Author Topic: Long- v. Short-Term Rental - Pros and Cons?  (Read 4724 times)

cheddarpie

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Long- v. Short-Term Rental - Pros and Cons?
« on: August 07, 2015, 12:33:14 PM »
Hi MMM Team! I'd love your wise advice on an experiment I am thinking of undertaking.

I have a 2BR basement apartment in my house (separate entrance). It's fine, but not super great -- very low ceilings and poor light. It's a basement. I currently rent it for $1150/month. My tenants are moving out at the end of the month and I think I could probably get more for it now since it's a great location (near a university, great walk score) and hot rental market; I would list it around $1275.

Instead of renting it out as normal, I'm considering updating it a bit with new carpet and paint (and possibly some required bathroom/plumbing updates) and furnishing it to have for a short-term rental, possibly through AirBnB but more likely month-to-month rentals through postlets/craigslist. I haven't developed a full budget yet, but assuming I spent $5000 on the renovation, I would need to rent it for about $1700/month to "break even" in a year (i.e., the equivalent of $1200/mo rent + the updates).

The "Pros" I see of this approach are that I have the potential to make more money, I will have fun doing the work and choosing furnishings (I share my living space with a roommate and like the anti-Mustachian idea of having a space that's more "mine"), and I'll have the space available for guests when I know my family is going to visit (they usually plan a year in advance). The cons are of course, spending money I don't need to and the risk that I won't make what I need to on it. The low ceilings and lack of light are quite limiting. The AirBnB option would mean a lot more work, turnover, risk, and a cut of the money going to the company, but also potential for higher nightly rates.

What's the Mustachian thing to do here?

Anyone have experience with short-term furnished rentals v. long-term unfurnished?

What do you think about AirBnB as an option? (Note that I own my house and it's legal here)

Any tips on listing a furnished place -- better to call it temporary, sublet, month-to-month, or something else?

Thanks!!

Eli



LadyStache in Baja

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #1 on: August 07, 2015, 01:21:56 PM »
Get on airbnb and check out the competition in your area.  If there's a lot, it could be good...it means that there's a market for weekly stays.  Try typing in specific dates and see how many still come up as available.  If all of them do, for lots of different dates, then maybe you'll have a lot of vacancies.

Also, I love airbnb and vrbo way more than craigslist.  Craigslist has just been lots of showings and no bites.  But on airbnb and vrbo, the renter researches online and books online, so you don't waste as much of your time.

I have a rental in a high tourism area, so people come here on vacations.  Will people vacation in your area?  I can't see how a short-term rental would attract renters if it wasn't in a vacation area, unless maybe people come to watch a football game and stay the weekend?

cheddarpie

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #2 on: August 07, 2015, 02:01:16 PM »
Thanks! Great idea -- I have looked at AirBnb for nightly price comparisons, but not to see how much is actually getting booked. I will do that now ...

I'm in Seattle, so we get a lot of tourists in the summer, but not so much the rest of the year. Being close to a university and football stadium (great point!!) may make it more likely to get folks. We also have a ton of people moving here, so I was thinking it might be good for new-to-towners as they are looking for a more permanent place.

totoro

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #3 on: August 07, 2015, 04:17:22 PM »
I have Airbnb rentals that used to be long-term rentals.

The things I like about Airbnb are that:

a. you will make more money - between 30%-50% more net in our case
b. your place will be cleaner than with long-term tenants as it will be regularly cleaned to a high standard in between short term tenants
c. no move-in move-out wear and tear
d. furnished to a high standard
e. you can use it for your guests

The downside is that you go from fairly hands-off - like almost never having to deal with things - to a service business with public reviews and pressure to maintain ratings.  The more reservations you have in a month the more you make but the more time you'll spend on it too.  You need to either clean or hire cleaners and it is hard to find good reliable cleaners.

In your case you are in a good location but you'll have to gauge the impact of the low ceilings on your ability to rent short-term.  If Airbnb doesn't work out over the winter for you you could still charge more for a long-term furnished rental.  Improving the space will likely benefit your equity in any event.  Keep in mind costs $3500-$5000 to furnish a suite even using craigslist for some or all of the furniture.



sammybiker

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #4 on: August 07, 2015, 10:27:54 PM »
Don't forget to add utilities cost back into the equation.  This can take a good chunk out of your gross when operating as an airbnb rental where as with a traditional rental, this cost is passed onto the tenant.

Once you really nail down your net vs net, you may find that the extra $200-300 isn't worth the hassle. 

totoro

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #5 on: August 08, 2015, 12:30:08 PM »
Yes, there is a good example of the costs of Airbnb here: http://affordanything.com/2014/11/04/the-airbnb-experiment-42-guests-1-police-visit-and-19000/

Some places are worth more per night short-term by far and others not so much.  In our case we have five Airbnb rentals operating fairly recently.  Our very small one bedroom has been listed for the longest - since January 1.  Prior to Airbnb we rented it out monthly for $800 a month including heat and hot water but not wifi.  The net was approximately $730.

From January 1-July 31 we have made $8,622 with Airbnb.  Our costs, not including time or furnishing costs, have been $1,840 for a net of $6,794 over seven months including money set aside for future repairs.  We have made $957.71 net per month on Airbnb - or $227.71 more per month. 

