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Top 5 Things to Consider Before Buying an Airbnb Investment Property Thumbnail

Top 5 Things to Consider Before Buying an Airbnb Investment Property

Many of my clients are considering ways to generate additional income with real estate. 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 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 Especially In The Beach Cities

The local ordinances and legislation governs 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. Recently in The Beach Reporter it was stated that the Manhattan Beach City Council opened the door to allowing short-term rentals within Manhattan Beach by agreeing to consider a length of stay restriction and host fee. Short-term rentals are currently illegal as the city researches options, including holding a public study session. 

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 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 a 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 sizable amount saved above what you estimate what it would take to purchase a rental property or make improvements on 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 a few days out of the 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 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 may need a business policy.

Before you make a monumental move, talk to a financial advisor about your options so that you’ll be ready for anything.

About Angela

Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.

1 https://www.tennessean.com/story/money/2018/04/13/rental-homes-owned-investment-firms-draw-scrutiny-researchers/514806002/

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. 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.