Airbnb investment seems like one of the easier ways to become a real estate mogul. A growing number of people are jumping in, even the current real estate moguls. They see the potential for a great return on the investment. Yet, is the Airbnb business for everyone? It's important to do some research before jumping into the home-sharing craze.
Understanding the Market
Before investing time, sweat and equity into operating an Airbnb, it is important to know and understand the current environment. Conduct research into what kind of profit investors are actually making. Will what you gain in rental price eclipse your initial investment over the long-term? Are visitors to your city using the Airbnb service?
The Airbnb market space is becoming more crowded as big money players are now entering the home-sharing game. In recent times, multifamily property developers like Tricon Capital are able to come in and pay cash for homes in middle-class neighborhoods according to a Tennessee State University researcher Ken Chilton.1 The associate professor of business said in a presentation that many individual investors may not be able to keep up with the near bottomless resources of those developers and may have to look towards less potentially valuable investment properties.
Local Laws Can Have an Effect
The local ordinances and legislation govern where and how Airbnb rentals can operate. Zoning laws determine whether a neighborhood will be residential, for business or dual-use. You may not be able to operate an Airbnb in certain neighborhoods. If it is allowed, you may need to engage the bureaucracy and get a permit or license to begin renting space.
There Will Be Costs
Whether you are looking for an investment property to use for the Airbnb or you’re using the spare bedroom, there's no doubt that you will incur start-up costs.
If you’re buying a new property with cash, that’s great, you’ve covered the initial hurdle. On the other hand, many will have to take out a second mortgage. If you’ve ever purchased a home you are well aware of all of the costs associated with the first mortgage. On top of that five-figure price tag, you’ll have to furnish the place and provide good working appliances. Even if you use your residence for rental space, you will likely need to make a few improvements. How much you spend is up to you.
Another cost you may not have considered is the cost to secure the property. This applies whether you have a rental property or if you’re using your residence. If you have a separate property, you may want to think about buying a home security system with cameras you can monitor remotely. If you are using your home, you may want to install new locks on places to which you want to restrict access. And don't forget the additional insurance to protect it all.
There will of course be operating costs. You’ll need to keep the lights on and perhaps have cable service and broadband Internet with WiFi. The property will have to be maintained. It’s something you can do yourself; however, you may need to hire someone. It's likely that there will also be a fee for processing payments when someone rents from you. The state and local tax board will want their share of the revenue as well.
Slow Down and Save Up
You’ll have to ask yourself if you can weather the storm during the slow months. Can you afford the upkeep of two properties when there is no revenue coming in from the rental? It may be a good idea to have a sizeable amount saved above what you estimate what it would take to purchase a rental property or make improvements to your residence.
Taxes, Fees and Insurance
The IRS and your local and state revenue agencies will have rules on how rental income is reported. Unless you’re only renting for 14 days or less per year, you will have to report the income to the IRS. If you’re using your personal property, you will have few deductions. If you're a DIYer, you won't be able to deduct your own labor, painting, cleaning, repairing. If you are using a rental service like Airbnb they will also take a portion or percentage of your profits as well as asking for a sign-up fee. Your current home insurance policy may cover infrequent visitors. However, if your door becomes a turnstile, you will certainly need a business policy.
Consider Your Business Entity
There are lots of hazards and liabilities that your policy may not cover. Carefully consider the policy AND the business entity that you set up to run your rental. Most landlords don't set up a business entity and by default are Sole Proprietors. That is risky. Sole Props have no liability protection. An injury or death on your property exposes all of your assets to a judgment. This includes your primary residence, accounts, other business assets, and vehicles. A business entity like an LLC (Limited Liability Company) is designed to protect owners from liability. Plus an LLC can choose to be taxed as a C-Corp or S-Corp, and that could be helpful in managing your taxes.
Before you make a monumental move, talk to a financial advisor, tax professional, and business attorney about your options so that you’ll be ready for anything.
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This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.