know what airBnB is – it is a website that allows you to rent out your personal space to others for a fee. Essentially , you become the host of a “bed & breakfast” - of course no one actually expects you make breakfast for them, it's more of a colloquial term although some hosts do actually offer to serve breakfast and in some cases dinner too. You can rent out a single room of your home – or you can rent out your entire home. You can be there when your guests are renting it from you or you can vacate it and let them have run of the place - it all depends on how you prefer to run your business. The good news is that when you are listed on their website – you don't have to advertise – as they have already spent millions building out their system to attract thousands of potential guests who will be browsing their website and looking for a room / house to rent.

Who uses airBnB?

Travelers, vacationers, traveling nurses , students, parents visiting college students, and anyone else looking for a short term place to stay.In Fresno we get a lot of traffic to Yosemite – we are also very close to 3 large recreational lakes. We have a renowned heart hospital here as well as a State College - so we see a lot of airBnB traffic.

The cool part about airBnB is that you have the option to rent out a wide variety of living spaces – what kind of space can you rent? Glad you asked – the following list comes directly off of their website as the type of accommodations that can be rented.

You can rent out the following:

• House/ Apartment
• RV / 5th Wheels
• Tent or Yurt
• Bungalow
• Cabin
• Castle
• Cave Chalet
• Dorm
• Earth House
• Hut
• Igloo
• Island
• Lighthouse
• Loft
• Plane
• Ti-pi
• Train
• Tree house
• Villa

And here's the BONUS – one member of our meetup group says that she just stayed at an airBnB and she stayed in a Chicken Coop. Yes – you read that correctly – she says she rented and stayed in a CHICKEN COOP! And – she said it was great.

So as you see – there is almost no limit to what type of space you can rent out for income.

In addition to renting space to people you can rent experiences to people as well – for example you can give someone the experience of sleeping in a chicken coop – lol. Just kidding- the are real experiences that you can offer to your guests. Doing so not only makes you stand out from the crowd, but can grow your profits by increasing the amount of money you make from each stay. Identify something in your city that attracts tourist and you could start to see your passive income double or triple. Almost anything can be an experience as you can see from the list below which came directly from the airBnB website.

Experiences can be:

Winery tours	Cliff Diving	Bicycle Tours
Wale Watching	Yoga on a Malibu Mountaintop	Surf in Japan
Explore the Nightlife	Spar w/ REAL Samurai Sword Sparring	Meet Rescued Farm Animals
Design your own Jewelry Workshop	Craft Beer Tours	Sailing Adventure
Learn the Rituals of a Cuban Cigar	Para sail in Korea	Make Macaroons with a Pastry Chef

 

With so many different adventure possibilities, you're sure to find something that you can market to your target audience. This can make all the difference when it comes to guest selecting your place instead of someone else's. It's just another one of the facets of airBnB that makes it so different from your standard long term rental.

So we talked a little bit about the number and what the difference I between long term rental and short term airBnB hosting. One of the first things that come up when we contrast the two are the amount of flexibility that you have with short term rentals. With airBnB, you can adjust your pricing based on demand or by peak season.

For example, when you are renting out an apartment to a family -you cannot just tell them “ hey it's Christmas time and this is a much higher demand season for me so your rent is going up this month.“ However, with airBnB – this is not a problem – when you are in a peak season you can simply raise the price of your rentals and your new guests will pay the new seasonal price with no fuss or muss since they typically expect rates to be higher during these times anyway.

You can also change your rents quickly to keep up with the market. So for example, in Fresno, according to the airDNA website, which provides stats for airBnB – rooms rent for an average of $108 per night. Compare that to a traditional house or apartment which averages about $30 / night in rental income. Of course this number varies depending on what part of town you are in – but still – 3x the rate is still a big difference. If you are wondering what to charge for your space, you can use this website to determine what the local going rate is and then adjust your price accordingly. If rates go up or demand is unusually high -you can raise your rates to match the market price – or you can price it lower to compete with other hosts – really the choice is yours and you have enough information available to you to help you make that decision.

The Math

Based on some quick math – here is what an apartment looks like compared to airBnB

$1050 / month = $35 per night per unit

At an average price of $180,000 for a duplex in Fresno

Here is a picture of what it looks like:

 Income : $1,347 ( includes vacancy rate of 5%) 

 Expenses :   $593 ( not including management) 

 You get a net of $753 a month
  5.02% CAP Rate 

 

This is assuming that you paid for the property in cash - if you leveraged it with borrowed money , then you are looking at negative cash flow ( -$19.42)

For a triplex – with an average price of $220,000 the numbers look a little better

 Income = $709 X 3 units = $2,020 a month ( includes vacancy rate of 5%) 

 Expenses of around $713 ( not including management) 

 You get a net of $1,265
 6.9%  CAP Rate

 

Again this is the all cash number - if you have a mortgage then you are looking at closer to

$320 / month total

SO as you can see – buying in cash is a large difference than carrying a mortgage and makes a big impact on your monthly income.

