To Be, Or Not Airbnb. Should I invest in an Airbnb property?
A recent trend over the past few years is to buy residential properties and rent them out as a vacation or short-term rental through websites such as Airbnb or VRBO. Investment properties aren’t new, but this technology promises to put the strategy on steroids and provide owners supplemental income.
Let's explore how that may, or may not, be a good long-term investment strategy for you versus traditional investment strategies.
What is Short-Term Rental (Airbnb) Investing?
At its core, the short-term rental investment concept (e.g., Airbnb) is a platform that enables you to rent out your property or a part of it to travelers/guests for a fee. Airbnb is a form of peer-to-peer (P2P) or sharing economy, which is a model of economic activity that involves individuals or groups exchanging goods and services directly with each other, rather than through intermediaries.
When you have an Airbnb as an investment, you are essentially turning your property into a business, and you expect to receive a return in the form of rental income.Can Airbnb income be potentially higher than traditional investing? Is the risk worth the reward?
Depending on where you are, what kind of property you have, and how often you rent it out, you can potentially make considerable rental income. Not to mention your Airbnb property may appreciate over time as a lot of real estate does. An average single-family residence may recognize 3-5% appreciation each year.
But it can also be risky...
Is It Worth The Risk?
There is no guarantee your property will make a profit, and your success can vary due to several outside factors. For example, your Airbnb income can be influenced by seasonality, competition from other hosts and hotels, changes in local laws and regulations regarding short-term rentals, and even the feedback and ratings from your guests.
Your Airbnb property will come with the costs and responsibilities of maintaining and managing your property, and this can be much higher than traditional investing fees. For instance, if you rent out a two-bedroom condo in a popular vacation city for $400 per night, you could essentially make $12,000 a month if you can keep it rented. Sounds amazing, right? But don't forget, you also have to pay for the mortgage, utilities, the cleaning service after each stay, property taxes, and the service fees to Airbnb. Plus, there is no guarantee you will keep it rented all the time, so then you add the worry of an empty property being at risk for theft, vandalism, or even squatting!
You also take on the risk of guests potentially damaging your property during their stay. There are plenty of horror stories about short-term rentals that were severely damaged due to large parties or inconsiderate guests.
Let's Compare to Traditional Investments
With traditional long-term investing, you're putting money in assets that may have a historical track record of generating steady and predictable returns over time. With the right mix of investments, you could expect to receive a return in the form of dividends, interest, and even capital appreciation.
Traditional investing also allows for diversification by utilizing different types of assets and sectors, which can lower your risk and exposure to market fluctuations. Traditional investing is also a bit simpler to manage, as you don't have much in fees as you do with short-term rentals. Traditional investing is also very favorable should you have an urgent cash need. Most stocks, mutual funds , and ETF's can typically be converted to cash within a day or so, allowing for quick liquidation.
What Way is Best?
So, how do you decide which type of investment is best for you? While there is no definitive answer to that question, it really depends on your personal goals, preferences, risk tolerance, and financial situation.
While Airbnb has the potential to be a lucrative and exciting investment for some, it shouldn't be your only source of income or your primary retirement vehicle. Before you enter into the Airbnb arena, it may be wise to first start with a solid base of traditional investments that can offer more consistent and reliable returns, as well as protect you from the risks and uncertainties of the market.
No matter what investment path you take, remember that there are always great quotes to fuel your risky desire. Such as, "He who is not courageous enough to take risks will accomplish nothing in life". But then don't forget about this wise quote, "The fastest way to double your money is fold it in half and put it back in your pocket". Choose your investment path wisely!
There are plenty of investment options, strategies, and investment firms out there, and it can be a daunting task to figure it all out on your own. Getting a clear direction on your financial goals is a great place to start!
Take our 2 minute financial analysis today and see where your financial strengths and weaknesses are.
