If nightly rates, occupancy percentage, and revenue decline at your Airbnb, you may be forced to pivot your real estate investment strategy. In this post I will walk through my thought process as I decide whether to keep all of my units listed on Airbnb or consider safeguarding my investments through a partial conversion to a long-term rental strategy.
There has been a lot of discussion about Airbnb lately. It seems like more and more people are becoming interested in hopping on the short-term rental train. While I love the idea of other people getting to experience the joys that hosting has brought me (and hopefully I am helping them be successful), the truth points to simple economics: more supply of Airbnb properties means less income for all of us. The more we slice the pie in our market, the smaller each slice becomes. The “side hustle” culture spreading across social media channels like TikTok has many “gurus” spreading false hope and big dreams to people eager to make extra money. This influx of hosts, along with ongoing criticism of guest cleaning responsibilities and quality of these homes going up on Airbnb’s site have caused many guests to reconsider going the classic hotel-route for their trips. In short, more supply and less demand are causing income-per-unit to drop significantly in some major cities.
Weighing My Options
Uncertainty in the vacation rental market can be unsettling. It can also be a reminder that this is a business. As much as I love pleasing guests with warm and welcoming messages, coffee and tea bars, and other little hospitality touches, I need to remember that I’m not putting in all of this work for charity. The units need to make money. Specifically, they need to make more than the alternative use of the home. The alternative use of my investment homes is a classic long-term rental strategy, having a renter sign a 12-month lease.
Now, the 2 strategies are not equal. While the short-term rental model is (typically) more profitable, it does require more work with guest communication, supply stocking, cleaning coordination, and the staging of the unit in the first place. So, the amount of extra income needs to be worth the extra work.
Alternatively, the long-term model would be more hands-off. In fact, I prefer to utilize a property manager for long-term tenants. Personally, my most stressful task is simply the understanding that a guest can contact me at any time, day or night. With a short-term rental, there are many days during the year that the home is vacant, taking some of the stress off. With an “always on” long-term rental, I prefer to take that worry off my plate completely. Check out this post for a more detailed comparison of the 2 models.
My most useful tool for making my decision is my monthly financial breakdown. I keep a spreadsheet that shows my payouts from each of my listing sites, my cleaning expenses, utilities, landscaping care, and other costs of the operation. With the ups-and-downs of a seasonal vacation rental it can be helpful to look at a full year’s financial snapshot and identify the average monthly net income. Then, using market rental data or talking to a property manager, I can easily make a comparison to what the net income would be if the home were a long-term rental (being sure to account for the property manager’s fee, usually 10% of rent).
Once I have the comparison laid out, I can decide if the extra money from the short-term rental model is worth the extra work on my hands. Or, if the money is NOT more than the expected income from a long-term tenant, the decision becomes simple.
Luckily for me, I have 2 short-term rental homes in the same vacation town in Michigan. What I might do is convert one of them to a long-term rental and keep the other as a short-term rental. This will allow me to establish some predictability in my income, get a feel for the property management company, and hopefully generate extra income at the short-term rental by reducing the number of options for travelers. After working in this 1-and-1 model for a while I can reevaluate the remaining short-term rental the same way I did the first one.
Removing the emotional attachment from your short-term rental is the first step in making a rational decision for your business. The clean, adorable vacation home is there to serve you, not the other way around. If protecting your investment means changing up your strategy, do so with confidence. The decision can always be reversed down the line, if the numbers make sense.