Lets compare that to short term rentals on airBnB

 

Using the same duplex at an average of $108 / night with a 30% vacancy rate-

  $108 x 30 days x 2 Units = $4,536
     
 airBnB service charge: 3%

 $4,536 x 3% =  $195

  Expenses ( insurance, tax, repairs, cleaning fee) : $778

    $ 4,536  Income
 - $      195 Service Charge
  ____________________

    $ 4,341
 - $      778   Expenses
 ____________________

      $ 3,757  Net
      CAP Rate: 25.05%

At $180,000 average price for a home in Fresno – if you can keep it rented out for at least 70% of the time then you could be capable of producing a cap rate of 25%

Compared to $593 / month cash flow and 5.2% CAP rate, It is clear that there is a lot of opportunities with airBnB compared to typical long term rentals.

Get creative and add an “Experience” as part of a package deal and you can really ramp up the income. By combining a local experience with the room and board – you give your guests a reason to come back again and to tell their friends all about it. If they have a good time and are treated well then they are likely to give you good review which can go a long way towards getting more clientele.

 

Bonus Strategy

Make a deal with a property manager or homeowner to rent out an apartment / house for long term such as 3-5 years at steep discount. Then use that space as an airBnB location and profit from regular short terms. This strategy allows you to make money without even owning a house. Just be sure to let the management know what your intentions are in advance so you run into any problems with breaching the lease due to restrictions against subletting.

While airBnB affords its hosts plenty of opportunities to create passive income – it's not all fun and games. You have to figure that anytime you invite total strangers into your home , there is going to be some degree of awkwardness and this is no different. You have to be careful who you rent it out to and airBnB helps you make that choice by proving profiles on all hosts and guests. Hosts can rate their guests after they stay – so if someone was noisy, messy, disrespectful to the home or the family pet, it will show up here in their profile as hosts will want to warn others about their poor experience with that guest. By the same token, guests can rate the host -so you always want to be on your best behavior so that you can be a “Super Host” and continue to get good ratings and attract more guests.

So how exactly do you become a “Super-Host” ? Here are few tips and tricks:

1. Be honest about your accommodations – you want to make sure that you are managing expectations and aren't setting up your guest for disappointment. Don't show images of places that are far from your house or use stock photos of other peoples homes. This is a sure way to get a bad reputation fast.

1. Be flexible with checking in and checking out – remember that people are coming from far away – they've been traveling , their tired, they have anxieties about staying in a strange place – make them feel comfortable and give them the wiggle room they need to be late or to be early. You would want to have to wait an hour or two after getting into town to set your things down and rest – why make your guests do it ?

2. Always do more than promised. Give them the extras bit of attention that they weren't expecting. It really goes a long way towards getting good ratings and creating good relations with your guest who you want to enjoy staying in your home.

3. Send an email a week before their arrival or a couple days if it id shorter notice. The point is – give them some confirmation and let them know what to expect and any house rules you expect them to abide by as well as amenities. Try to not to make it list of “DO NOT DO's” - keep it pleasant and friendly. Let them know what places to eat are close by or if there are any special parking instructions.

4. Ask about their food preferences in advance so you know where to direct them and what local places they might really enjoy eating at.

5. Greet them at the door if possible. Everybody likes to get a warm welcome and it will give you a chance to give them a tour of the place. If you can't be there to greet them , then at least have a key less entry to make it easy for them to check in when no one is around to help them.

6. Offer them drinks or snacks. Have a bottle of wine and some bottled waters in the room for them. Every little thing you do makes a big impression on visitors. Do your best to make them say “wow” everywhere they turn around.

7. Decorate the place with nice artwork, unique furniture, and over-all interesting decor. This will help set your place apart from others and wont make your guests feel like they are staying in someone else's bedroom.

 

So do some homework – check out what the scene is like in your town. What draws out of town travelers to your area and how can you market to that group? Be sure there are no restrictions where you live. Hotels and hospitality chains HATE airBnB for taking so much of their business and are working closely with politicians and lawmakers to secure their position by creating laws that restrict where homeowners can do short term rentals and have big fines and fees for those who break the law. There are also several other options to use other than airBnB. Competing sites that allow you to set up short term rentals include names such as:

Tripping.com
FlipKey.com
HomeAway.com
VRBO
VayStays

….and many more

In summary, short term rentals give you the opportunity to increase your over all cash flow. It allows you to be more flexible with pricing and increase income during peak seasonal times. You can attract more more clients with the help of websites and rating systems that not only bring attention to your property, but cover the price of advertising for you as well by being listed on their website. You can choose who you allow to rent your space, which can be anything from a cave to a castle. You can add exciting experience packages. As you can see , there's a lot of reasons why it could make sense for you. Next time your rental lease comes up for renewal, think about whether or not short term rental is the right way for you to grow your business.

 

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Please be sure to check out my others articles on real estate, investing , and crytocurrency ( and some other random dog stuff)