Airbnb hosts losing money have three options

0

Comment

Airbnb won’t release its third quarter results until November 1, but some hosts have noticed a sharp drop in bookings in recent months. If short-term bookings dry up, it could spell trouble for anyone relying on Airbnb revenue to cover the costs of owning a second home.

It’s understandable that a sudden drop in rentals took guests by surprise. In recent years, investing in vacation rentals seemed like a great way to earn extra income. Yes, there are borrowing costs and maintenance costs, and your capital is tied up in the property. But mortgage rates were low and property values ​​seemed to continue to rise.

Even so, there are at least four major risks an Airbnb host needs to consider if they still expect to make money from their property as the economy slows.

First, there is the risk of making overly optimistic financial assumptions. Rollover costs, unexpected cancellations, and downtime during unpopular seasons would reduce revenue forecasts. A host may only be able to rent a property for, say, 100 days per year. The projected costs should also include hiring a professional property management fee, say 15% if you don’t manage the rental yourself and Airbnb’s fee of around 14%. It’s also easy to underestimate property maintenance costs. Being a top-notch host means furnishing the space like a corporate hotel, with new linens, furniture, and fancy coffeemakers. Short-term guests are tough on a property, driving up maintenance expenses higher than usual.

The second risk is a sudden drop in demand. Tourism is particularly vulnerable to catastrophic events like hurricanes, wildfires and even algal blooms. Tourists have many choices; if a destination is suddenly less attractive, they can easily cancel their trip or cut short their stay.

This brings me to risk number three: political risk. As short-term rental platforms have grown rapidly, local governments have been pressured by hotels and housing advocates to impose limits. For example, New York has passed laws restricting short-term rentals, making it harder for hosts to rent rooms in apartment buildings. Other cities have followed suit.

Finally, there is oversupply. You might have a good spot in an attractive location; but if supply has exceeded demand, there could be a drop in rents or a lack of bookings. In big cities with high housing costs, lots of hotels, and lots of other Airbnb hosts, it’s harder to demand a price premium.

Small towns aren’t necessarily a better bet. In late January 2020, I remember visiting Sedona, Arizona and chatting with a couple from New Jersey who had also been enchanted by the red rock wonderland. They were strongly tempted to buy a house and rent it out on Airbnb during the weeks they weren’t there. But Sedona is one of the worst places to be an Airbnb host, according to AirDNA, an analytics firm that ranks the best places to invest in short-term rentals. It rates Sedona poorly due to high housing prices, low demand and the large number of listings already on the market.

Hosts looking to exit the business have three options: sell, rent to a long-term tenant, or move in.

House prices are falling, but supply is still limited, so depending on the appreciation of the property, selling might not be a bad option. Renting the property long-term may be the best choice in some markets, especially when rental prices are high. Moving in is a very personal choice with a lot of additional costs.

Of course, not all Airbnb hosts rent out their vacation home. Some rent out their only home and use the extra income to balance their budget. I know a family from LA – two adults and two teenagers – who move in with friends and rent out their house when they need back-to-school clothes or a car repair. A more predictable source of income could be a long-term roommate, but that comes with legal complications — long-term tenants have more rights — as well as privacy considerations.

Even though Airbnb itself brings in another quarter of impressive revenue, if the hosting math isn’t working for you, it might be time to cut your losses.

More from Bloomberg Opinion:

• Do you feel pinched? Sometimes Your 401(k) Can Help: Alexis Leondis

• Do you think the owners will stay put? Austin suggests otherwise: Jonathan Levin

• I can buy because the rent is just too high: Erin Lowry

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Teresa Ghilarducci is Schwartz Professor of Economics at the New School for Social Research. She is a co-author of “Rescuing Retirement” and a board member of the Economic Policy Institute.

More stories like this are available at bloomberg.com/opinion

Share.

About Author

Comments are closed.