Eight crazy months, 42 guests, one police incident, and $19,000 in gross income.
I’ve packaged the adventures, ideas and oddities into this blog post.
Brace yourself, this is epic.
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Here’s the background: I own a handful of rental units. One of these is a 1-bed, 1-bath Atlanta apartment, a stainless-steel-and-granite beauty.
This unit could fetch $1,100 per month on a traditional one-year lease.
But I’m too antsy for the normal road.
I subject my life to oddball experimentation for the sake of curiosity and amusement.
So I launched “The Airbnb Experiment,” in which I compare running a vacation rental against a traditional, one-year lease.
The vexing question: Could I earn more as an Airbnb host than I could as a “traditional” landlord?
If so, HOW much more?
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Huh? What’s Airbnb?
Airbnb.com launched during the depths of the 2008 recession.
Its co-founders were roommates in San Francisco who couldn’t afford the rent. To scrape the rent payment together, they started inviting tourists to sleep on air mattresses (“air beds”) in their living room, and they served their guests breakfast — hence the name, “Air Bed and Breakfast,” which later shortened to Airbnb.
By 2010, the company had 15 employees working out of the roommate/founder’s shared apartment. To make room for these employees, the CEO gave up his bedroom and started couch-hopping through Airbnb. He lived out of a suitcase until the company could cough together the funds for an office space.
Their sacrifices paid off: Airbnb grew at an astronomical rate, gathering more than 800,000 listings in 192 countries over the span of six years.
I list my apartment on two vacation-rental websites, Airbnb.com and VRBO.com, although most bookings come from Airbnb.
Three months into the experiment, I penned my first Airbnb update, and now … drumroll please … here’s the latest, 8 months into this project.
Shocking Adventures in the Vacation Rental Biz
Well, it’s official.
When you host 42 guests over the span of 8 months — an average of 5.25 guests per month, or a turnover every 5 to 6 days — you’re bound to get at least one nut job.
That’s precisely what happened. It would be unprofessional to spill the gory details on the Internet, but let’s just say “we called the cops” and leave it at that.
On a lighter note, I can now utter the phrase “we had a domestic” at cocktail parties. It’s my new favorite party trick.
(If I sound jesting or flippant, it’s because I use humor as a coping mechanism. Also, hats off to the City of Atlanta Police Department. Y’all rock.)
After what I’ll dub “The Incident,” I made a game-changing decision: I decided to stop using VRBO entirely, and I refuse to host any “new” Airbnb user. Here’s why:
In a traditional rental, landlords run extensive background checks on the applicant, which include:
- Credit report
- Criminal background
- Employment history
- References from previous landlords
By the time “tenant screening” is done, I know that the applicant holds a B.A. in Music from the University of Texas, made one late payment on their MasterCard, waited tables at TGIFriday’s for 17 months, and got an underage drinking citation when they were 19. Creepy, huh?
Obviously, we can’t go to those lengths for vacation rentals (imagine having your credit screened every time you stay at a hotel?!)
Yet most vacation-rental hosts will ask: “How do I know this guest isn’t a huge weirdo?” The answer: Read the reviews.
On Airbnb, the hosts and guests review one another. (I’m proud to have 18 reviews with a 5-out-of-5-star average.) On VRBO, the guests review the hosts — there’s no vice versa.
There’s an (inevitable) snag in both of those designs.
Airbnb’s skyrocketing popularity is a double-edged sword: Hosts get inquiries from guests without reviews. I’m often contacted by people within a few days after they’ve established a new account.
In the past, I’ve always given new guests a chance. Not anymore. After “The Incident,” I require every guest to have at least one positive review. And I won’t accept any new reservations from VRBO.com, since that website doesn’t have the functionality to evaluate the guests.
(In fairness, 41 out of 42 guests were rockstars. It’s that 1 out of 42 that hogs the spotlight.)
The drawback to my self-imposed policy? My vacancy rate will probably jump.
The benefit? I hopefully won’t need to call the cops again.
Spill Your Numbers: What’s Your Airbnb and VRBO Income?
Speaking of vacancy rates — let’s cut to the chase. Time for all numbers to be revealed.
Note: This isn’t gratuitous “financial porn.” I’m sharing these numbers because I hope it will be an effective teaching tool — and I’ll expand on the lessons carried by these numbers in the rest of the post.
