Hey Gang,
Do any of you know how, first or second hand, how you realistically look at rents and would do a DCF for a 5-10 year hold on a property. Would you look at occupancy based on AIRBNB asking rents for the same area, or there more a strategy involved? How hands free is this idea, or conversely how much management is required. What is the potential negatives of this type on investment?
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Which city? I may be able to help if it is in LA.
not LA, but I'm just looking for some guidance in general. Some numbers I have seem like too good of a deal and I want to whack them from a risk perspective.
It can be a good deal in the short-term, but it is extremely time consuming to keep a short-term rental SFD rented year-round. In LA for a 3-bedroom home in the Hollywood Hills (A+ location), you are lucky to achieve 65%+ occupancy on an annual basis. 5-10 years seems like an eternity in an Airbnb-type rental because it is in the grey area (or illegal) in most cities. Also, you really couldn't pull accurate rent or occupancy data from Airbnb listings, your best bet would be to pick the brain of a successful Airbnb host in your target market with a similar rental.
While I was in the rental business, we came across parties, guns under mattresses, insane guests, credit card/ID fraud, lots of drugs, blood, whole home being ransacked, etc. Airbnb did pay out for damages on the ransacked case though... I'd say don't even bother, lol.
I have a really indepth model i made for a property we were going to covnert to a legal airbnb.we ended up killing the deal because legislation is hard to predict in the short term rent space. Are cost of gp capital was also higher then our roi in a down side rental case. Pm me. i got stuff i can share including airbnb market reports
For those who PM me let me know your thoughts. Additionally, if anyone wants real assumptions /operation advice for this type of operating business LMK.
You'd probably want to analyze it in a similar way as you'd as a hotel. You'll have higher management costs, higher overall vacancy, variable rents.
From a risk perspective, I'd want to know what occupancy I'd need in order to breakeven as my first test.
Agreed with this, the low-hanging fruit is to just find the break-even occupancy on a few different rents (+- of where you think you'd be). If it passes that litmus test you can dig deeper
I have a buddy with a really nice 2 on 1 in Carlsbad, Ca. Great location, garages, unit mix (3br and a 2br) and private access to a boat launch at the Carlsbad Lagoon. After vacancy, expenses and a 15 - 20% management fee, his net income wasn't much higher than being a rental. The risks did not justify the increase in CF.
Also, something to keep in mind is that AirBnB income is taxed as ordinary income vs. rentals which are passive.
You get a 1099 and can offset income with expenses.
Edit: be creative...
Yes you can offset income with expenses. AirBnB rental is treated like an active business, so the net profit after expenses is taxed at your ordinary income rate + SE income.
I used to run an AirBNB in NY (legally gray, but was changing apartments and was curious about the opportunity...). At 80% occupancy I grossed $4900 compared to rent of $2800 (large 1BR apartment with ugly kitchen in chelsea) Gross after fees, extended stay discounts, utilities, and cleaning was $4200. So no, AirBNB is not a direct proxy for rent comps. You can use a DCF, but should use marginal cost of funds. Cash outlay is broker fee (1 to 1.8 months) rent, deposit (1 month) and furnishing (at least one months rent, even if you use craigslist and Amazon). I worked about 12 hours/ month . Also, factor in any potential regulatory fines if you're in NY. 1k first time offense. 7.5k after.
PM me for details. I wouldn't do it again, but if you have capital and no job, it can be profitable. If you do it full time, get your RE broker license.
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