Becoming a Short-Term Rental Host? Here’s What You Need to Know

by Jessica Sommerfield · 16 comments

key on front door
Many singles with expensive leases in major cities, traveling retirees with empty homes, and couples with a spare room and a desperate need for cash are looking for ways to make the space they rent or own pay for itself. Many budget-conscious vacationers, seasonal university-town students, hotel-weary business travelers are looking for cheap, interesting, short-term accommodations. Where the two sets of people often meet is a growing marketplace of online communities that connect hosts with travelers – services like Airbnb, HomeAway, VRBO, and FlipKey.

Although I can’t rent out a room at the moment, the idea appeals to me. Not only is being a short-term rental host a way to earn extra cash; it presents the opportunity to ‘travel,’ learn, and widen your perspective as you meet all sorts of interesting people from different cultures and walks of life – without having to leave your home.

Before getting too caught up in the possibilities and contingencies (what it involves, the legalities, the material risks), the first question I’d need to answer is whether it would be profitable for me. Unfortunately, that requires a little math.

The Math of Short-Term Renting: Arbitrage

Although services like Airbnb act as the mediator between travelers and hosts, they are not what creates the market force known as “rental arbitrage” — a fancy term for the earning potential created when the daily rental rate exceeds the daily rental/payment cost. Crunching these numbers is the first serious step to determining if being a short-term rental host would be profitable for you. There are four steps:

  • Search out the average daily weekday and weekend rental rate for similar homes in your area. Check Airbnb listings, homes for rent in the local newspaper, etc. This is what you could expect to charge.
  • Calculate the average weighted rental rate. Multiply the weekday rate by 5 and the weekend rate by 2, then divide by 7.
  • Divide your monthly lease/house payment by 30. This is your daily rental cost.
  • Divide the average weighted rate (results of step 2) by your daily rental cost.

If your result is 1, it means you’d have to rent out your home the entire month to cover your housing expense. If you own and live in your home and the goal is just to supplement your income, this might be fine. On the other hand, if you have (or are looking for) a dedicated rental unit, you’ll need a 2 or greater (common for urban areas) to make it worthwhile once other expenses are added in. Basically, the larger the number is, the fewer days you’d have to rent just to cover your housing costs, and the greater number of days you’d be making a profit.

Other Financial Considerations

Insurance:
Besides the basic equation to determine whether you’d make a profit, there’s insurance to consider. Services like Airbnb offer $1 million damage guarantee (funded by the fees they collect from renters and hosts). Most homeowners and landlord policies will not cover short-term rental claims because the venture is considered a business and falls under their ‘business activity exclusion.’ Some insurance carriers will write dedicated policies for short-term renting, but it’s rare. Experts suggest getting a business insurance policy; in fact, some cities require it. Business insurance doesn’t cover personal liability, however, so you’d need to add it if you were concerned about renter accidents you could be blamed for.

Amenities:
You’d also be responsible for providing hotel-like amenities for your guests. After all, you’ll want them to have a comfortable experience so they give you a good review and send their friends your way. Initially, you might need to purchase nice furniture items, bedding, and towels; long-term, you’d need to stock personal toiletries and other incidentals. All of these expenses need to be considered at the beginning, since they could delay the rental’s profitability.

Short-Term Renting: Financial Freedom or Fallacy?

The answer to this question will be different for everyone. Renting your home or apartment to weary travelers might seem like an easy and interesting way to earn money, but if the numbers don’t add up, it just becomes hospitality.

Have you ever rented out a room or your home to strangers? Thought about it? I’d love to hear your experiences, tips or concerns.

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{ read the comments below or add one }

  • Arminius Aurelius says:

    I bought a 2 bedroom summer cottage on a lake outside of Northampton, Mass. back in 1974. Stone fireplace in the living room and about 18 foot from the waters edge. Cost me $22,900.00. Sold it about 6 years later because I had to move close to Boston which was about 3 hours away. Owning several restaurants, I had little free time. Thought I would buy another cottage closer to the new restaurant. As it turned out I was too busy to look for one. Had I kept the cottage, I could have rented it out every summer which would have paid for the property taxes and maintenance.

    To buy that cottage now would cost me about $ 175,000.00. Biggest mistake I ever made. In the meantime I did buy 2 and 3 family houses and commercial properties and am quite happy being a landlord.

    • David Ning says:

      Let’s not dwell on possible mistakes because no one will ever know how one decision can affect everything else in their lives.

      At the end of the day, your financial life worked out great so let’s just count our blessings 🙂

  • Ryan G says:

    My wife and I are living overseas right now, but we plan on buying a home when we return to Houston, in the next 6 to 12 months. We are specifically considering a home with a garage apartment in order to rent it out on AirBnB. We have seen places with garage apartments that lease to full time tenants, and that is a really nice source of income. Homes that sell for $350-$500K that have a garage apartment can lease the space for $800-$1000/month, which can be a major help with the mortgage.

