Boiling housing market should make buyers think twice before buying an Airbnb property

Short-term rentals are now proliferating in all major US cities thanks to popular home-sharing apps like Airbnb and VRBO, and buying homes and turning them into investment properties has become a popular tactic to generate additional income.

However, the housing market has reached new highs of competitive supply, with many homes closing at 15%, 25% or even 50% above demand.

With so much competition, does it even make sense to buy for the sake of investing – or is there too much risk involved?

Buying a home for Airbnb: is it worth it?

House prices are at their peak. In 2020 alone, the median home price in the United States rose 12.8%. In Washington, DC – an increasingly popular tourist area – homes sell for a median price of $ 655,000, with some neighborhoods surpassing the median selling price of $ 1 million for the first time.

While historically low mortgage rates have boosted purchasing power, the lack of available housing has led to fierce competition among buyers. The winning bids were up to 50% higher than those requested for houses in good condition and in desirable areas. Pushed to the limits of what they can afford, many buyers go out of their way: forgo unplanned inspections and write “love letters” to woo sellers.

This dynamic has played out to varying degrees in all the markets in which Houwzer operates in the Northeast and Florida. People who are successful in buying a home almost always get it for asking too much, and often the buyer makes up the difference between the sale price and the appraised cash value.

The average Airbnb rental home generates more profit per year than a similar sized home in the long-term rental market, and short-term rental income can be very lucrative (on average, hosts earn 924 $ per month, but this includes rentals and single rooms). It is possible to do this as a side business for many years, allowing homeowners to pay off their mortgages faster and generate some additional income.

It sounds like a great setup: but what happens when things go wrong?

When Covid-19 hit, it caused massive disruption in the travel industry. Overnight, Airbnb hosts who previously earned thousands of dollars in revenue each month saw their listings for the entire year disappear. Airbnb went back and forth on its policies, ultimately allowing many customers to cancel at the last minute. Hundreds of hosts, representing more than 10,000 homes, are currently pursuing legal actions against Airbnb.

Although Covid-19 is a once in a lifetime event, he highlighted the potential dangers of relying on tourism and an online platform to rent a house. If owners have any issues, Airbnb will likely be of limited help, while also claiming limited liability. And past success is no guarantee of future bookings.

Anyone entering the market now with the intention of renting out their property must be asking themselves: how many months can they cover the mortgage, insurance and costs of a second property, without making additional income? And with so many homes selling well above their listing price or appraisal, how much money are you willing to put into this investment?

Problems with Airbnb Backdated Covid-19

While Covid-19 made some of Airbnb’s biggest drawbacks more obvious, there were already plenty of issues brewing in the background.

Partying has been a constant problem for neighbors of Airbnb rentals in Philadelphia – and the platform removed or suspended dozens of ads for violating party policies in November alone, according to The Philadelphia Inquirer. The problem is hard to avoid as most guests won’t tell their host that they’re going to have a ton of loud guests. Homeowners can find out the hard way when their account is suspended and they lose weeks of income.

Regulations have caught up with Airbnb as well, and you have to wonder if future legislation could hamper your ability to generate income. The topic of affordable housing is becoming as hot as the equally hot real estate market, and as long as there is a housing shortage, major cities will face increasing pressure to regulate the short-term rental industry. .

In Philadelphia, a city council bill introduced in February seeks to further regulate rentals in the city, requiring operators to obtain business activity licenses as well as limited accommodation operator licenses for $ 150 per year. . And in May, New York City introduced a bill that could dramatically reduce the number of short-term rentals operating there.

If future regulations, especially zoning regulations, end up making a property unsuitable for short-term rental, landlords will have little recourse except to switch to more traditional long-term tenants or sell. So the question is, if for some reason an investment property ceases to be profitable and the owner has to sell it, will it lose money in a sale?

If it is a second home, it is especially important for owners to calculate the numbers and make rational decisions about what they can offer for investment property. Before potential buyers get into a bidding war, they need to understand the financial cushion they will need to reserve in an emergency. Everyone needs to make sure that their anticipated cash flow is sufficient to justify the price well above what is being asked to pay in today’s hyper-competitive market.

It’s not just doom and gloom

That may not have painted the rosiest picture in Airbnb hosting – and there are plenty of unknowns going forward.

But there are emerging trends that bode well for discerning hosts. For example, the rise of remote working has also given many people the option of booking longer trips or taking “work placements”. And after a year locked up at home, Americans are eager to travel, even if not overseas. There has been a huge need for this during Covid-19 with people looking for a way out of their cities and overcrowded homes, whether for a weekend or even a month.

As restrictions ease, Airbnb is seeing increased demand for “remote destinations” and “places off the beaten track” among travelers. Vacation properties out of town may be a more promising entry point for those looking to enter the rental real estate industry. Buying properties in more remote areas is often easier and can save buyers the regulatory headaches that are more common in cities.

Many former Airbnb hosts have also turned to building their own direct booking sites to cut out middlemen and have more control over their listing policies.

Ultimately, any investment in real estate comes with risk, and potential buyers will need to analyze the numbers to determine if the risk is worth the potential reward.

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