Airbnb - A Smart Investment?

Real Estate

The rage of Airbnb rentals (and stuff to keep in mind about value)


March 30, 2018 By Ryan Lundquist 


The owner has a cash cow. Her second unit is bringing in $3,300 per month as an Airbnb rental, and it’s paying her mortgage. Since these types of rentals are all the rage right now, let’s talk about some important details to keep in mind from a value perspective. This isn’t meant to be exhaustive, but I wanted to share some things on my mind. I’d love to hear your take in the comments.

 

1) Airbnb rent vs. market rent: Having an Airbnb rental is really more like a hotel since the guest is only there for a short period of time. In the owner’s case above she was getting $3,300 per month for Airbnb rent, but market rent with a tenant would have been $1,900. In other words, Airbnb was renting 73% higher in this case. Granted, there are expenses and taxes to consider, so the owner is not actually netting 73% more.

2) Lenders and market rent: Typically lenders are going to ask residential appraisers to use market rent in appraisal reports instead of a short-term transient rent (“hotel” rent). Thus when appraisers do The Income Approach for a 2-4 unit residential property, you can expect the appraiser to use market rent instead of a short-term rent that might be much higher. We can also expect for the real estate community to keep thinking through how to value properties like this because it’s an emerging market. For appraiser colleagues, which rent do you use and why? How do you deal with highest and best use?

3) Investors & seller expectations: In some cases investors can make more money with a residential property by doing a short-term rental. They can buy at fair market value based on fair market rents, but then attract higher-than-market rents through a short-term rental setup. Many savvy investors have been doing this by targeting properties near Downtown. Yet sellers trying to sell a property with a short-term rental would be wise to recognize that not everyone wants to run a short-term rental business. This means buyers are going to be looking at market rents instead of just “hotel rent” when assessing whether a deal works or not. So if you’re broadcasting the unit can rent for $3,300 as a short-term rental, but it’s market rent is $1,900, buyers can’t ignore the $1,900 (and the lenders probably won’t ignore that number either). Let’s not forget to look at similar sales too. It’s easy to say, “I have an accessory dwelling and it’s a cash cow because of Airbnb.” I get that, but what have other properties with accessory dwellings been selling for? Let’s look to the market for the proof of value.

4) The fine print and a 12% tax: Owners need to know the fine print. In the City of Sacramento a rental is deemed “short term” if an owner is going to rent to someone for less than 30 consecutive days, and a short-term rental permit is needed (cost is $125 per year). If you’re going to rent a house or room for longer than 90 days during a calendar year, you’ll need a conditional use permit. But if you live in part of the property as your primary residence you only need a short-term rental permit. Oh, and there’s a 12% transient occupancy tax that Airbnb (or sometimes the owner if not using a third party) will pay to the city. Lastly, the city will require the owner to have a business operation tax account because the residential property is being used like a hotel.