Investing in an Airbnb property – what you need to know

Thinking about renting out a property on Airbnb? In this edited extract from his book, Property Fit, Luke Harris looks at the pros and cons of Airbnb as an investment strategy and outlines the key things you should know.

Most of us are familiar with Airbnb; most likely we’ve all either stayed in one ourselves or know someone who has. The main reason that this strategy is popular over a long-term rental strategy is that the returns can be higher.

You might have an Airbnb or short-stay property for a year or two and then switch it off. For many people, it’s not something they have to take that seriously because they’re only doing it for a bit of extra pocket money. People like to ‘give this one a go’ and see how it works. Your mate is doing it on a property in South Yarra, a sought-after suburb in Melbourne, but you’ve got a place in Berwick, further out of the city. Why not give it a go, you ask?

The reality is that you must manage guests and furniture. You must learn how to price – and how to tweak your pricing – along with everything else that goes with managing a listing. And most people are self-taught if they’re treating it as a hobby.

If you are considering investing in an Airbnb property for the long-term, it’s important to take a strategic approach when it comes to all the things you’ll need to be across. Let’s take a look at some of the key considerations.

The top three pros & cons of an Airbnb investment property

Pros

1. A higher yield can put more money in the bank each week, even after all expenses. Many investors have built a great cash flow portfolio this way.
2. You may be able to use the property for your own holidays – who doesn’t want a property by the beach they can use for a few weeks a year? Providing you disclose this personal use in your tax return, it can make owning a holiday home more affordable.
3. You control your income to an extent. If you wish to be more conservative, you don’t need to charge a premium; so, if consistency of income is the most important factor, you set your prices accordingly. You may also take a more aggressive approach and charge a higher fee but take fewer bookings.

Cons

1. Guests can cause damage to your property, which can cause huge headaches. Trying to repair the damage with only hours left before another guest checks in can be quite challenging.
2. Insurance can be expensive, hard to get and hard to claim. Make sure you do your research into your insurance options before taking on this strategy. Read the policy in detail before signing up because there can be many hidden exclusions.
3. Getting finance can be difficult. Ensure you can keep borrowing if you’re planning on building your portfolio or this strategy could actually slow you down.

The strategy

One of your first considerations if you’re considering Airbnb to increase rental returns is to assess your appetite for risk. One of the biggest risks involved in this strategy is fluctuations in cash flow. One month you may have a very high occupancy rate, and the next month you may not have many bookings at all. Therefore, balancing your books and managing your cash flow is critical – you need to ensure you don’t drain your account every month.

There are two key rules to keep in mind:

1. Have enough of a financial buffer to get you through periods where bookings are low.
2. Aim to double your baseline rent when setting your price, considering your effort, energy and effort, as well as opportunity cost. For example, if you can get $400 per week on the long-term rental market, you should aim to average $800 per week on the short-stay market to make it worthwhile.

If you decide you’re comfortable with the cash flow risk, your next step is to identify and investigate your property. Is there market demand for it? Areas in market demand will likely be within walking distance of a CBD, business park, café or restaurant strip, public transport or other sporting or entertainment facilities. These are more likely to be in high demand throughout the year, while some areas may only be in demand seasonally. For example, beachside towns may be extremely popular during the warmer months but struggle to attract bookings during winter. Make sure the property isn’t reliant on one thing – if it’s near a popular tourist attraction that later closes, that will likely affect your yields.

Your best bet to determine the competition is to do a quick search on Airbnb, which will show other properties in the target area, if any. Some property types and suburbs are simply not in high demand, and while you may believe you have the best property in the area – and maybe you do – that doesn’t mean it would make a great Airbnb property.

Property presentation

Assuming you’re comfortable with the cash flow risk and your property is in an area that will have sufficient demand, you next need to determine how to present your property to the market in its best light.

Look around and review your property through your guests’ eyes. If it’s already furnished, you may need to declutter and make the place feel comfortable – but don’t make it too personal. If you have an empty property, this gives you an opportunity to style and fit out the property to suit the market you’re targeting. Are you targeting families or young professionals?

Decorate to suit your target market, but also be mindful that you want your property to appeal to as many people as possible, so a more conservative approach will appeal to a wider market and increase your chance of attracting more guests. People are typically looking for a more homely stay than a hotel – something with a little more warmth.

However, there’s a fine balance that you need to strike between giving your guests the warm and fuzzies and not making it too personal. At the same time, it needs to be clean and tidy but not too clinical with no personality. Your personal taste may not appeal to others, so it’s best to ask your friends, family and trusted advisors what they want to see in a short-stay property when they are travelling.

The listing

How many times have you jumped online and glossed over the listings that have crappy photos where the images are fuzzy, or purely of the surrounding area and not the property itself? Don’t be that host. Get professional photos taken – spend some money and show your guests that you’re taking this seriously. Don’t take them yourself or have them done by your friend who’s a budding photographer; pay the money, because a good property photographer will be able to tell a story through your property’s images, and this takes considerable skill and styling. It’s worth it.

You’ll also need to write an engaging description, covering in detail what’s included in the property. Are you offering a room or the entire house? It’s better to be specific than risk a bad property review, which will translate to fewer bookings because the reviews are a vital part of a guest’s decision process.

