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Airbnb versus a savings account

Short-term rentals can come with high rewards — and high risks.

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Buying or renting an Airbnb investment property can potentially be a profitable move if it’s in the right location. But if you aren’t booked as often as you want, you could end up with a second mortgage you can’t afford to pay.

What is an Airbnb investment property?

An Airbnb investment property is a house or apartment used solely for short-term renting on the Airbnb platform.

For an investment property to be potentially successful, it’ll need to be located in an area that’s likely to get visitors. The idea is to generate enough money to pay off the property’s mortgage and begin to turn a profit, but how quickly you do that depends on the amount of work you put into your acquisition.

History of Airbnb - context

In January 2009, the Airbnb team received their first funding of $20,000, followed by massive injection of $7.2 million in November 2010. Since then Airbnb has continued to attract investors eager to cash in on this unique business model. The biggest investment was a one-off $1.5 billion, the highest amount in one of the largest funding rounds in startup history. Today Airbnb offers more than 6 million homes in 191 countries.

Investing the time

Besides the financial investment, there’s also the time commitment to consider. Upkeep, day-to-day management and tenant relations take a lot of work, especially if you’re renting more than one property. Some investors choose to hire someone to clean the rental unit between guests or even a full-service management company, but that will eat into your potential profits.

The risk factor

Buying a new house or apartment to use as an Airbnb rental is a risky investment. You’ll face all of the usual risks of buying real estate, like the chance of the market worsening or the property needing expensive maintenance, plus additional risks. Talk with an accountant before investing in an Airbnb property to make sure you’re financially stable enough to face the risks. For example, can you pay the mortgage if you don’t get as many renters as you’re anticipating? What if you don’t get any renters for the first few months?

Airbnb reviews

Another risk factor with an Airbnb investment property is the review system. Travelers can comment on the state of your property, whether or not you were helpful and friendly and whether or not they’d recommend you to other Airbnb users. One or two negative comments can be enough to dissuade travelers, which would likely have a significant impact on your ability to attract future guests.

Savings accounts

Savings accounts offer a low-risk way to grow your investment. While they don’t have the same potential for gain as an investment property, they also don’t have the same potential for loss.

Risk-averse investors may prefer keeping their money in an account where the return on investment (ROI) is predictable. If you are ready to jump into the world of Airbnb, you may still want to consider setting aside a portion of your savings into a savings account so that you have a cushion if your rental isn’t immediately successful.

Alternative options

Other options for growing your money include:

  • Stocks. Investing in stocks also means taking on risk, though you can mitigate that somewhat by building a diverse portfolio.
  • ETFs. Exchange traded funds are another way to invest in the market without picking stocks. They represent a “basket” of stocks and can diversify your portfolio.
  • GICs. Guaranteed investment certificates are a low-risk way to grow your money and often offer higher interest rates than traditional savings accounts.
  • Bonds. Similar to GICs, bonds are another low-risk way to help your money earn money.

Example: Francine and Roy

Francine and Roy recently inherited $100,000 each from their late grandfather. Roy plans to use his money as a down payment on a $300,000 home he’ll rent out on Airbnb, while Francine decides to put hers in a savings account that pays 2.45% interest.

Roy

Roy takes out a 15-year mortgage on the remaining $200,000 for the home at 4.10% APR. This leaves him with a monthly payment of $1,489.

He rents the home out for $150 a night — after Airbnb fees, he keeps $145.50. He also need to pay state and local sales taxes plus a hotel/motel tax, which adds up to about 10% in his city, leaving Roy with about $130/night. In order to break even, he’ll need to keep the home rented for about 11-12 nights a month.

The first year, Roy is only able to keep the home booked on the weekends, so he loses about $4,350 dollars. By the second year, though, his property is booked about 15 nights a month, and he turns a profit of about $5,500 — but he’s still doing all of the cleaning and the maintenance himself. If he wants to hire someone to manage or clean the home, it’ll eat into his profits.

Francine

Francine decides to put her money in a savings account so she doesn’t have to worry about it. She compares accounts and finds one she likes that offers 2.45% APR. The first year she makes $2,479.67. The second year she makes an additional $2,541.16.

Becoming an Airbnb host: How it works

As a host, you’ll be asked to list details about your property, including availability, accommodation type, location, the number of people it can accommodate, price and whether or not you offer cleaning services for an additional fee. Travelers can then get in touch with you and if you agree to host them, the payment transaction is conducted wholly on the Airbnb platform.

Airbnb takes a percentage of the payment from both the guest and the host, though the exact amount can vary. In some locations, Airbnb may also be able to charge tax directly to the guests. In others, you may be required to calculate any necessary taxes and pay them. The laws regarding renting out property differ from state to state and even by county or city, so make sure you understand the implications.

Everything you need to know to become an Airbnb host

Which should I choose?

It depends on your situation. Airbnb is a long-term financial engagement and requires consistent effort to turn a profit. While the potential for clearing a decent profit is high under the right circumstances, choosing a property in the wrong location or getting a few bad reviews could lead to a major loss.

A savings account takes much less effort and almost no upkeep. While the potential gains aren’t quite as high, you’re unlikely to face losses of any kind, and you can generally predict how much money you’ll make over time.

But that doesn’t mean you need to choose one or the other. If you’re interested in starting an Airbnb, it may be a good idea to keep a savings account as financial padding. Talk with a professional to find out more about the best way to manage your finances.

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Bottom line

Airbnb can be a great investment for some people looking to use real estate as an investment. In other cases, it can lead to major losses. Talk with a professional about your plans to learn more about the risks and rewards of investing in real estate. And whatever you decide, consider opening a savings account to provide a financial safety net.

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