Before buying a house, it is critical to be well-informed on the benefits and drawbacks of an Airbnb investment. To increase your ROI, check our guide on investing in short term rentals.
Table of Contents
- What Is a Short Term Investment?
- What Is Airbnb?
- What Is the Best Short Term Investment?
- How to Succeed at Running an Airbnb
Building a portfolio of Airbnb rentals may appear to be a clever strategy to increase your passive income. The fact applies to both new and experienced investors. It can bring in potentially good returns even if you’ve only recently learned about the profitable opportunities of owning a sought-after short term investment home,
Using the Airbnb platform—or an alternative—to rent out houses can be a profitable real estate investment approach, but it also comes with some drawbacks. In other circumstances, it may be simpler and more profitable just to rent out a home to a single tenant or to avoid real estate investing overall.
In this article, we will look into Airbnb investments and the unique benefits and drawbacks they may have. Continue reading to find out more.
What Is a Short Term Investment?
Short term investment opportunities are marketable assets that can be easily converted into cash in about five years. Furthermore, short-term investments are typically utilized to store additional funding for a limited time. Investors use them because they are extremely liquid and can be used to satisfy anticipated approaching expenses.
Long-term investments are less risky than short-term ones. It is because such securities come with longer tenure and provide predictable returns.
High-earning savings accounts, reoccurring deposits, debt funds, and government securities are a few short-term investing possibilities. They are the most common short-term securities, with durations ranging from several months to one to two years. Bank fixed deposits, national savings certificates, and large-cap mutual fundings are some other short-term investments with investment terms of up to 5 years.
However, we are focusing on Airbnb, which is an example of a short term investment.
What Is Airbnb?
A real estate investment may be a smart alternative to explore if you’re searching for passive income. But what exactly is the distinction between a typical investment property and an Airbnb?
When a portion or all of a property is leased out on Airbnb after the acquisition, it is called an Airbnb investment. The rentals are often short-term, allowing you to accommodate a large number of guests during the year. On the other hand, traditional investment homes are typically leased to long-term tenants.
Moreover, with the growing popularity of Airbnb and other holiday rental websites over the years, property owners now have higher chances to create a stream of passive income.
Although it demands full commitment, short-term investment is a good strategy that allows Airbnb hosts to accumulate wealth. The key to managing numerous duties is using tools and software solutions that help automate most of your everyday tasks.
Related: How to Evaluate an Airbnb Investment
Would Airbnb Be a Good Short Term Investment?
Before you choose to invest in short-term rentals, evaluate all of the benefits and drawbacks of the short-term rental investing strategy over traditional rental investing.
Benefits of Investing in Airbnb
Here are several benefits of Airbnb investing:
1. It Can Be More Profitable Than Traditional Renting
A well-booked Airbnb rental may be more lucrative than leasing the same property to one long-term tenant. It is because you can typically charge more on a nightly basis. According to February 2022 statistics, the average apartment in Seattle rents $2,190 per month if the tenant agrees on a 12-month lease, which equals $24,000 in annual revenue.
But what if you decided to use Airbnb? According to our latest investment property data, the average daily pricing for an Airbnb rental in Seattle is around $153, with a 65% occupancy rate. If you lease out your Airbnb for $153 per night for a total of 270 nights annually, you might earn $41,300 in total income from the rental. It’s $17,000 more than you’d make renting traditionally.
2. You’ll Have a Diverse Tenant Portfolio
Traditional renting involves putting all of your goods in one box with a single tenant. It can succeed if the tenant is financially responsible and stays for an extended period. However, if they ever fail to make rent payments or simply disappear in the middle of the night, your income suffers immediate damage that is difficult to restore.
With Airbnb being maybe the best short term investment, you earn money from various tenants regularly when you rent out your Airbnb space. Every renter represents a relatively small part of your overall revenue. So, if one of them cancels at the last moment or refuses to pay, it may not have much consequence.
In San Francisco, for instance, you can’t rent out any portion of a house unless it’s your principal residence, which is defined as spending at least 275 nights annually there. Furthermore, it is forbidden to have more than 90 nights of “unhosted” rentals, which means you are not there when guests are around.
In many situations, the regulations were put in place to maintain an appropriate housing supply for residents. Still, they are likely to reduce the potential return on investment for someone trying to make money via Airbnb.
3. Greater Control Over Your House
Although you should not allow your personal ideology to drive your Airbnb business, the possibility to use your rental properties as holiday homes is still an appealing extra perk. You will be able to use your Airbnb apartment as a second home as an Airbnb host. All you need to do is mark specific days on your Airbnb calendar.
While short term investment needs more effort and costs more, it may be easier to handle maintenance. Since you’ll be receiving new visitors more frequently, you will be notified of any maintenance problems sooner, granting you more control over your property. In addition, when you manage an Airbnb property, you can change your prices regularly and raise them during peak seasons or occasions. It also implies you have more flexibility over your pricing policy.
