The vacation rental conundrum
In general, vacation rentals have been a secondary and riskier source of property investments for the experienced investor. They represent a greater degree of risk than year-round rental units simply because they tend to be seasonal in nature. So cash flows thrown off from any vacation rental property are not uniformly consistent throughout the year. Ultimately, this makes for a greater likelihood of negative cash flows on an annualized basis. In addition, vacation homes, and time shares as well, are difficult to predict performance over the long term, due to market fluctuations and the overall state of the economy – depending on where they are located. Certainly foreign investments are even riskier, having much greater market fluctuations abroad than in the United States. Values can drop unexpectedly based on demand factor fluctuations. After all, vacations are made up of leisure time dollars. Thus, trying to predict future rental income and cash flows based on prior historical data is a tricky proposition. Also, keep in mind that vacation homes and time shares can be difficult to sell quickly should you need to get out fast.
And then came Airbnb…
With the creation of Airbnb in 2009, however, small investors have been able to utilize their own homes as investment property, converting them into part-time hotel lodgings, available to the entire world. Now you don’t have to have a villa overlooking a beach front property to get in on the action. Your small studio apartment in an active metropolitan area can suffice as a money-maker. So what is Airbnb? It’s simply an online booking service that anyone in the world can partake in – either as a host, offering your home or unit for short-term lodging, just like a hotel does. Or, you can be a traveler who actually books a lodging in one of Airbnb’s host sites. And you would book a reservation much like you would for any hotel room. This privately held company has grown exponentially since it began, and now has a twenty billion dollar valuation, and may be going public soon as well.
Airbnb offers the ability to search for lodgings of its hosts’ units by location. For example, host lodgings are quite plentiful in large metro areas. Airbnb NYC is the obvious choice for those travelers looking to book vacation accommodations in New York City. And Airbnb has numerous other search locations as well, world-wide. And they earn their revenue by charging a fee for every transaction, be it for hosts or travelers (though travelers pay a higher fee).
This business model may seem like an excellent source of additional income for the small property investor. However, keep in mind that Airbnb has been getting a great deal of flak over the last couple of years. It seems to be in a constant battle with the hotel industry (naturally). And many recent bad reviews come from a number of horror stories associated with the service. In an online article by George Hobica ( “10 Incredible Airbnb Horror Stories,” FoxNews.com, May 8, 2014), Mr. Hobica lays out many tales of woe associated with the service. As an investor, you should be certainly wary of these reports. He notes that “in many cities, Airbnb is flat out illegal. You can actually be evicted during your stay – it’s happened – and your host could find themselves on the street, right along with you (this has also happened).” He goes on to say that “I also know of users who have booked – and paid for – apartments listed as completely private, only to find them anything but. I’ve heard of hosts informing guests halfway through their stay that they’re moving the guest across town, with no compensation for the hassle. As is to be expected when you book into a stranger’s home (or, when you rent your home out to strangers), things can get plain weird.”
Some cautionary tales
Mr. Hobica summarizes in his article ten different horrendous scenarios. Here are some of the most egregious ones he reports: “The meth addicts…Troy Dayton rented out his home in Oakland, Calif. to a young woman who turned out to be a meth addict and who trashed his home and stole his birth certificate. A request to Airbnb to have his birth certificate replaced and the damages covered was ignored; he was eventually begrudgingly given some site credit. The sudden eviction…Matt Lynley moved to New York ready to take over the world – but first, he’d come face to face with some of Airbnb’s greatest weaknesses. He reportedly wound up having his reservation cancelled when an owner wouldn’t verify a booking (that’s part of Airbnb’s system), and as a result had most of his cash tied up in the pending room charge. Lynley ended up finding another place, but was out the money until Airbnb refunded it. The fraudulent rental…A California man was enjoying his rental in Berlin when a knock came at the door from a man who professed to be the real owner of the unit, wondering what was going on in the apartment. “This guy with a thick Russian accent knocks on my door, demanding what I’m doing in his house. For a moment I thought I was in a bad 80s movie,” he said at the time. The pop-up brothel…Two Stockholm women handed over the keys to their apartment only to find eventually that their flat was being used as a brothel. How’d they find out? The police alerted them that their home had just been raided – two working girls had been caught in the act.”
The problems keep multiplying
Much like driver services like Uber and Lyft Driver, Airbnb has been experiencing many legal problems despite its enormous growth. For this specific reason, property investors should be most concerned with getting involved with the service. For example, in New York City, short term lodgings are highly regulated. A permanent resident of a lodging facility must be present when subletting an apartment for fewer than 30 days. Obviously, this law is designed to protect the extensive hotel business in the city. But Airbnb hosts have run afoul of this particular law on many occasions. In a recent newspaper article by Lisa Fickenscher ( “Airbnb Feeling Effects of Big Apple’s Illegal Rent Crackdown,” The New York Post, June 5, 2015), the reporter notes that “New York’s crackdown on illegal Airbnb rentals is starting to hit home for the controversial Web site, a new analysis shows. Airbnb’s growth had been surging in the Big Apple — but that was before this year when the city put more muscle into purging bad actor landlords that violate short-term rental laws. There were 15,485 illegal listings in New York — out of more than 27,000 — as of May 1, down 3 percent from January, according to insideairbnb.com, an independent Web site that tracks the San Francisco-based company’s listings. The decline is significant because Airbnb’s growth has seemed unstoppable since it launched here in 2009.” Ms. Fickenscher goes on to quote a local politician: “Increased attention to and growing outrage over Airbnb has compelled the city to increase its enforcement against illegal hotel activity,” said Assemblywoman Linda Rosenthal, D-Manhattan. “It’s clear that this has had a chilling effect on the industry.” The crackdown could slow Airbnb’s growth in New York — and potentially other big cities that see the online room-rental company as a threat to affordable housing and the hotel industry.”
I’ve written in several articles here that vacation rentals are inherently riskier investments than year-round rentals. With the advent of Airbnb, and its tremendous success and popularity, property investors should take note of the pitfalls of this type of investment when considering all their investment opportunities in real estate. Certainly, know your local laws regarding short term rentals. And also be wary of one other story that has circulated in the news recently, providing Airbnb with some rather nasty bad publicity. The incident involved a host who rented out their unit to a traveler for a month, only to find that the traveler would not leave. Due to local law, once the traveler occupied the unit for at least 30 days, they were considered a “tenant.” And as such, they were afforded all protections due tenants in tenant law. And the host had to go through a very long, expensive eviction procedure to have the “traveler” removed. Again, property investors need to be very wary of all local ordinances regarding short term stays, as well as landlord/tenant law before using a service such as Airbnb.
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