As Putin impersonates Hitler and attempts to steal a big piece of real estate with 44 million people, I’d like to discuss a few small pieces of the American real estate dream where ambitious folks are trying to build an investment safety net that will grow in value.
In the last five years, accelerated by COVID-19, Americans moved away from staying in hotels. They are seen as sterile, institutional, unsafe, and boring. The remarkable entrepreneurs who run Airbnb and their competitor Vrbo picked up on this trend early and figured out how to capitalize on it. When some observers saw the pandemic as their armageddon, they turned it into an opportunity.
Maybe pleasure travel would die for a while, but Americans travel from one place to another for millions of different reasons. Many are tired of hotel boxes, waiting at front desks, and sleeping on institutional beds with the wrong pillows.
The Airbnb business model is brilliantly thrifty in its use of capital. Let individual owners be the host. Airbnb is the enabler, the rental agent, who takes a commission off the top for their internet marketing, branding, and knowledge of the business. A multibillion-dollar enterprise was born from this contrarian idea. Conrad Hilton would have smiled if he was alive.
In the last decade, hundreds of thousands of regular people have scraped together a few bucks, lined up bank loans, very cheap money until recently, and looked for properties, usually in areas they know well, planning to convert them into Airbnb rentals.
This week I spoke to a machinery business acquaintance who gave me a free education on building an Airbnb side business with his wife, who recently retired after 21 years as an airline attendant. Before entering the Airbnb business, Chris had little real estate experience, but he understood borrowing from a quality lender, the value of a well-connected real estate agent, and the power of the Airbnb brand. He moved from Chicago to Charlotte with his wife. His business office was his phone and home. He quickly realized that Charlotte was a spot that many people wanted to move to, and if he was ever going to take the property plunge, Charlotte was the place.
Over the last few years, he bought three rental homes, all in Union County, a middle-class suburb outside of Charlotte, and gradually learned how to turn them into cash cows.
He told me the first thing to do when getting into the Airbnb business is to make sure an area is accepting of rentals and that there are no regulations to get in your way. A good real estate agent will know where to check before the buying process gains momentum. Chris, with his machinery selling experience, knew how to check the pricing comps and borrowing costs, which would establish price ground rules.
Airbnb, with its fees, takes around 14% of the rental proceeds. Short-term rentals tend to be more lucrative but require more work by a host. Cleaning costs money, bedding gets holes in it, and big parties alienate the neighbors quickly. Being an Airbnb landlord is a second job with a lot of annoyances, but Chris and his wife felt they could handle the task. They took the jump and bought their first house, hoping for the best. Over the next couple of years they purchased two more, despite the red-hot Charlotte home market.
Chris’s wife welcomes each tenant and gives them a bottle of wine. She makes sure the towels are clean and ample. She is available in emergencies and Chris is handy enough to do a lot of repairs.
One house has been continuously rented by a single person whose own house burned down. Insurance has paid the rent for 18 months. That property brings in less money but is less trouble than the other two homes, which average 5 to 7 renter changes a month.
Airbnb and Vrbo provide most of Chris’s renters. He says he and his wife average about $7,000 gross rental per month. For the lodgings with frequent renter turnover they try to screen the renters, but outward appearances can be deceiving. He said their biggest partier was a woman who was celebrating after earning her Ph.D.
Chris would like to buy another property for short-term rental. The tax benefits with the depreciation have made these investments extremely worthwhile, but high prices in the Charlotte area have him sitting tight. Also, three homes are plenty of work for him and his wife at the moment.
The Airbnb game is definitely not for everybody, but it seems like a nice side gig and a great opportunity to build wealth. It’s America, not Russia. Opportunity is all over the place if you have the guts and are willing to work. Have you tried it?
What’s your favorite place you’ve ever stayed in your travels?
Would you stay at an Airbnb?