Drawbacks of Investing in Airbnb
Along with the benefits, investing in Airbnb comes with a few drawbacks, including:
1. Expenses Can Be Greater
If you own a home and lease it to a single tenant, your participation in property management can be minor. A responsible tenant will pay bills on time, clean the property, and mow the grass. You’ll only need to jump in occasionally to do property upkeep or handle emergencies.
As one of many short term investment options, an Airbnb apartment is likely to be more labor-intensive because it will be up to you, the landlord, to keep it in excellent condition at all times. You’ll also most likely be required to provide stuff that you would not usually give to a single tenant, such as:
- High-quality furnishings, decoration, and more: If you want to impress possible Airbnb tenants, you may need to spend some money to ensure that the space feels and looks sophisticated. Airbnb guests want to get the impression that they are vacationing in a high-end property.
- Food items: You don’t need to cook for your Airbnb visitors, but providing some essential food products will help keep them pleased. They can include keeping fresh eggs, tea, or alcoholic drinks on hand. Some Airbnb hosts go out of their way to provide snacks at different times of the day.
- Wi-Fi and more: If you lease to a single tenant, they will typically be responsible for connecting the cable television and Wi-Fi. On the other hand, Airbnb guests usually anticipate these services to be present during their visit. Therefore, the cost of internet connectivity—and its upkeep—falls on you.
2. Progress Can Be Gradual
It’s doubtful that you’ll be able to reserve an Airbnb home almost every night straight away. Bookings on Airbnb are determined mainly by your status as an owner. The better your rating from previous tenants, the more likely you will attract new ones.
You may only get a few recommendations at first, so you may need to maintain rent reasonably or offer incentives to encourage people to stay. Even if you offer a fantastic unit in a wonderful location, don’t expect to start earning rental revenue right away.
Also, keep in mind the short term investment tax. Any profit from investments held for less than one year must be included in your taxable income for the said year.
3. Income Can Be Unpredictable
If you own a house and rent it to a constant tenant, you may be able to maintain that tenant on a long-term lease and receive rent every month, providing you with a consistent income stream.
Short term investment rentals may be significantly more unreliable. In theory, while you can lease out a house 365 days every year, you are bound to see many empty dates on your schedule. You can even choose to set a day or more off between bookings to prepare the house for the next visitor.
You might be able to balance the vacant periods as an owner by pricing more than you would for a conventional rental property, but there’s no certainty you’ll come out on top. In general, your occupancy rate will be determined by various factors, such as weather, period of the year, and location.
What Is the Best Short Term Investment?
According to our study and analysis, the high-yield savings account is currently one of the best short term investment options with high returns to consider. High-yield savings account at a banking institution is a better option than keeping money in a checking account, which usually pays relatively little interest on deposits. A savings account will earn interest regularly from the bank.
How to Succeed at Running an Airbnb
Apart from running the numbers, knowing the local laws, and getting excellent feedback—use real estate tools. Mashvisor and other similar tools can make the entire procedure considerably easier. The platform, for example, provides a trustworthy Airbnb calculator that you can use to calculate crucial ROI parameters, such as cash flow and cap rate.
Here is a list of the Airbnb analysis and insights that our Airbnb investment calculator provides:
- Occupancy Rate: The Airbnb occupancy rate must be known in order to calculate the predicted Airbnb rental income of an investment property using an Airbnb calculator. The better your Airbnb occupancy rate, the more monthly Airbnb rental money you’ll be able to generate.
- Rental Income: Investors can use the rental income data to estimate how much to ask for rent and calculate Airbnb’s cash flow and return on investment. Rental income estimates for traditional properties are also provided via our calculator. Our tool makes it simple to analyze the profitability of the two rental strategies and pick the best one based on rental income.
- Cap Rate: Capitalization rate, also known as cap rate, is a return on investment indicator used by real estate investors to swiftly analyze the profitability of investment prospects without considering the financing source. Calculating the Airbnb cap rate can be difficult if you analyze several income properties for sale. Luckily, our rental income calculator provides quick cap rate predictions.
- Rental Expenses: The Mashvisor calculator lists important one-time startup expenses associated with owning an Airbnb home, such as repairs and inspections. You can also take in recurring monthly costs like insurance and HOA fees. You can also include customized expenses in your calculation.
We can go on with the Mashvisor calculator features, but you can learn more about it by clicking here.
Suppose you’re thinking about short term investments. In that case, you should think about all of the advantages and disadvantages you might encounter along the route, from the possibility of increased income to the loss of personal time needed to advertise and maintain the home.
With the Airbnb industry still reeling from the impact of the COVID-19 pandemic, it may be smart to wait for the situation to stabilize before making a decision. However, suppose you consider purchasing a primary house to generate Airbnb revenue. In such a case, the risks may be minimal, as long as you can afford your loan without the extra income.
To put yourself in a better position to succeed in your real estate investing journey, make sure to use software solutions from Mashvisor. To learn more about Mashvisor’s tools, schedule a demo today.