Is Airbnb a Good Investment?

If you’re looking for an extra source of cash flow—especially if you happen to have an extra piece of real estate, like a vacation home or an inherited property—you might be wondering about the pros and cons of renting it out on Airbnb.

Pros and Cons of Airbnb as an Investment

PROS:

• Higher Profit Potential
• Airbnb’s Advertising Platform
• Maximized Occupancy

CONS:

• Higher Expenses
• Covid Travel Economic Uncertainty
• Highly Competitive
• Unstable Income
• Extra Responsibilities

Airbnb is one of the many peer-to-peer apps that allow individuals to exchange money for services—in this case, staying in someone’s property instead of a hotel. They collect a commission for each booking, while the property owners collect payment. Airbnb has become a direct competitor to the hotel industry, with more than 5.6 million listings in more than 100,000 cities around the world. In recent years, they have expanded by purchasing direct competitors, like the European CrashPad and Accoleo, along with related industry players, such as local city guides. They always say if you want to make money, go where you can find buyers. But does it really make sense to leverage Airbnb to make money?

Pros of Airbnb as an Investment

1. Higher Profit Potential

Airbnb listings are going to yield higher profit potential than you would get with traditional renting. This is because a traditional tenant pays a monthly rent, which, when looked at on a day-by-day basis, is much lower than someone paying for a few nights.

For example, at the time of this article (albeit a time beset by inflation), the average rent in the United States (according to Redfin) was $1,877 per month, which comes out to about $61 per day. But what if you could rent out the same space for $200 a night? Even if you only rented the property out for 10 days out of the month (a very low occupancy rate of 33 percent), you’re surpassing that monthly rental income. There are fees that Airbnb charges, which you need to factor into your rental profits, but you do have many short term rental deductions you can utilize. Even so, if you can get the property rented on a part-time basis, you’re looking at more profit potential.

For additional tips on maximizing the profit potential of a rental property, join our weekly Real Estate Investing Room. 

2. Airbnb’s Advertising Platform

This brings us to our next point. In order to get your property rented out, you need to spread the word. This can be time consuming and costly if you’re marketing it yourself, even if you know how to create flyers and use social media ads. But if your property is on the Airbnb platform, you can take advantage of their platform to put your property in front of travelers browsing for accommodations in your area.

Additionally, Airbnb has a proprietary marketing component called OMNI that will facilitate content marketing across multiple channels (like different social media platforms), hence its name—a reference to omnichannel marketing. A real estate investor may not be as effective at marketing properties on their own. Airbnb investing takes that burden off their shoulders, and often at a much lower price than the cost of paying someone to advertise rental property to prospective renters.

3. Maximized Occupancy

If you have a vacation home or second property you’re not renting for whatever reason, listing on Airbnb can reduce your vacancy rate.

For instance, you might have a vacation home that you don’t want to rent out to a tenant for 12 months or even six months because you want to be able to enjoy it seasonally. In that case, you won’t be able to turn that vacant property into cash flow vis-a-vis a full-time renter, but you could turn it into a cash flow property with more periodic renters, such as a guest who only needs it for a few nights or weeks.

Cons of Airbnb as an Investment

1. Higher Expenses

You are going to have more expenses if you rent your property out as an Airbnb. The thing to note is that it’s not going to come from the three percent commission that Airbnb charges (because if you had a real estate portfolio of properties you were renting out full time, you’d presumably need to hire a property management company to help take care of them). Instead, it comes from the fact that in order to compete with other properties, you have to make yours stand out.

Remember that Airbnb guests are not just looking for value; they’re also looking for an experience. You have to put time and money into the decor of your Airbnb, along with cleaning it between stays. You will also need to likely need to foot the utility expenses in order to make your property appealing. While internet, cable, and electricity are paid for by a full-time tenant, someone staying at a hotel expects these accommodations as part of the price…as does an Airbnb guest.

2. Covid Travel Economic Uncertainty

The travel industry has taken a serious hit during the Covid pandemic, with lockdowns and mandates that restrict travel. Although the pandemic itself has seemed to subside, in its wake are vaccine and/or testing mandates that make travel more restrictive and less desirable for some.

