Investing in Airbnb: Benefits and Implications

There’s money in real estate, and one doesn’t have to spend millions of dollars on building an apartment complex. Many Americans are even likely to be sitting on a possible goldmine: their house. With their property, they can already consider joining Airbnb.

Airbnb is a peer-to-peer platform and an online portal connecting hosts who have accommodations to rent with guests looking for temporary lodging. This arrangement offers the following benefits, especially to homeowners.

1. Generate Passive Income

Homeowners can also earn money in different ways:

  • Renting out a room in their home through Airbnb
  • Renting out the entire house when they have to leave for an extended period
  • Offering a vacation home that they do not use
  • Earning through other add-on services like car rental, tours, and more

2. Favorable Returns on Investment (ROI)

Airbnb investments give homeowners great returns on investment (ROI). These days, the ROI ranges from 8 to 12 percent. On average, a host can earn around $900 a month.

However, many factors can increase that amount dramatically. These include location, frequency of renting, number of rooms or homes available for rent, and demand.

Even during the COVID-19 pandemic, the demand for such accommodation options soared as people wanted to quarantine or isolate, enjoy a quiet and safe vacation, or wait until apartments and homes, which are in short supply these days, become available.

Also, the returns given by rental properties tend to increase in value over time. Airbnb properties are considered growth investments to be sold for more than their original purchase price.

3. Increase in Home Equity

Many studies and reports have already shown that Airbnb can impact property values, especially in houses or neighborhoods located in tourist destinations. According to Forbes, even a percentage increase in Airbnb listings within a particular area could already boost house prices by 0.026 percent.

This home equity then makes excellent leverage in case the homeowner decides to secure another home loan, refinance the property, or apply for a home equity line of credit.

4. High Demand on the Market

Currently, there is a high demand for rentals worldwide, which makes the property more valuable than ever before. This puts the homeowner in a good position to charge higher nightly rates that reflect its demand on the market. This means that one can quickly increase their earnings while also using Airbnb to rent out spare rooms or other spaces in the home.

5. Flexibility With Pricing

Even though Airbnb hosts are required to follow some basic rules, they can still set their nightly rates based on the market value of similar nearby properties. The platform provides access to the website’s Revenue and Response Management Tools, allowing the property owner to adjust their rates with ease. They can also easily set up automated pricing so that their rental property will automatically increase or decrease its prices daily.

rental place

Considerations Before Investing in an Airbnb Property

Overall, investing in Airbnb sounds like an attractive proposition. But before homeowners spruce their properties for rent, they need to consider the following points:

1. Compliance With the Law

Although the business model of Airbnb is straightforward, implementing it can be tricky because rules and regulations can vary between states and even cities or towns.

Moreover, whether a homeowner can use their residence for Airbnb depends mainly on their agreement with the lender. In 2018, for example, Fannie Mae and the platform partnered, allowing homeowners to use their rental income to qualify for refinancing with a mortgage company.

2. Tax Implications

Whenever Airbnb hosts prepare their income tax returns, one of the first things they need to do is account for rental income. For this reason, every host must understand the intricacies of taxation in different cities and states across the United States.

Most states and cities now collect taxes on rental income, although the levies can come in different names: sales tax, hotel and lodging tax, occupancy tax, bed tax, etc.

Different places can also have various ways of defining short-term rentals, which is the basis of this tax. In general, renting a property for no more than 30 days is short-term. But in some states, it can be as long as six months.

These collected taxes are usually different and separate from what hosts give to the IRS, such as income tax. Instead, these charges often end up in the local coffers.

3. Property Insurance Coverage

Homeowners’ insurance coverage can also affect whether they can use their property for any type of rental. Most insurance companies will generally exclude any form of business, which means that an Airbnb host should still look into the specifics of running a short-term rental.

Hosts can look into various protection programs offered by Airbnb, such as the Host Guarantee, which provides property damage protection up to $1 million. They can use these to complement their homeowners’ insurance policy, although they still need to discuss the setup with their insurer.

The popularity of Airbnb has made it an excellent opportunity for homeowners to earn extra income. Renting out a spare room or space in the home will require some effort. Still, most hosts find the experience very rewarding.

However, investing in an Airbnb property is not risk-free, especially if one is unfamiliar with local laws and regulations. Homeowners, therefore, need to research this business model extensively before participating.

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