Short-term rentals are now on the rise in every major U.S. city thanks to popular home-sharing apps like Airbnb and VRBO, and buying homes and turning them into investment properties has become a popular tactic to generate additional income.
However, the housing market has reached new heights of competitive offerings, with numerous homes closing at 15%, 25%, or even 50% above demand.
With so much competition, does it make sense to buy to invest – or is there too much risk involved?
Buying a house for Airbnb – is it worth it?
House prices have reached a fever pitch. In 2020 alone, the median home price in the US rose by 12.8%. In Washington, DC — an ever-popular tourist area — homes are selling for an average price of $655,000, with some neighborhoods exceeding the $1 million average sale price for the first time.
While historically low mortgage rates have boosted purchasing power, the lack of available homes has led to fierce competition among buyers. The winning bids were as much as 50% higher than the demand for homes in good condition and in desirable areas. Pushed to the limits of what they can afford, many buyers do the unheard of: forgo unforeseen inspections and write “love letters” to win over sellers.
This dynamic took place to varying degrees in all the markets in which Houwzer operates in the Northeast and Florida. People who successfully buy a home almost always get it for too much, and often the buyer makes up for the difference between the sale price and the appraised cash value.
The average Airbnb rental property generates more profit per year than the average home of the same size in the long-term rental market, and short-term rental income can be very lucrative (landlords earn an average of $924 per month, but this includes part-time rentals and single rooms). It is possible to do this as an afterthought for years, allowing owners to pay off their mortgage faster and generate a little extra income.
That sounds like a nice setup: but what happens if things go wrong?
When Covid-19 hit, it caused a massive disruption to the travel industry. Overnight, Airbnb hosts that previously made thousands of dollars in revenue each month saw their year-long ads disappear. Airbnb went back and forth on its policy, ultimately allowing many guests to cancel at the last minute. Hundreds of hosts, representing more than 10,000 listings, are now taking legal action against Airbnb.
While Covid-19 was a one-off event, it highlighted the potential dangers of relying on tourism and an online rental property platform. If homeowners run into trouble, Airbnb is likely to provide limited assistance, while also claiming limited liability. And past success is no guarantee for future bookings.
Anyone entering the market now with the intention of renting out their home must ask themselves: how many months can they cover the mortgage, insurance and costs for a second home, without receiving additional income from it? And with so many homes selling for well above their sale price or appraisal, how much cash are willing to invest in this investment?
Problems with Airbnb before Covid-19
While Covid-19 made some of Airbnb’s biggest drawbacks more apparent, many problems were already simmering in the background.
Partying is a constant problem for neighbors of Airbnb rentals in Philadelphia — and the platform removed or suspended dozens of ads for violating party policies in November alone, according to The Philadelphia Inquirer. The problem is hard to avoid, as most guests won’t tell their hosts that they’re going to have a ton of raw guests. Property owners can find that out the hard way when their account gets suspended and they lose several weeks in revenue.
Regulations have also caught up with Airbnb, and something to consider is whether future legislation could hinder your ability to monetize. The topic of affordable housing is becoming as hot as the correspondingly hot real estate market, and as long as there is a housing shortage, major cities will come under increasing pressure to regulate the short-term rental sector.
In Philadelphia, a city council bill was introduced in February to further regulate rent in the city, requiring operators to obtain licenses for commercial activities, as well as limited licenses for lodging operators for $150 per year. And in May, New York City introduced a bill that could drastically reduce the number of short-term rentals operating there.
If future regulations, especially zoning laws, cause a property to become unsuitable for short-term rentals, homeowners have few options except to switch to more traditional long-term tenants or sell. So the question here is, if for some reason an investment property is no longer profitable and the owner has to sell it, are they going to lose money on a sale?
If this is a second home, it’s especially important for owners to analyze the numbers and make rational decisions about what to offer for an investment property. Before potential buyers get into a bidding war, they need to understand the financial cushion to reserve in case of an emergency. Everyone needs to make sure their projected cash flow is enough to justify the well above asking price they’re likely to pay in today’s hyper-competitive market.
It’s not all doom and gloom
This may not have painted the brightest picture of Airbnb hosting – and there are many unknowns in the future.
But there are emerging trends that bode well for smart hosts. For example, the increase in remote working has also given many people the flexibility to book longer trips or take “workplaces”. And after being cooped up at home for a year, Americans are eager to travel — even if it’s not abroad. There was a huge need for that during Covid-19 with people looking for a way out of their busy cities and homes, whether that was for a weekend or even a month.
As restrictions ease, Airbnb is seeing a surge in demand for “remote destinations” and “off the beaten track” among travelers. Out-of-town vacation rentals can be a more promising entry point for those looking to rent out real estate. Buying property in more remote areas is often easier and can save buyers from the regulatory headaches more common in cities.
Many former Airbnb hosts have also moved on to building their own direct booking sites to cut out the middleman and have more control over their advertising policies.
Ultimately, any real estate investment involves risk, and potential buyers will have to run the numbers to find out if the risk is worth the potential reward.