[REN #24] Airbnb BANNED in Some Cities – Short Term Rentals at Risk

Airbnb is becoming a hot commodity for some professional investors. What started as a low-key business model could be turning into a large-scale enterprise for some operators. But savvy investors need to evaluate the upsides and the downsides of the short-term rental.

Airbnb got its start in 2008 as a way for private property owners and renters to make a little extra money. They could rent a spare bedroom or a backyard cottage for a short amount of time and make a profit. But in just eight years, Airbnb has become a $25 billion dollar success. And some of that success is being driven by a new kind of Airbnb operator.

These new operators are investors and don’t live in the buildings they rent. And while many own just a few rentals, there are some who are experimenting on a much larger scale.

According to the Realty Shares blog, it’s difficult to find out exactly how many professional investors are listing their units on Airbnb. The issue has become controversial as demand for long-term housing grows scarce in some places. So Airbnb may not be willing to throw that information out there.

But Realty Shares did get a look at some data that became public through a court order in New York. The data was subpoenaed and released by the New York Attorney General in 2014.

It showed that 94% of Airbnb hosts in the city rented just 1 or 2 units. That’s the business model that Airbnb was founded on — that regular folks would rent out rooms in their home or their entire homes while they are away on vacation.

And then there’s the “other” 6%. Those hosts were listing as few as 3 units to as many as 272 units on the website. And here’s the big nugget of information — the revenue generated from these units amounted to more than a third of ALL bookings and revenue earned by Airbnb rentals in New York City. The total for that year was about $168 million dollars.

But even those figures can’t be trusted because Airbnb allegedly “pulled” a lot of commercial listings from the site before the data was released. And it’s difficult to track a particular listing since you don’t get an exact address until you have rented the unit. Plus, listings may be posted and pulled according to the whim of the host.

Realty Shares also found out from other sources that most of the so-called professionals are smaller personal investors. But, those sources say some of the bigger players have also been showing interest.

Another source of information came from Pillow, which offers management services for short-term rentals. Clients are mostly individuals and families who own Airbnb rentals, but Pillow executives told Realty Shares that major investors have also inquired about their services.

They say investors with as many as 500 units have asked Pillow to quote, “take all of them”. Pillow is a small start-up and apparently refused that offer.

So there is evidence that bigger investors are sniffing around, but are not ready “yet” to bite. That’s probably because there isn’t enough hard data to justify a large-scale investment and plenty of potential pitfalls.

Realty Shares, itself, is a commercial real estate investment company, but it says it has not invested in Airbnb properties. It says the business model is TOO NEW and that Airbnb is still in the process of proving itself. But, Realty Shares says it could be something it considers in the future.

There are several other wildcards that could affect the success of the Airbnb business model. Hosts need to successfully promote their listings and satisfy their clients. That requires individual treatment for each listing in order to portray a rental unit’s unique and attractive features. And guests have to be happy with their experiences because you know how lethal a bad review can be on the internet.

So hosts have to hope and pray that clients will leave them positive reviews, to encourage future business. That’s never a foregone conclusion no matter how pristine, attractive, affordable, and well-located your rental unit may be. Because the customer “is always right”, the customer is also “always a wildcard”.

Other factors that institutional investors may not like include maintenance costs that are higher for units that are scattered across a city. When units are located in one building, they can have maintenance crews work more efficiently at one location. Purchasing supplies can also come at a reduced cost when you are buying a larger quantity for apartments with similar features.

Short-term rentals must also be furnished and provide utilities. All these represent higher costs. But what could be the scariest variable of all is the political climate surrounding Airbnb in some cities. There’s growing hostility toward short-term rentals in places like New York and San Francisco.

In New York, there’s a law that says the owner must be home in order to offer a short-term rental. That limits Airbnb to that Mom and Pop business model and essentially eliminates any professional investor from entering into the mix.

In San Francisco, city supervisors passed a law that limits short-term rentals to just 90 days total per year. Some people wanted that reduced even further to just 75 days. They put it on the ballot last November but it lost. But that 90-day limit still stands.

And many cities have outright “bans” on short-term rentals. They feel that short-term rentals could destabilize neighborhoods and decrease the availability of much-needed long-term housing. And when housing units become scarce, demand and rents go higher.

In California – Santa Monica, Pacific Grove, Monterey and Danville are among the cities banning short-term rentals. Many gated communities also have similar rules. Generally, those rules state that units cannot be rented for less than 30 days.

So the regulatory environment is extremely volatile at the present time. With cities and municipalities each adopting their own unique sets of rules, or thinking about doing so, it’s not clear what those regulations will look like years from now. That’s not something big dollar investors are comfortable hearing.

And small investors shouldn’t be either. If you’re renting out a room in your home or vacation home, have at it! But if you are buying property specifically to AirBnB it, (notice it’s become a verb), then make sure you have a backup plan in place.

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