In the past 8 months, the gross income from Airbnb and VRBO came to $19,004.93, which is an average rate of $2,375.62 per month.
Here’s the spreadsheet. “HomeAway” refers to VRBO (it’s the parent company). “Withdrawals” are security deposits I’ve refunded. I’ve been renting this at $99 per night with near-full occupancy (and I’ll be raising the rate to $125+ soon).
But wait! “Gross” revenue is meaningless. Let’s check out the expenses:
The results are in: Being an Airbnb host allows me to earn, on average, $605.55 per month more than being a traditional landlord.
That’s an extra $4,844.37 above the “benchmark” in the 8 months I’ve conducted this experiment.
What’s Your Hourly Rate?
I’m glad you asked.
I didn’t keep great notes on the time I spent, but I think two hours per turnover is a reasonable approximation. That represents:
- 90 minutes of cleaning per turnover
- 30 minutes of emails, phone calls, etc.
(I hired a housecleaner on a few occasions, but I also dealt with miscellaneous oddities, so we’ll call it even.)
That comes to 84 hours, which we’ll round up to 90 hours to err on the conservative side.
An extra $4,844.37 across 90 additional hours of work comes to a $53.82 hourly rate.
A few notes:
- Consumables such as soap, coffee, shampoo, detergent, etc., cost less than I expected. Yay!!
- Utilities cost waaayyyy more than I anticipated. “When the landlord is paying, let’s crank the A/C!”
- Cleaning I’ve handled myself, unless Will and I are both out-of-town.
- Landscaping costs more than I’d spend on a traditional rental property, since I’m planting more flowers around the apartment entrance. (It creates a better guest experience.)
- Standard overhead (e.g. mortgage, maintenance, etc.) are the same regardless of whether this is a vacation-rental or a traditional-rental, so they’re excluded from this spreadsheet. If you’re curious, you can scope out those numbers here.
- Nerd Alert: The $1,100 benchmark is pre-vacancy, while the actual Airbnb/VRBO numbers reflect vacancy. I contemplated reducing the benchmark to adjust for this occupancy discrepancy, but decided to hold to an $1,100 benchmark because its a conservative estimate — the apartment may rent for anywhere from $1,000 to $1,250 depending on the time-of-year and market conditions. #GeekSpeak
Passive Income vs. Active Income: Showdown!
Travel is one of my greatest loves. These days, I’m out-of-state more than I’m home.
As a “traditional” landlord, this ain’t no thang.
Rental properties (done right) are wonderfully passive. In fact, I’ve coined a formula: “PM + PM = Passive,” which means “Preventative Maintenance + Property Manager = Passive.”
- Preventative Maintenance means spending lavishly on “Keeping Sh** from Breaking.” Tune your HVAC, re-caulk cracks, replace that prehistoric water heater before it triggers an emergency. Prevention also means enforcing strict tenant criteria.
- Hire the best property manager, not the cheapest.
A great-condition property with an incredible tenant and a kick-butt manager is a gloriously passive asset — on par with an index fund portfolio. Legit.
But here’s the problem with vacation rentals:
- Inability to properly screen tenants (as we chatted about above).
- Insufficient margin to pay a manager and still make a profit.
In fairness, some vacation rentals may carry this margin — perhaps some gorgeous villa on an exotic beach. But my Atlanta apartment, which costs $99 per night, can’t support that type of margin.
The only way to collect a so-called “profit” (ahem) is by managing the turnover yourself. And that means one thing: It’s NOT passive. Not by a long shot.
Here’s my conclusion:
Running a vacation rental is an awesome side hustle. But it’s NOT a passive investment.
You Should Be a Host If: You want the cold, hard cash.
- You’re looking for a side hustle.
- You’re trying to pay down debt.
- You’re restless and need a new project.
You Should NOT Be a Host If: You want a hands-off passive investment.
- You want to travel the globe, living on passive income.
- You have a crazy-hectic-busy-stressful job.
- You’re looking for an alternative to an index fund or rental property.
- You crave location independence.
For months, I fretted about WHY vacation-renting is so hands-on. “Is it me?? Do I suck at creating systems / checklists / automation?”
Then Will made an astute observation: “This isn’t the Real Estate industry. This is the Hospitality industry.”
Duh!! He’s right. As an Airbnb host, you’re not a landlord — you’re a hotel owner. A hotel of one.
