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
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.
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.