About two million people enjoy the convenience of Airbnb every night. The company is projected to be worth $8.5 billion by 2020. It seems like the right time to invest in property to cash in on part of those profits.
Airbnb rentals are in high demand. The service offers travelers convenience unmatched by many hotels. It’s hard to imagine a hotel being inconvenient. However, room service and a full kitchen aren’t enough to dissolve the inconvenience of being far away from your intended destination. If your hotel isn’t close to where you want to be, your vacation becomes time-consuming and expensive. You either need to plan ahead for public transportation (and cut your day trips short) or pay to rent a car.
Airbnb eliminates that scenario. That’s why the company is doing so well, and people don’t mind renting out their spare room or even their whole home to strangers, despite the risks.
Since renting out property by the night is more lucrative than renting by the month, many purchase property just to rent it out through Airbnb. It makes sense as an investment. However, it’s not as easy as it looks. Even if you own the land and provide top-notch housekeeping, there are laws you need to follow.
Airbnb is considered a short-term rental
The first thing to know is Airbnb is considered a short-term rental. Each city defines and governs short-term rentals differently, but generally, a short-term rental is available for a minimum of one night. Short-term rentals have a high earning potential, especially where seasonal demand exists. Short-term rentals are also flexible, so you can live in the home when it’s not rented out.
Airbnb rentals are often treated as hotels by city ordinances
The downside of short-term rentals is the strict ordinances many cities have that either ban one-night stays, or require you to pay large taxes. Airbnb rentals are not exempt from these ordinances. You may need to pay a hotel tax, otherwise known as an occupancy tax. You will be treated as though you’re running a hotel, so be prepared to share your profits with the city.
Homeowners’ associations don’t like Airbnb guests
If your property is governed by a homeowners’ association (HOA), you probably won’t be able to rent it out on Airbnb for less than thirty days. HOAs don’t like Airbnb guests for several reasons. Airbnb guests compromise the security of the community, especially when it’s gated and a code is required to get in. They’re essentially strangers that haven’t been vetted by a background check, and letting the wrong person stay in your home even for one night can turn into a disaster. Homeowners in the community don’t want to see strangers coming and going every night. Guests not on the lease are also less likely to follow HOA rules, especially when nobody’s there to enforce those rules.
Some HOAs will allow Airbnb guests only for a 30-day rental minimum, but you’ll need to request this in writing and have it approved. Investors who don’t obtain permission through the HOA end up getting cease and desist letters that include fines of up to $500 per day.
Airbnb violates some mortgage agreements
When your mortgage lists a property as a primary residence, renting it out even for a month during the year can blur the lines between residence and investment property.
The difference matters because investment mortgages are more expensive. “The theory is that people who live in their own property are less likely to default,” mortgage banking attorney Stuart B. Wolfe told usnews.com. Mortgage companies charge higher interest rates when a property is going to be rented out. Don’t misrepresent your property when taking out a mortgage, and don’t violate your existing mortgage agreement. It’s not worth it.
Airbnb income won’t qualify you for refinancing
If you plan on using your Airbnb income to qualify for a cash-out refinance, think again. Rental income from a traditional lease will qualify, but Airbnb isn’t seen the same way. Airbnb is seen as a temporary source of unstable income. Not even government-sponsored mortgage buyers Freddy Mac and Fannie Mae can get Airbnb income to qualify.
Dedicated Airbnb properties require a fierce strategy
Buying a dedicated Airbnb property doesn’t make sense for most investors. To make a dedicated Airbnb property work, you’ll need to do more than provide top-notch housekeeping and an environment people want to stay in. You need a strategy for turning a profit after you’ve paid your taxes and your investment mortgage. A full-time Airbnb property isn’t a hands-off investment.
To read more on topics like this, check out the lifestyle category.
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