AirBNB (etc) modeling

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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Comments (16)

Aug 7, 2017

Which city? I may be able to help if it is in LA.

Aug 10, 2017

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.

Best Response
Aug 7, 2017

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.

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Aug 10, 2017

I sincerely appreciate the feedback. As Howard Marks says, always know every downside to an investment. With this mantra you can be incredibly successful, as I've found. I have 2-3 of the things that would mitigate your negatives in the scenario. I know 2-3 successful hosts all in their 60s in a market that I semi-understand.

Let me know if you have more negatives, I would appreciate it. Also wish I could give you a bunch more SB's for the feedback.

Aug 7, 2017

Utilities - who pays? Built into a short-term rate, but be careful on longer rentals.
Minimum Length - 1 or 2 nights is bad bad news, but you need to take short rentals to stay occupied.
Pricing Scheme - Static rate won't work, and my market was very seasonal. Also know the value of a long-term (1-yr) traditional rental.
Management - who manages, and what is the cost?
Cleaning/Upkeep - need the same team to clean & maintain, or the house will be sloppy.
Turnaround time - can the rental be cleaned and turned around in 4-6 hours? If not, you lose rental days.
Scheduling - Need to schedule arrival and departures, guest delays or cleaning/maintenance delays can mess you up big time (angry guests, refunds, bad reviews).
Guest Relations - who manages the guest and their questions and concerns? There will be questions, every damn time.
Disputes/Refunds - People will complain and ask for money back, Airbnb handles the claims and can be unpredictable in their resolution methodology.
Neighbors - They'll know, and they'll hate it.
Fraud - So many people with fake credit cards and Google Voice.
Reviews - You are in the customer service business, so you need to bend over backwards for people on vacation. A lot of effort goes into building positive reviews, and crazy people can ruin your reviews very quickly.

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Aug 8, 2017
trojanusc11:

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.

wow this is really interesting, you should write up a full post on this! would love to read more

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Aug 7, 2017

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

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Aug 7, 2017

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.

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Aug 8, 2017

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.

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Aug 8, 2017

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

Aug 8, 2017

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.

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Aug 8, 2017

Also, something to keep in mind is that AirBnB income is taxed as ordinary income vs. rentals which are passive.

Aug 8, 2017

You get a 1099 and can offset income with expenses.
Edit: be creative...

Aug 8, 2017

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.

Aug 8, 2017

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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Aug 10, 2017