Should you Buy Investment Property for AirBnb?
The Sharing Economy is Amazing.
What is the sharing economy? It’s when people put to work the property, items, and assets they already have into an entrepreneurial endeavor.
This is a wonderful concept, because it transforms liabilities into wealth producing assets – and helps generate wealth.
People are starting to buy property so they can rent out the rooms to people like a hotel by using Airbnb. In certain areas, this can be a wonderful way to generate income from your property, even more than you would typically receive from a permanent renter.
We really like the business notion – but we’re fearful that there’s a great deal of policy and political risk for these investors.
Policy and political risk is the risk that your investment will be impacted negatively by changes in political climates, rules, laws, and regulation. Agency risk is when certain government agencies decide to impose agency law and restrictions on certain industries or behaviors.
Right now, the hotel and lodging industry pays sales tax, often an additional lodging taxes, inspection fees, licensing fees, re-licensing fees, and a host of other bureaucratic rule following.
The hotel industry is plagued with frictions – so naturally they don’t like it when a group of entrepreneurs can jump in and avoid many of these regulations and taxes.
Lodging Taxes, Lodging Licenses & Short Term Rentals
Minnesota’s Lodging industry has a document here that states the following grievances:
SUPPORTING STATEMENTS (from the Minnesota Lodging Industry):
- The short-term online rental market continues to grow as a business, and as such, it should be looked at as a business to ensure that it is meeting the proper standards of public health and safety.
- By avoiding the collection of sales and lodging taxes, private renters are at a competitive advantage in the marketplace and the state and local units of government lose out on much needed tax revenue.
- By avoiding required licensing and inspections by the health department, privately rented cabins and homes have an additional competitive advantage in the marketplace which is unfair to businesses that provide jobs, follow all of the applicable regulations and collect and remit all required taxes.
- National research indicates that many of the listings on Airbnb in some markets are commercial operations rather than owner-occupied accommodations. In some cases these are faux hotels without any regulation or oversight.
What does this mean? That the regulations and taxes on the lodging industry puts them at a disadvantage to the new short-term rental hosts at Airbnb. When a large industry is at a disadvantage – particularly because of regulation and taxes – they will have to lobby to protect their best interests.
This means we should expect a push from lodging industries in the most heavily regulated and taxed cities in Minnesota to spend money to even the playing field. We’re not saying that bureaucracy and taxes are what should happen, we’re saying that it’s inevitable that the lodging industry will fight hard to push extra taxes and regulations on Airbnb hosts.
The Star Tribune pointed out that Minneapolis and St. Paul are mulling how to regulate and tax Airbnb transactions.
The Minneapolis City Council has the most to gain by forcing lodging regulation and taxes on Airbnb industries since the Minneapolis lodging taxes and lodging licenses generate steady income for the city.
Should You Buy Investment Property for Airbnb Then?
Bigger Pockets has a blog where experienced investors commented on the subject besides the political and regulatory risks. Read the full article about risks of being an Airbnb host.
Top 10 Things to Consider about Short Term Rentals on AirBnB
- Airbnb and other short term rental economies could be banned – New York, San Francisco, and others have done so already according to Investopedia
- Your utilities will be higher
- Late night calls from being locked out – and other nonsense.
- You’ll have increased wear and tear on your property
- Airbnb as a company will not side with you – it’s going to side with renters almost every time.
- You’ll have stains and damage from things like parties
- Guests can change their minds instantly – with no financial reimbursement to the owner.
- Anything possibly construed as a safety violation means the renter will get a full refund.
- You might make your neighborhood mad about the strangers coming in and out
- You’ll have a greater risk overall because you have a greater chance of a litigious person interacting with you
Our verdict about buying investment property to rent out with Airbnb:
Hedge your bets. Remember that while you might have some great financial and lifestyle benefits with owning a short-term rental property, you’re facing massive political and regulatory risk. If reading all of this has you leaning towards operating a long-term rental property instead, check out our resources available on learning to buy a duplex. In this resource, we link to a variety of articles, most of which are geared towards long-term rental investments.
Tips About Short Term Rental Property:
- Don’t rely solely on a short-term rental strategy. Make sure that the property you buy is also a great property as a long-term rental.
- Prepare for additional taxes
- Get set to see additional inspections, licensing and regulatory – akin to the hotel industry
- Protect yourself with additional insurance for liability, but work with a professional that can guide you on this
- Stay informed on the subject of short term rentals, lodging taxes and fees, and regulations.
In short, we think it’s a great business to run – but it won’t stay as easy as it’s been forever!