It takes me about 20 minutes per booking of my time and there have been 18 bookings so I've spent 6 hours on this.  I have also cleaned twice as our cleaners were not available but have paid myself for this.  That is a hassle and something it doesn't make sense for me to do as I have a higher hourly wage than a cleaner gets, but it has proven necessary at times and I have put teenagers to work helping so they have earned money too.

You might think $227.71 per month is not worth it but it is 31% more than we were receiving before and it is $265.66 per hour for my time after we pay off the furnishing and account for our time in setting it up (we have a one-year payback period on this).   

We have added a cleaning fee to the listing recently and this will increase revenues by approximately $120 per month.  In addition, we have had the benefit of family and friends stay in the suite and our tenants upstairs have also had family stay and an extra approx. $4100.00 per year net.

In our case the effort to fix up and furnish has paid off more for our higher value suites.   We have two that are recent additions to Airbnb.   

For one we have gone from $1200 a month net rent to $3100 a month net (158% more) for August with a long-term rental from September-December at $1650 net a month.  We probably set the long-term rate a bit low, but that is still $450 a month (36%) more than before and we won't have to deal with the turnover.  Our parents will have the place to stay in over Christmas.  We should make approximately $7000 more a year with Airbnb/furnished rentals for this suite.

For the second we have gone from $1400 net a month to $2800 net a month (100% more) for August.  The suite is $1700 a month net (21% more) on a long term rental from September to April.  If the numbers work out for the rest of the year we should make at least $6000 more per year with Airbnb/furnished rentals for this suite.

An additional $17,100 a year is worth the extra effort for us at this point.  We are in a higher tax bracket but the extra income we have made has been put into improving and furnishing the properties.  Much of this is tax deductible which reduces our taxable income on the properties a lot for this year and decreased the after-tax dollars required to repair and increase the aesthetics of the properties which we were planning to do anyway.

Going forward it makes sense for us to decrease our income so we pay less tax on the net rental income.  Our retirement requirements are only $3000/month so we are more than half-way there with these three rentals alone as the properties were cash flow positive to start (one marginally so).

The thing I really like about the rental property approach is that the mortgages are being paid down by other peoples money and the properties are appreciating over time while providing a place to live and income.

The thing I may get tired of with Airbnb is managing a service business.  We may at some point just do long-term furnished rentals instead.

cheddarpie

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #6 on: August 08, 2015, 01:59:44 PM »
Don't forget to add utilities cost back into the equation.  This can take a good chunk out of your gross when operating as an airbnb rental where as with a traditional rental, this cost is passed onto the tenant.

Great point -- I hadn't really thought about this. Our utilities (water and garbage) are extraordinarily expensive compared to prior places I've lived (i.e., east coast, where water is free and nobody cares about garbage).

Thanks!

cheddarpie

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #7 on: August 08, 2015, 02:06:10 PM »
Yes, there is a good example of the costs of Airbnb here: http://affordanything.com/2014/11/04/the-airbnb-experiment-42-guests-1-police-visit-and-19000/

Thanks so much for this and the summary of your experience. If I could net even $200/mo. more, that would be well worth it for me. I am also looking to recoup costs within a year, but you made a good point I hadn't thought about that maybe even the furnishings are tax deductible since this is a separate unit that will be used solely for business purposes? I'll double check on that one (maybe it's just the depreciation), but that could make a difference. I know the utilities would be deductible, at least.

I am feeling like I want to give this a shot and see what happens -- try for a couple of longer-term short-term rentals (1 mo. +), put it on AirBnb, and see what happens. If it doesn't work, I will be in the hole a bit, but not dramatically so, and I can always put it back on the rental market later.


ben4prez

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #8 on: August 10, 2015, 06:29:49 PM »
My Wife and I have had incredible success using Airbnb vs a long term rental.  We have two units in a booming downtown area in Texas -- long term rent prices would be about $1750/mo and $1500/mo. One is a 1br loft (about 650 sq ft), the other a 1br (about 550 sq ft).

With airbnb, we on average clear over $5k Gross for EACH...and in some months (big festivals), even more (our record was $21,000, gross, in one month this past spring).  Net after taxes, mortgage, utilities, cleaning fees, etc is about $1500 profit for each. 

Taxes take a huge chunk out...esp in areas with a defined hotel tax (15 percent). 

We blindly stumbled into this -- happened to own the properties from a previous period living there, and wanted to try something new.  There is a lot of time involved in managing it, but it's spaced out, and each booking takes 5-10 minutes of total time.  But given the right location, pricing strategy, and focusing on getting really good reviews, you can do very well.  That said, there are increasing calls for legislative restrictions...but I guess in that case we'd just convert back to long-term or sell.

totoro

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #9 on: August 10, 2015, 08:13:45 PM »
Where in Texas are you?

Ricky

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #10 on: August 10, 2015, 09:17:26 PM »
Where in Texas are you?

I would assume Austin.

ben4prez

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #11 on: August 11, 2015, 08:16:48 PM »
Austin is correct...

cheddarpie

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Re: Long- v. Short-Term Rental - Pros and Cons?
« Reply #12 on: August 14, 2015, 10:57:55 AM »
That's great you've had such a good experience -- If I was in Austin, it would be a no-brainer, I've heard such great/crazy things about the AirBnB market there for festivals. Good on you!!