(That should be a commercial tagline. “I’m a hotel of one!”)
What the Heck is ‘Management’? Do You Mean ‘Cleaning?’
Whoa, are you still reading? Awesomesauce.
If you’ve made it this far, you must be either bored-off-your-skull or dying to know more. I’ll assume the latter, and explain what I mean when I talk about vacation rental “management.” Here’s an example:
We set up an air mattress anytime that:
- A guest requests one
- A guest makes a reservation for more than 2 people
Last month, our air mattress sprung a gigantic (un-patch-able) leak. We threw it away, figuring we’d replace it the next time we need one.
Two weeks later —
Will and I flew to San Diego (for the third time this year) for an arts and music festival. Before we left, we arranged everything:
- A 24-hour gap between check-out and check-in, to leave “wiggle room” for any problems.
- Clean sheets and towels stored within the unit.
- A two-hour housecleaning, coupled with a step-by-step checklist (e.g. “wipe the inside of the microwave …”)
- Keys stashed in a spot the guest can access without needing anyone’s physical presence.
In theory, everything is streamlined, systematized and automated.
The guest checks into the unit and sends me a text message: “Where’s the air mattress?”
She booked a reservation for 2 adults. She arrived with 2 adults and 2 children. From her perspective, this is a minor oversight: She brought her kids, unannounced. What’s the big deal?
From our perspective — it was a very big deal. How could we set up an “extra bed” from California?
- Plan A: We couldn’t Amazon Prime an air mattress to her — it would take two days to arrive — and FedEx Overnight wouldn’t arrive until morning.
- Plan B: We called our roommate to ask for help. She couldn’t buy an air mattress, either, since she doesn’t have a car or bike, and the nearest Target is too far to walk. (She moved to the U.S. last month.)
- Plan C: We asked our roommate to haul the physical mattress from our bed. “Can you please lug our mattress to the vacation-rental unit? Pretty please?” She tried, but that mattress was too heavy.
- Plan D: Ultimately, she gave the guest our duvet, sheets, and as many pillows as she could conjure. The kids slept on the floor.
Needless to say, this was a lose-lose-lose situation:
- It stressed us hardcore.
- It gave our guest a sub-par experience.
- It burdened our new roommate. (“Welcome to America! Can you haul a mattress up a flight of stairs?”)
And that, ladies and gentlemen, is what I mean by “management.”
No matter how well you plan, no matter how many checklists you create, you need an on-site manager who can deal with unplanned situations.
How much will that cost?
Unfortunately, vacation rental management typically costs between 40 to 50 percent of gross revenue. (I hear your groans! But don’t worry: That’s super-fair, considering how many turnovers, inquiries, checkout inspections, cleaners and key hand-offs they need to manage.)
Lop 50 percent from the $19,000 gross revenue, and you’re left with $9,500. Eek!!
That’s not enough to cover the rest of the expenses:
Even if it could beat a traditional lease, the net profit (after management fees) would be too small to justify the added risk and hassle.
That’s why I believe vacation-rental hosting is a great job, not a great investment.
Update 11/15/2014: There are companies like Guesty that will conduct “virtual management” — e.g. dealing with online inquiries and booking — for only a 3 percent fee. But that’s the easy part. These “virtual management” companies can’t provide boots-on-the-ground support, when guests ask, “Where’s the air mattress?” or “Can I have more towels?” or “Help! I need a plunger ASAP.” There’s a startup called AirEnvy that provides “full” boots-on-the-ground management for only a 12 percent fee, but they only offer this in San Francisco and Los Angeles, as of today.
My goal (personally) is to create passive investments, so this Experiment must reach an inevitable end.
It’s an awesome side job for anyone who’s not traveling (yet) and wants extra cash.
The apartment is booked through December, so you’ll be hearing another update before the end of the year — which will feature specific tips that any aspiring Airbnb host can put into practice.
An awesome host-guest experience is a two-way street, so my next post will ALSO include tips for first-time guests, including how to choose stellar listings, what level of service to expect, and how to maximize your shot at an awesome experience.
Update 3/11/15: Check out Episode 4 of The Airbnb Experiment — Now at nearly $30,000 in gross income, at the one-year anniversary of launching this experiment.
Grab the FREE Ultimate Airbnb Host Guide
~~~~ P.S. Use this link for a $20 Airbnb coupon, plus a list of top resources for Airbnb hosts.
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