Savvy hosts create a ‘brand’ for their property and play on specific themes or details, complemented by images that support the narrative. For example, a house may be marketed as highly sustainable and green, with its recycled materials or passive design; or it might have beautiful period details and be on a single level, which may appeal to older guests who don’t want stairs.

Finally, the price – don’t set it too high. It’s better to start with a lower price and test the market. See how you go with bookings and adjust your price accordingly – even if you feel your property is worth a higher price. As I mentioned before, Airbnb guests rely heavily on reviews, so you will want to attract people to get your first bookings.

If you’re the ‘new listing on the block’, you may only be able to compete on price at first – even if you have a stellar location and fancy furniture. It can take a good 12 months to get the pricing right for your property, as there will likely be variables that you haven’t considered and seasonal changes that require regular price adjustments.

Making Airbnb work

To make this strategy work, there are a few things that will need to work in your favour. Firstly, you must be extremely selective about the property you choose. For example, you might buy a property in a high-rise tower with amazing views, and it looks great in isolation, but you didn’t do any research on the area; soon enough there’s another tower being built next door blocking the view that was the only thing that sold the property to guests in the first place. You’ll have a property looking into another building instead, and you’ll have to drop your price.

Think about how you like to travel. You want to ensure your property has:

• Plenty of natural light, so that guests don’t feel as if they are living in a shoebox. When it’s dark, you don’t want the lack of light to affect your rent or nightly rates.
• A great location that’s close to amenities. Think of the reasons why people travel: in most cases, it’s to be close to a business district, which then also needs to be close to cafés, bars and restaurants because if they’re travelling for business they’re going to want to go out for dinner.
• Excellent maintenance. Your cash flow will go up and down like a yo-yo with all the bits and pieces you’ll need to fix or be across to meet guests’ expectations. Guests expect much more than tenants, so you need to be ready to meet their requests and needs – and get used to long days.
• An external cleaning company. Take it from me – if you lease the bed linen and towels instead of buying them, you’ll never look back. Cleaners will come in, rip everything off and take it away, saving you a huge chunk of time.

Property management

While guests breeze in and out of their short-stay rental, there’s a lot of work going on behind the scenes. Hosts must manage check-in and check-out, as well as follow up guest feedback (good and bad) and coordinate cleaners and other maintenance items. This can be quite time-consuming if you’re managing it all yourself. After all, you’re providing accommodation services akin to a hotel, so it’s no wonder guests expect high levels of service from their host when they’re used to receiving excellent service from other hosts and from hotel chains. The bar has been set pretty high, so you need to be ‘on your game’ all the time.

What’s important to note is that there are now professional companies that specialise in Airbnb management. These companies are experts in analysing cash flows, occupancy rates, pricing strategy, cleaning services and, of course, guest services. If you’re serious about using Airbnb to increase yields on your investment property, you can mitigate the risks involved by using a professional management company to manage all of this for you.

While the initial fees may appear high, remember they are dealing with scores of ‘tenants’ (guests) for your property every year. They’re dealing with every issue, such as the wi-fi not working, toilet paper running out and cleaners not turning up, which means time saved by you not having to deal with this. As a result, they do a lot more work than a traditional property manager with a single tenant on a 12-month lease.

As with other ‘hands-on’ property strategies, make sure you have factored your own time into your figures. If you’re going to spend an extra 10 hours a week doing this, what is that time worth to you? What is your hourly rate? Deduct that from your expected return and your true profit is the difference between that and the long-term rental yield.

Getting a loan

To make this strategy work, the banks or any lender will wish to see consistent income over two years. So, if you’re getting $1000 one month, then $3000 the next, then $500, and then $2000, the banks aren’t going to use that income to assist with your servicing. Banks want to see stability, as anyone who’s self-employed would know.

If you’re applying for a loan, they will look at your last two years’ tax returns and average out your income. If it’s up and down, they’ll smooth it out and spit out an average. Of course, you don’t look at the property the same way. You might have a few good months over Christmas and Easter, but most months you’re not hitting that consistent income, and often the banks will want to see two years’ history on that property. So, from a lending perspective, short-stay properties can trip you up or slow you down, because it’s the inconsistency that the banks don’t like.

If you’re going to use short-stay accommodation to build your portfolio thinking you’re getting a higher yield and be able to borrow more money, it might take you two years of good income, similar to being self-employed. That’s two years of good income, not just two years of tax returns. This means spending two years building your Airbnb business, getting the reviews in, increasing your prices and building up the financials so you can borrow more money. Put simply, you need to take it seriously and not just ‘give it a go’. There are several banks or vendors that won’t accept Airbnb income, so you need to be aware of who will look at you from a lending perspective.

The last word

This can be an amazing strategy to increase yields. Who doesn’t want to watch the money roll in week after week? But, as with all our strategies, you’ll need to weigh up the time involved in doing it yourself versus engaging an external professional company to manage the entire process for you. As one of my favourite sayings goes, “Just because you can, doesn’t mean you should.”

This is an edited extract from Property Fit (Major Street Publishing, $29.99), republished with permission.

Cover image source: HALCHYNSKA KSENIIA/Shutterstock.com

About Luke Harris

Luke Harris is the CEO of The Property Mentors. He has more than two decades of personal experience across business, property and investing. He is the co-author of Let’s Get Real and the author of Property Fit.

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