The popularity of short-term rental businesses has eclipsed the glow of a stable office job and for good reason. Anecdotes abound about entrepreneurial individuals who took a chance on an Airbnb business and manage to rake in tens of thousands a month – far more than they’d previously earned or could earn with a regular salary. Yet for all the hype, is starting an Airbnb business really worth the risk?
What is an Airbnb business?
Airbnb (and Vrbo, its competitor) are short-term rental sites that connect hosts with guests looking for overnight accommodations. When you have an Airbnb business, you’re essentially offering to host guests in your spare room, apartment or house in exchange for a fee – just like a hotel.
What are the advantages to having a short-term rental business?
Unlike with a hotel, people looking for short-term rentals are oftentimes quite accommodating when it comes to renting a place to stay. For the high price tag, hotel guests usually expect a minimum standard of service. But with Airbnb, hosts have a lot of flexibility, and although bookings are never guaranteed, the potential to make a lot of money with relatively little start-up capital can be enticing.
Airbnb hosts can benefit from:
- Higher income compared to long-term renting
- Flexibility in hosting dates
- Having the mortgage or rent paid for you
- Tax advantages
What are the risks to being an Airbnb host?
On the other hand, it’s vital to note that being an Airbnb host isn’t as simple as taking a couple pictures of your spare space and tossing it onto the internet. Hosting is a serious business that requires plenty of planning and forethought, just as any other business would.
Specifically, Airbnb hosts should be aware of these potential drawbacks:
- Not every accommodation is appropriate for an Airbnb listing
- Hosts must pay a host service fee to the listing site
- Guests can be careless and you’ll need insurance specific to short-term renting
- If the space is unfurnished, you’ll need to invest in high-quality furniture
- Bookings aren’t guaranteed, so you may have irregular income
- If you’re not prepping the property yourself, you’ll need to set up a regular cleaning and maintenance service
How to start an Airbnb business
Becoming an Airbnb host may seem less involved than starting other businesses from scratch, but don’t let appearances fool you. It’s important to understand the time, effort and investment involved in order to make a profit. While the cons listed above might seem significantly longer than the pros, in reality, much of the drawbacks stem from short-term rental costs. Starting a business often requires an initial outlay in order to fund the venture, but if properly planned and managed, the business should generate solid income in time.
Review these steps to evaluate if starting an Airbnb business is a good idea for you:
1. Find out if you need permission
Not all accommodations are appropriate for a short-term rental, so ask your landlord or homeowners’ association if you need permission. Your lease may have a specific clause that prohibits subletting or your association may have rules restricting short-term rentals in your property.
Another option may be sourcing a specific property for your Airbnb business. Research the area where you’d like to list. Look for apartments or houses that are close to tourist attractions or areas of interest. If you choose to rent the place long term, understand the commitment you and your business are undertaking and ensure that your landlord will allow subletting for your short-term rental. You may be required to submit extra insurance proof to convince them to rent to your business.
2. Prepare the property for hosting
Whether it’s a single room or an entire vacation home, you’ll need to invest in the space to prepare it for hosting. Consider the costs associated with prepping the space and calculate how much you’ll be investing to appeal to your targeted guests. You won’t necessarily need cash in hand to pay for everything, since you can apply for a business credit card to finance your purchases, but you will need to weigh those costs against your possible pricing to ensure you’re making a profit later on.
Key costs include:
- Keyless entry lock and installation to make check-in easy
- Furnishing the property with high-quality furniture
- Stocking appliances that guests may need, such as a fridge, stove, microwave, washing machine/dryer and coffee maker
- Creating a comfortable living area with a television
- Stocking clean and comfortable bed sheets, towels and toilet paper
- High utility bills, including wifi internet
- Providing a cleaning service between reservations
- Paying taxes and hosting fee
3. Calculate your Airbnb price
Compare your property to others, keeping in mind affordability for your area, your targeted audience and the general market.