Additionally, the economic hardship imposed by the pandemic and its lockdowns and downsizing have resulted in many individuals or families having less disposable cash for discretionary purchases, including travel. This all bodes poorly for the travel industry in general.

The good news is that if you are already holding on to a property, you won’t be in the same jeopardy as an actual hotel, restaurant, or other such venue that needs a revenue stream in order to operate.

3. Highly Competitive

As mentioned earlier, there are 5.6 million listings in 100,000 cities around the world. There are seven million Airbnb listings in Los Angeles alone. But in addition to competing against other Airbnb owners, you will also be competing with the more established hotel industry.

Some people just prefer to stay in a hotel, no matter how interesting or attractive an Airbnb is. Additionally, some locations have lots of restrictions on how you can operate an Airbnb, making it more difficult to turn a profit. This includes cities such as Paris, Barcelona, New York City, and San Francisco. If you have a property in a location like this, not only will you have to compete with other landlords, you will also have to adhere to onerous local regulations.

4. Unstable Income

Airbnb as an investment can be unstable. Recall earlier that we mentioned even a 33 percent occupancy could turn a better profit than renting out a unit for a whole month (as part of a typical six- or 12-month lease). What happens, however, during seasons when travel is reduced? Or if there is some sort of natural disaster or unforeseen circumstance that limits travel? When events like these occur, they can destabilize the business model of short term property rentals.

You might be surprised to learn that the average Airbnb occupancy rate across the United States is 48 percent. This means that the short term rental potential of an Airbnb property actually exceeds the minimum threshold for profitability in most markets over a long term tenant, which means that an Airbnb investment property can be an excellent and stable source of passive income. However, this does not take into account some of the additional operating expense considerations of short real estate investments.

5. Extra Responsibilities

How do you feel about being the property manager of your residence? What if offering your residence as a vacation rental property via an Airbnb listing came with the added responsibilities of navigating Airbnb regulations, or even just managing the Airbnb booking process?

If you’ve never managed a hotel or Bed & Breakfast before, you probably don’t know everything that goes into it. It’s a lot of marketing, cleaning, problem solving, and hunting down reviews. In the case of your Airbnb rental property, you are going to have to (essentially) become a hotel manager.

For some people, that makes an Airbnb business an unattractive real estate investing option. But perhaps you are the type of investor that doesn’t mind navigating the challenges that can come with Airbnb rental income.

There are also additional headaches you may have to navigate, such as parties and property damage. One property owner in New York had a guest throw a party for 300 people, resulting in stolen artwork, broken glass, and missing furniture. While this doesn’t happen with most Airbnb rentals, many investors find that the pros of using the Airbnb platform outweigh the cons and risks of having an Airbnb investment turn into a frat house.

Is Airbnb a Good Investment?

People who need or want some extra cash flow are always wondering about the best side hustles. For those individuals that already have a property they are not using full time (such as a vacation home or an inherited property), Airbnb can be a great way to make something out of nothing.

But for those who don’t yet have a property and are thinking about buying one to rent out as an Airbnb, there are probably better and easier ways to make a profit—ones that don’t involve redecorating, changing the sheets, and stocking the refrigerator with tiny bottles of liquor.

If those DIY tasks sound appealing to you, becoming an Airbnb host may indeed be a fun source of side income. Alternatively, if you have experience in the hospitality industry, marketing, or property management, Airbnb could provide a decent source of income.

Airbnb is Just One of Many Ways to Generate Real Estate Income

As with any real estate investment, there are a few pros and cons when it comes to listing a property on Airbnb. For most individuals, the competitive nature of the field and its relative instability might outweigh its benefits. But for individuals with an extra, unoccupied property on their hands, there isn’t much to lose.

If you don’t already have property to rent out, you might consider looking at other ways of generating income. One way to explore real estate investing strategies is by signing up for a free Infinity Investment membership. Not only will you gain access to an abundance of useful investing tools, but you’ll also learn the secrets of generating long-term wealth to ensure your family is set for many years to come.

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