Is Airbnb Hosting Worth It?
We live in the era of the sharing economy, side hustles, and stagnant wages. Is it worth trying to supplement your salary with one of the popular platforms like Uber, Lyft, Airbnb, or Etsy?
Regulation has increased, tax collectors are paying attention, barriers to entry for new competitors are low, and price discovery is easy for consumers. Remembering back to my economics classes, that is a recipe for perfect competition, not a way to gain wealth (unless you have pre-IPO shares in those unicorn companies!).
Take a look at Uber and Lyft. There has been a race to the bottom for ride sharing drivers, who typically make minimum wage after factoring in gas, maintenance, and depreciation. Great for consumers, not great for drivers.
Considering this changing competitive and regulatory landscape, what better way to find the answer than with an experiment. Over the next year, I’ll be posting a series on why we decided to try Airbnb, specific details of how we got started, and progress reports. While I can’t say if it will be worth it in your situation, it will be a helpful reality check in a world of hype and easy money schemes.
Data is hard to come by, but Airbnb appears to be the most lucrative sharing economy option.
First, a quick primer on Airbnb.
All companies have a myth of creation. In Airbnb’s case, it was two guys named Brian and Joe who advertised a few air mattresses and breakfast for attendees at a San Francisco conference in 2008.
Fast forward ten years and a name change later, and they oversee a company worth $30 billion. That puts them right between Marriott International and Hilton Hotels. Not too shabby!
How did a scrappy upstart take on established industry players? Like many sharing economy companies, Airbnb offers an easy way for users to monetize underutilized assets. In this case, lodging.
Airbnb was also a new and nimble entrant in a staid industry and regulators have been chasing them ever since.
Just like Amazon’s early sales tax loophole gave it an unfair price advantage against competitors such as Barnes & Noble, Airbnb hosts skirted many existing lodging and property taxes, which offered a compelling price difference to hotels. Research from the Financial Times for stays in London indicates that “around a third of the $100 saving you make over the price of an average hotel room is due to tax advantages that favour Airbnb’s business model.”
Airbnb hasn’t limited its disruption to just the hotel industry. It has also thrown a wrench in the rental market.
Enterprising early adopters quickly realized the juicy untaxed profits from their initial listing could be scaled by adding more units. Why not rent multiple apartments across town (or in the same building!), furnish them cheaply, and earn the difference between the nightly rate revenue and the monthly rent cost. Profit!
Airbnb rental arbitrage was born, followed by a flood of get-rich-quick Airbnb gurus and upset neighbors and landlords.
Today’s hosting environment is very different from the Wild West of Airbnb hosting a few short years ago.
Many cities are cracking down by stipulating that only primary residences can be rented, limiting the number of short-term rental days, adjusting zoning, or outright bans.
San Francisco, the home of Airbnb, limits whole home rentals to 90 days a year and is penalizing the companies, not the hosts, for non-compliance. As the SF Chronicle notes, platforms “face fines of up to $1,000 a day per listing and criminal penalties if they help arrange bookings of unregistered listings.” Listings are down by half!
Nashville, a poster child for Airbnb’s growth, voted on January 23rd to prevent investors from renting out properties in residential areas.
Income inequality and home affordability are growing issues across the US. Arguments can be made on both sides about the social and economic merits of artificially maintaining low-income housing versus discovering the fair market price for lodging, but it’s a worthwhile discussion at the local level.
On the tax side, Airbnb now collects taxes from guests for many state taxes and some local city taxes. This is a big improvement for potential audit issues, but also cuts into the profit margins of hosts.
Landlords have started to work with tenants interested in renting out their space from time to time. Companies like Pillow and Airbnb’s own “Friendly Buildings” program have tailored options to make this seamless and lucrative for everyone involved.
With these changes, is Airbnb still compelling for a new host following the rules?
For better or for worse, we’re about to find out with our crazy Denver Airbnb experiment!
The initial idea was hatched when we began seriously looking for our first home in 2016. Income potential was one of our criteria. Could we find a place that helped pay our mortgage and give us some nice deductions? It took a patient real estate agent, dozens of tours, and a number of offers before something stuck.
One of those offers was accepted for a squat, brick up/down duplex off-MLS at a reasonable price. We ultimately had to walk away due to the greedy seller who scuttled the deal (a tale for another time), but we did happen to meet a neighbor up the street with an identical layout and recent renovations. He was living in the lower unit and renting the upper unit out on Airbnb for 3x what he had made when it was a traditional rental. Our curiosity was piqued.
After beginning to doubt that we would ever find an income property to owner-occupy in the hot metro Denver market, and even going on four single-family tours, we found a century-old duplex across from a park and numerous area attractions. Not only did it offer traditional rental income possibilities, it also had a master bedroom with a separate exterior entrance! From the first tour, this room quickly earned the “Airbnb Room” sobriquet. With all that potential, it only took us 16 months to actually go live on Airbnb.
Why did it take us so long?
There was a lot of deferred maintenance from the previous owner. I don’t think he knew what a screwdriver was – let alone how to use it.
Those HGTV home shows all follow a similar pattern: initial excitement, finding a mentor, unexpected discoveries (water damage! termites! asbestos!), delays and despair, and then eventual triumph. The complete hero’s journey in a tidy 30 minutes.
As any renovating homeowner will tell you, the TV shows don’t prepare you for the daily challenges of a project, and boy, did we pick a project. It became easier to keep the “Airbnb Room” door closed while we worked on renovating other areas of the house. Some day, maybe…
There were changes all around us as well. Denver was wrestling with how to handle short-term rentals, which were illegal under city law. In June of 2016, a hotly-debated policy was approved to regulate the booming short-term rental market. Starting January 2017, all short-term rentals were limited to primary residences only, had to register with the city, and collect Denver lodger’s tax of 10.75%.
Unsurprisingly, close to 1,000 listings disappeared in the first six months of 2017. With the hosting body blows raining down left and right, Airbnb did start to collect state taxes automatically – squint and you might call that a silver lining.
So why start hosting now despite all the new regulations and all the tax changes?
Google wasn’t the first search engine. Apple didn’t make the first MP3 player. Amazon wasn’t the first online bookstore.
Companies that create a new product or service have many advantages, but later competitors are often able to sidestep the initial pitfalls that the innovator spent years struggling through.
When it comes to Airbnb, there are no inherent switching costs for guests between an established host or a newer host. New hosts are able to observe and mimic successful hosts for decor, descriptions, regulatory best practices, and pricing. Our “Airbnb Room” was able to neatly bypass the upheaval in the Denver short-term rental market.
Put another way, the second mouse gets the cheese.