    We want to go the AirBnB route as that will allow us to reserve the space for guests & family when we need it, and rent it out the rest of the time. My question for anyone who has rented space through AirBnB is this…
    1) How much money did AirBnB take from your rental? If you rent a room for $100/night, how much do you actually net from that?
    2) What was/is your average occupancy rate?
    3) What is your minimum stay and why?
    4) Do you charge a cleaning fee and why/why not?
    5) Any tips or suggestions for someone considering renting out space on AirBnB?

    • David Ning says:

      With a separate space like a garage unit, are you sure you want to rent it out on AirBnB and deal with the hassle + vacancies? I would think just plain out leasing it longer term is the way to go, but I haven’t looked at the numbers closely.

      Perhaps you can pencil it out when you start looking for that house in Houston in a few months.

      • RyanG says:

        The big advantage is that when we have family or friends coming in from out of town, we can have the space for them. My parents are retired and live in Colorado, but stay on the gulf coast in Texas during the winter. It would be nice to have a separate apartment for them when they come and visit.

        But you may be right. It might be better to get a long term tenant than deal with routine vacancies. My wife has done a lot of research, but the one thing we couldn’t find info on was the cut AirBnB takes.

        • David Ning says:

          Hmm… I would think the cut AirBnB takes is standard and readily available, unless it’s some type of a variable system. It might be better financially to rent the space out full time and just get your family and friends a hotel room when they visit. Of course you lose some of the interaction though. There’s no bad plan so it’s up to you!

          • Ryan G says:

            We’ve talked through the idea of renting full time and getting friends/family a hotel room. While that might be the best way to easily maximize the earning potential of the extra space, what ends up happening is that my parents get their feelings hurt if we invite them to town for a holiday, but we don’t want them to stay with us. A garage apartment solves this issue perfectly… they can stay with us without having to sleep on an air mattress or displace someone else from their bedroom. Friends might be more willing to stay at a hotel, but neither friends nor family would ever let us pay for the hotel…

            Anyway, it looks like I was able to answer my own first question. AirBnB charges Hosts 3% of the rental fee before taxes and other fees. AirBnB charges travelers between 6-12% depending on the total cost of the rental.

            I found a really good article on Forbes that explains the tax implications of short term (or long term) rentals. One thing to note is that if you rent for less than 15 days per year, you don’t have to report the rental income.

            http://www.forbes.com/sites/anthonynitti/2015/11/09/renting-your-home-on-airbnb-be-aware-of-the-tax-consequences/#540fcc9329ae

          • David Ning says:

            The “hurt feeling” issue can be tricky, but you are right – having the garage apartment is the perfect way to be accommodating to all your friends and family.

            Thanks for sharing the article on the fees too. The less than 15 days per year tax rule is an important point to consider. I wonder if AirBnB has some automated reporting system if you rent the unit out for more than 15 days.

  • Ethan says:

    If I had a bigger house I would love to do the airbnb thing, not just for the extra money but because I always thought it’d be fun to get to meet all the interesting characters who’d end up coming to stay with me (as you can see I’m a bit more optimistic and not worried about ending up with “creepy” people or whatever). Unfortunately it’s just not feasible right now given the size of my current place. I’d rather have an actual room for them instead of just having them sleep in my living room or something.

    • David Ning says:

      I bet you will find that creepy visitors will be interesting. At the very least, his stay will be a good story to share with friends.

      Remember to come back to share your stories when you have the space to rent out.

  • Jessica Sommerfield says:

    I can totally understand that, Latoya! If I had kids, the only I would consider it is if I had a dedicated rental unit separate from my home, or only rented my own home out while away on vacation with my family.

  • Now that I have kids, I don’t think I would be willing to take the risk. Even without them I don’t know how comfortable I would be sharing space with a stranger, but if I didn’t have to be there and the space was inpersonal, I’d totally consider it.

    • David Ning says:

      That’s a legitimate concern Latoya. You just don’t know what type of influence the renters will have on your kids. Maybe wait till you become an empty nester before you give this idea another shot.

  • I have always secretly wanted to host an airbnb or vrbo. I have even thought about building a tiny house in a desirable area and renting that out short term.

    Maybe in the future I will eventually just do it already but I really love the idea of it.

    • Jessica Sommerfield says:

      I hadn’t thought about it until it became popular in the last few years, but I’d totally do it! I’d probably use some kind of service like AirBnb to reduce the risks, but it’d be a great way to earn a little extra money and maybe get to meet some interesting people.

    • David Ning says:

      To you and Jessica, I’d say just do it! Try it out, because you may actually end up loving to meet interesting people even more than the eztra income!

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