The income potential for Airbnb rental property is quite apparent to investors. Even with the rise in popularity of Airbnb real estate investing over the years, there are still Airbnb investment opportunities available. It is possible to make more money with Airbnb compared to listing the property for long-term renting. However, earning revenue from this strategy may not be as simple as it seems. There are several risks of Airbnb real estate investing to consider before you get started.
So, how do you start an Airbnb business with these risks and still generate a high return on investment? Don’t worry! Here are 5 risks of Airbnb real estate investing and how to avoid them.
1. Fierce Competition
With the increasing popularity of the Airbnb business, one of the major risks of Airbnb real estate investing is fierce competition. Today, Airbnb operates in over 100,000 cities with more than 6,000,000 listings. Any beginner investor will have to compete will several other Airbnb hosts in the market. This risk can leave your Airbnb investment non-operational.
To beat the competition, your Airbnb investment should be different from others within your location. You can do this by ensuring your prices are slightly lower than those of competitors. You can also spend a little more cash on better amenities and offer more and better services. Purchase good quality furniture, bedding, bath accessories, etc.
Welcome your guests in style with gift baskets and brochures that include a local map and recommendations. This will give your guests a better experience. When Airbnb guests are happy and satisfied with the services, they tend to leave good Airbnb reviews. You should also invest in alluring professional photos for your Airbnb profile to attract more guests.
2. Vacancy Risk
The possibility of having a high vacancy rate is also one of the risks of Airbnb real estate investing. Even though it is possible to make more money with an Airbnb rental relative to a long-term rental, there are no guarantees. Bookings tend to be seasonal and hard to predict. There are times when you will have many bookings and be followed with a dry period. Unlike with long-term rentals where you get monthly income, Airbnb income can be erratic.
Definitely, you wouldn’t want your Airbnb rental property to just sit empty. A low Airbnb occupancy rate can reduce your income, leading to negative cash flow. The uncertainty of Airbnb income also makes cash flow planning quite difficult, especially if you have a tight budget. This can be frustrating if you are relying on Airbnb rental income to pay off your monthly expenses like insurance, mortgage, property taxes, etc.
Related: How to Estimate Airbnb Income Before Buying a Rental Property
To overcome the vacancy risk, you need to select a location with high demand. Such locations tend to be near tourist attractions, good transportation networks, and other amenities. Once you find a good location, you can use Mashvisor’s Airbnb profit calculator to calculate Airbnb occupancy rate, together with other financial metrics like cap rate and cash on cash return. This tool allows you to search and compare several Airbnb rental properties and see which one has a good return on investment. After hosting for some time, you can check your Airbnb income statement to see if your investment is still viable.
Related: Airbnb Profit Calculator: The Ultimate Real Estate Investment Tool
3. Legal Airbnb Issues
Airbnb hosting is not legal everywhere. This is also one of the critical Airbnb investment risks to be aware of. There are many areas across the United States that have enforced regulations to restrict Airbnb use. Affordable housing is hard to find and some local governments establish regulations for short-term rentals in an effort to encourage more long-term rentals. Some cities have banned Airbnb while others are looking into banning it. Airbnb hosts may also be required to acquire special permits or licenses. If you are not compliant with state and city regulations, you risk paying penalties or even getting severe jail time.
So, how do you avoid this risk? Before listing your property on Airbnb, carefully review the local regulations pertaining to short-term rentals. You can reach out to your local city council to get detail information about the regulations in the area. You also need to remain vigilant and stay up-to-date on the Airbnb regulations in your location.
Related: 8 Best Cities for Airbnb Investment in 2019
4. Potential Damage to Rental Property
Probably one of the biggest risks of Airbnb real estate investing is damage to rental property. Most stays go without incidents of guests damaging your property. However, there are some stories of careless guests damaging expensive furniture or appliances in the house. Some hosts have reported that their guests either got drunk or into fights and ended up shattering house windows or breaking other sections of the rental property. Sometimes damage to the rental property may be accidental. Whichever way, damage to the rental property can cause considerable inconvenience and repair costs.
Although Airbnb’s Host Guarantee program provides some assurance, it may not cover everything. It may also be a hassle you might not want to deal with. Airbnb landlords can choose to charge guests for damages to avoid incurring the cost. Upon receiving guests, make sure you warn them in advance that they will be responsible for any damages to the property. For instance, you could write a manual outlining all the precautions and penalties that guests ought to consider.
5. Bad Guests
When hosting your property on Airbnb, there’s also the risk of having bad guests. This is one of the risks of Airbnb that most potential investors dread. Although most guests are usually responsible and polite, you will sometimes encounter guests with anti-social behavior. There are times when guests can refuse to leave in time and stay for a longer period than they have paid for. You may also encounter some guests who are excessively loud and annoying. Others can even fail to pay their rent in time or refuse to pay at all. The worst Airbnb guests are those who are malicious and leave bad Airbnb guest reviews no matter how hard you try. You may do your best to offer the best experience to your guests but there are some who will still be unhappy. Some guests may just not be a good fit for your rental property.
It is usually a matter of chance who your guests turn out to be. Although there is no certain way to prevent having bad guests, you can still take some measures to mitigate the risk. First, you need to actively screen your potential Airbnb guests. Look at reviews posted by other hosts on their Airbnb profiles. Do not consider those who have many bad reviews. Also, ask your guests questions about their trip, their intentions, how long they intend to stay, etc. This can give you some insight into the kind of people they are.
The Bottom Line
The biggest advantage of Airbnb real estate investing is the potential cash flow. Short-term rentals can typically generate far more rental income than when renting out long-term. However, there will always be some risks of real estate investing and Airbnb is no exception. Having Airbnb guests in your rental property on a regular basis does open you up to some risk. These Airbnb risks can significantly sabotage your success.
By assessing these potential risks of Airbnb real estate investing, you will be in a better position to come up with ways to overcome them. Also, to protect yourself from the inevitable risks of Airbnb real estate investing, be sure to purchase investment property insurance tailored to short-term rentals.
Are you planning on buying an Airbnb investment? Be sure to use Mashvisor to learn more Airbnb tips. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.