This post originally ran in August 2018. The COVID-19 pandemic is a wakeup call to consider unexpected events when thinking about whether you can really make money using your home as a short-term rental.
At least 75 U.S. hosts on the Internet home-sharing service [Airbnb] are grossing more than $1 million in rental income a year. That’s $2,739 a day or $19,230 a week. Forbes.com, “The 75 People Who Make $1M A Year From Airbnb.”
$1 million a year? That’s a lot of money! Makes you wonder, “Could I do that, too?”
Maybe….but don’t count on it. Those hosts either have very special homes that are rented out all year long, or they are “multi-property” hosts who rent out several homes at a time.
Chances are that few of us who use our homes as short-term rentals will hit the $1 million mark, or even come close.
Still, being a short-term rental host must pay off in some way; otherwise, why do so many people list their homes on Airbnb, VRBO, and other short-term rental sites?
The question is, would using your home as a short-term rental be worthwhile for you? Before you quit your day job, put the issue in perspective by considering these 5 questions.
1. Are you ready to run a business?
That’s right. Unless you have guests for only 14 or fewer days a year, using your home or second home as a short-term rental means you’ll be running a business.
Here’s what entails:
- Being a bookkeeper. As a business owner, you’ll need to keep very careful records of all the income you receive and and all the direct and indirect expenses related to the rental.
- Paying taxes. You’ll need to fill out tax forms, calculate your net income after deductions, and pay federal and perhaps state and local taxes.
- Obtaining a permit. Many cities and towns now regulate short-term rentals, so you might have to apply for a permit, have safety inspections, and pay permit fees.
- Finding the right insurance coverage. If your homeowner’s insurance excludes short-term rentals, as many do, you might have to switch companies or even buy a commercial policy.
2. How much time can you spare?
We’re all so busy these days that it sometimes seems we hardly have time to eat, let alone spend time with our families.
Unless you’re retired (congratulations!) or have a job that leaves space in your day, think carefully:Where you will find the time you need to set up and run your short-term rental business? (Hint: everything always takes longer than you expect it to.)
Here’s a snapshot of what you’ll need to do (in addition to the tasks listed above):
- Get your home in shape for guests. Successful short-term rental hosts do what is needed to make sure that guests have a safe, pleasant, comfortable place to stay. Even if your home is in tip-top shape, you still might need to do at least some repairs and replace at least some worn-out furnishings.
- Research short-term rental listing sites. Airbnb isn’t the only game in town, and it’s not the right listing site for everyone. Take a little time to find out which site is best for you.
- Create a listing. You’ll need to write a great description and take compelling photos that will make your home stand out from the competition
- Manage your listing. Short-term rental listings need regular attention. Most important is keeping the availability calendar up to date. You may also need to update the photos, description, amenities, and other key information from time to time.
- Respond to inquiries promptly. Hosts who get more bookings respond quickly to inquiries, typically within a couple of hours. Delaying for a day or two might mean that a guest books another home, even though your might have been their first choice.
- Screen guests. You can expect the vast majority of guests to be the kind of responsible, reliable people they appear to be. But hosts routinely report problems, ranging from people who complain a lot or leave the home dirty to those who hold wild parties and trash their homes. Even if the listing site says it screens guests, it’s best to do some screening yourself, either before or after the guests makes the booking.
- Communicate! Successful short-term rental hosts will tell you that the problems they experience with guests can be traced directly to a lack of communication. A series of back-and-forth emails is no substitute for direct conversations by phone or Skype that help to build trust and clarify understandings. Direct conversations are also the best way for you to build trust to pick up clues that a guest might not be a good fit for your home.
- Prepare the home for the guest’s arrival. If you live in the home you’re renting out, you’ll need time to get it ready for guests: e.g., reduce the clutter and make room for guests things; re-stock basic supplies like soap and toilet paper; and make sure the home is sparkling clean when guests arrive.
- Manage guests’ arrivals and departures. You’ll need to make sure guests know how to find your home and arrange a way for them to get in if you can’t be there yourself. On departure day, they’ll need clear instructions for what you want them to do to leave the home secure. Then, once guests have left, you’ll need to check to see if any repairs or replacements are needed, restock supplies, and clean for the next set of guests.
- Handle problems. Unexpected problems can wreak havoc with the most carefully planned schedules. You may need to drop what you’re doing because guests have locked themselves out or the Internet stops working or….the list of potential problems is endless, and you have to be available to deal with them.
3. How much can you afford to get your business started and carry it when things are slow?
Renting out your home for $100 a night doesn’t mean you’ll actually end up with an extra $100 a night. It takes cash to start up a short-term rental business and there are lots of costs along the way. These kinds of costs are likely to take a big bite out of the rent you receive:
- Listing site service fees and commissions. Nearly all listing sites charge fees and commissions that can take a hefty bite out of the rent you receive. Airbnb currently charges most hosts 3%, and VRBO takes 5-10%. Some sites, such as Sabbatical Homes, charge considerably less, and a few charge more.
- Repairs and upgrades. Most new hosts find that they need to make an initial investment to make essential repairs and safety upgrades, update furnishings, and, perhaps, buying and installing a Smart Home system.
- Your regular monthly payments. The costs of running your home – e.g., mortgage, utilities, TV cable, Internet, HOA fees, gardener, insurance, etc. – keep on while your home is rented out.
- Taxes. As mentioned earlier, the net rental income, after allowable deductions is taxable.
- Cleaning and maintenance. Short-term rentals tend to experience more than the usual amount of wear and tear. Your budget should include the costs of keeping the home clean and replacing worn or broken items. You’ll also have to replenish basic supplies between guests.
- A manager. If you travel a lot or live in another state, You might need to pay someone to handle things when you’re not there.
- Lodging. If you are renting out your primary residence, you’ll need another place to stay while guests are in your home.
4. How much rental income can you expect?
Like so much else about the short-term rental business, the potential income can be tricky to calculate. The amount of rent you can reasonably expect depends on such factors as….
- The size and type of home. Larger homes and unique homes with lots of amenities and special features typically (although not always) command a higher rent.
- Where your home is located. The more popular your location, the more you can charge and the more bookings you can expect to get.
- What the competition is charging. Travelers compare short-term rental costs with local hotels and similar short-term rentals. To be successful, you’ll need to keep your rates competitive.
- How many bookings you get. Hosts who make a lot of money on their short-term rental keep it full for most of the year. Your rental income depends on how many nights (or weeks) you can expect to have guests.
5. Reality check: Is the money you might make worth the time and effort?
The study quoted at the beginning of this post also found that “50% of active Airbnb listings make less than $3,300 in total booked revenue in a year.”
The fact is that few people who rent out their second homes earn enough to pay more than a percentage of their expenses. Those who rent out their primary residences make even less.
Before you leap into the short-term rental business, decide on your goals: what do you hope to achieve by using your home as a short-term rental? Earn a little extra cash so you can travel? Supplement your income? Make enough money to quit your day job?
To decide whether renting out your home is right for you, think about those goals. Then ….
- Add up all the costs and subtract them from the low estimate of the total amount of rent you can reasonably expect
- Factor in the wear and tear on your home and furnishings
- Consider the wear and tear on yourself when the heater stops working just before guests arrive, a guest cancels at the last minute, or a difficult guest makes your life miserable (it happens)
Now…what’s the bottom line? Can you really make money using your home as a short-term rental? Is the money you are likely to earn going to be worth the time and effort?
Only you can decide.
Do you use your home as a short-term rental? Is the income worth the time and effort? What advice would you give someone who is thinking about doing it themselves? Please share your thoughts in the Comments or on our Facebook page.