Over the last decade, the concept of AirBnBing your rental space has taken off. Between 2016-2020 it saw a massive increase in traction and as there were fewer restrictions from the local government the business was booming. Question is, is that something you should look at while figuring out renting your space.
There might be 100 dozen articles written on this topic but from a few real estate investments does it make sense? Let’s examine the topic in a bit more detail to derive an answer to that question.
Firstly, how is the AirBnB different from a regular rental. For a regular rental, you are providing the basic setup, with appliances and a place in broom swept condition. If the laundry is part of the deal you are providing laundry machines and depending on where you are (for example Texas Laundry machines are not included in the rental and in Ontario they usually are). Once the place is in top condition you would either market it yourself on craigslist or Kijiji or list it with a listing broker who will find a tenant and between the agents take one month’s rent from you. A credit check, and traditionally a personal interview is advised before handing over the keys. Usually, a term you work is 1 year so really you are getting 11 months’ rent. In most of these lease agreements, the utilities are paid by the tenant (if billed separately) and that’s pretty much it. You now have the place tenanted, and if you are lucky it will stay tenanted for many months after the initial term is over. There are rent control measures in place in almost all parts of the US and Canada, so your rent increase year after year is capped. In some cases with the recent pandemic (Covid 19), we had a situation where the Government got involved in trying to reduce the rent to help the tenants.
Now let’s look at AirBnB. Once the place is finished, with appliances you will start furnishing it. You focus on things that you do in an apartment or a hotel. Once you come into your hotel room you want to jump into that comfy bed with white linen and spend the entire time watching TV. Well… that concept is pretty much the same when furnishing your AirBnB. Comfy big bed, with fresh linens, furniture for your TV, books, coach TV (full list of items they recommend are on their website). For your personal touches, you have frames and decoration pieces that you can tastefully put in there to give it a customized feel. Once you have that ready and you are ready to list you get on their website and list your listing. Follow through with the steps are you are listed. (You can do the same process on other sites like VRBO). Once you are listed you generally tend to get a booking very soon and you are on your way. The funny part is that with technology a lot of steps are automatically handled by the engine working in the background. Note, AirBnB (and others like them) take heavy fees for managing the platform and that is deducted when you see your payout. The task at hand now becomes how to optimize your rentals’ full potential with the right pricing and occupancy levels to give you maximum returns. There are many rules and formulas you can apply with your listing as you proceed to get a better handle on how to fill the listing.
Let’s take a case and point example. We manage some apartments in a very old triplex in Little Italy in Toronto. We were AirBnBing these units very successfully from 2016 all the way to the pandemic. However two things happened, the City of Toronto capped STR to your own personal residence starting January 2021 and the pandemic had literally frozen the STR activity from March 2020 to December 2020. So we were in a difficult situation. Our monthly averages dropped to the level we had never seen. Also taking the freedom of having STR in the apartments from the city of Toronto was the biggest blow. Now we were left with a situation where we have these furnished apartments in the city and had to look at an option to generate steady revenue on an immediate basis.
Around late 2020 we reached out to a broker to see if they can rent the units for us. The rental rate we got for the apartments were as follows:
Basement Studio (400) sq – 1000
Basement Studio (350) sq – 900
Apt 1 (studio – 2nd floor) – 1200
Apt 2 (1B/1BA – 2nd floor – with patio) – 1600
Apt 3 (1B/1BA – 3rd floor) – 1500
We studied the numbers and they looked super low. The influx of new rentals in the market because of the city’s crackdown on STR really threw off the new rental numbers. So we decided to try a 30-day minimum on furnished rentals and be very mindful so there is not a big gap between the two bookings. It’s been 10 months or so and the numbers have come back 20% higher (without the cleaning fees). Keep in mind this includes utilities paid by the landlord so might be safer to say 10% more.
Now with only 10% more is it worth the headache of having folks come in per month and then leave per month? That’s a question you have to answer. The upside we see is that if and when the market resumes to its regular busy traveling self our busy month averages will increase which is not something you will be able to see with long-term rentals. Hope this was helpful as an analysis of the two scenarios. Please feel free to comment and suggest if you would like to see more topics in real estate investing.