Airbnb was launched in 2008. It started as an online platform where people looking for accommodation were connected to people who wanted to rent out space.
Being an Airbnb host almost seems like being the owner of a mini motel. And some people may think that it’s just too much work. But you don’t need a lot of capital or experience to start.
How Airbnb Works
It has a very simple business model. There are people with extra space and they’d like to make good use of it so as to reduce cost of ownership. Then there are travelers who are willing to pay for somewhere to stay when in town or have cheaper, homely accommodation for longer periods.
Is Airbnb Hosting Right for You?
Potential hosts are the backbone of Airbnb. The company is just a middleman. Because of the high demand for accommodation caused by the growing popularity of Airbnb, there has been an inventory shortage. Some super hosts are even becoming overwhelmed by the demand. This means that there’s an opportunity for you if you desire to get in the business.
Making Money with Airbnb
While this may seem like a simple business, you still need a plan. First, know your market and assess whether your listing will have demand.
Airbnb Vs Traditional Leasing: Case Study
Suppose there’s a property worth $300,000. Your initial costs include costs of closing (insurance, inspection, etc.) and down payment. So the total cost is roughly $70,000.
Don’t let this scare you. This cost is almost doubled up. You can find good properties for half that price.
Traditional Tenant Revenue
After acquiring the property, assume you get a tenant. The lease is a traditional one at $3000 a month. You will collect $36,000 in revenue by the end of the year. The standard cost of maintenance is 1% of property value. Your revenue is now $3000 less. If you account for managing costs, you may end up with about $31,300.
Return on Investment
So you invested $70,000 and got $30000 after one year. But if you subtract property tax, insurance and mortgage payment, you’ll end up with less than $10k.
Comparing with Airbnb
Using the same property, assume the daily rate is roughly $50. In a month, you have 150 bookable nights. With a 90% occupancy rate, you can expect to have 135 booked nights in a month. That’s $6750. Add $12 cleaning fees with each turnover. If you estimate 70 turnovers, that will be $840. The total income is now $7590.
Now subtract cleaning (about $1400), utilities ($400), supply cost ($600) and mortgage ($2000). Your net income will be $2515. Add insurance premium ($100) and the total is $3440.
Airbnb is definitely more profitable.
Note: you will need a higher initial investment because of furnishing and decorating.
Advantages of a Traditional Lease
- Dependable renters
- Lower initial investment
- Easy to find management
- Low regulation risk
Why You Should Consider Airbnb
- Higher potential revenue
- Lower variance revenue
- Less wear and damage on property
- Potential regulation by the city
- You need liability protection