Airbnb host fees are usually 3% of the booking subtotal. This fee can be higher if you’re an Airbnb Plus host, have a strict cancellation policy or happen to be listing in a region that regulates short-term rentals, like Italy. Note that the listing price will be higher than what you earn.
Airbnb’s metrics compare your nightly prices to other Airbnbs in the area and offer suggestions on when to consider changing your prices for periods of low or high demand. You can set minimums for the number of nights people stay at your location to reduce turnover costs (like cleaning and maintenance) and you can also charge guests extra for additional services, such as special cleaning, equipment rentals and pet accommodation.
Airbnb charges guests prior to arrival and sends your money to you (via PayPal or direct deposit) 24 hours after check-in. You cannot accept or require cash payments for your Airbnb. Payment methods accepted include credit and debit cards, Apple Pay, Google Pay and PayPal.
4. List your space
Be honest in your listing and highlight what’s special about your space so you can stand out from other listings. Make sure to mention accessibility features like an elevator or ramp and any other amenities that might be available to your guests.
Include great photos to help your guests understand the size and features of your space. Ensure your photos are high quality, taken during good light.
Are Airbnbs profitable?
Obviously, launching a business means you’re looking to turn a profit. Profitability is mostly determined by the quality of your offering and your pricing strategy. That’s why it’s so important to prepare your space to compete with other Airbnbs in your area and market your listing in the best possible way.
Airbnb reports that the typical U.S. Airbnb host earned $13,800 per property in 2021, an 85% increase since 2019. It doesn’t say whether that was gross revenue or operating income (with all hosting costs subtracted), so erring on the side of caution, you can assume this is income sent to the hosts minus Airbnb fees. Much of this income came from high-demand periods, such as holiday weekends and seasonal travel, so this figure can also vary. In fact, some hosts can make $12,000 a month and others can make as little as $200.
Profit margin is key here. Although the average Airbnb host can turn roughly $1,000 per property per month in revenue, you’ll need to take into account how much you’re investing in the place first to determine if your business idea can be profitable for you.
To calculate your profit margin, take your total revenue and subtract your costs. Divide that figure by the total revenue and multiply by 100 to get your profit percentage.
In other words: Let’s say you’re making $1,000 in revenue a month. Remember how you calculated your costs back when you were in the planning stage? If you’re a typical Airbnb host, you might actually be renting out your house when you’re away or a spare basement apartment. Cleaning costs might be minimal (it’s your house, after all, and we suppose you regularly clean it), so much of your costs are furniture, changing the door locks, utilities and whatever amenities you offer, like Keurig coffee pods, clean bed linens, etc. If you spend roughly $200 a month on all that, you’re really earning $800.
800 / 1000 = 0.8, or 80%.
80% profit is huge! All you’re doing is renting out your place when you’re out and you’re earning good money. Not a bad idea for a side hustle, is it?
But this is about an Airbnb business, which is much more involved than a side rental gig. Once you factor in your base rent for a property, insurance, initial investments, turnover costs and more, you’re definitely not going to be making 80% in profit every month. But you’ll also likely not make only $1,000 every month either. If, say, your listing goes for $250 a night and your property books 20 out of 30 days a month, you’ll be generating gross revenue of roughly $5,000. Subtract from that your fees and costs, and you may be making $1,000 in take-home income, or a 20% margin. This may seem a lot lower, but many investors consider a 20% profit margin to be a very solid number.
In fact, this figure is exactly why numerous Airbnb entrepreneurs end up managing multiple properties at a time. Once you have a system in place to find, list, clean and manage one Airbnb property, you can often scale that to a second, third and fourth property with little issue. After a time, you may find yourself saving costs and becoming more efficient, increasing your profit margin even further.
Bottom line
Airbnb hosting is not for everyone and most hosts only list their properties as a side gig. Launching a new business can be risky, but the payoff and experience might be a good idea for individuals who are interested in hospitality. It’s important to approach your Airbnb business like any other business venture, calculating costs, time and effort and understand that income is not guaranteed and may not be stable. However, many Airbnb hosts can make a solid profit, and over time, an Airbnb business has the potential to be lucrative indeed.
