Airbnb vs Long Term Rentals
So this is an important episode for those that are looking to buy rentals now everyone should be looking to buy rentals because that’s what you are in real estate for right you’re in real estate to actually generate wealth. As much as ATM is considered like an eight or I’m sorry, sorry about that. As much as wholesaling is considered like an ATM to me, right? it spits out a bunch of cash. really why I got into real estate investing and why I am now buying a bunch of rentals because I not only want the cash, I want the wealth. I want the wealth accumulation from buying rentals and we’re actually virtually buying rentals right now in Oklahoma, both in Tulsa and Oklahoma City and just yesterday I wanted to buy a home in Fayetteville, North Carolina but it got beat out by another investor unfortunately and so I’m also wholesaling virtually but also buying rentals virtually and so this subject will be about when do you Airbnb a rental and when do you keep them as a long term rentals..
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Okay, and so there’s a couple piece of advice I want to start out with is if you’re considering a home that you’re looking to buy whether you’re negotiating the deal yourself you’re buying from a wholesaler or the analyst the first place I would look if you’re considering it to be an Airbnb is what is on Airbnb in the general area and I would probably go out within a mile or two but you really want to make sure that there’s even air b&b interest in that area right and then so once you do that and I probably wouldn’t go out much more than two miles right. Once you do that I would try to get as close to the actual house as possible. Then you want to start looking at how much are they renting for and then look at the pictures obviously to see what type of remodel or you know some properties become like bachelor Airbnb type things or Bachelorette Airbnb type things. And when I say type things what I’m really saying is like in Scottsdale if you go to Airbnb you will quite literally see like a home that was remodeled painted pink has Barbie rooms has selfie rooms I mean it just screams Bachelorette style rental right like guys would likely not read that and so I bring all that to light to say you need to also look at the pictures and what styles that these airbnbs and by the way some might not be remodeled at all they just might be in a good location that people want to stay in for vacation right and I bring all this up because I’m looking at buying your condo and Scottsdale and I’m debating whether you do a remodel or not because it’s quite literally in Old Town Scottsdale This is where everyone wants to be because the bars the restaurants and nightlife etc right the shopping and so do you really need to go in there to spend a bunch of money making an Airbnb or could it just be in the right location and those are the things that you need to be looking at. When starting to consider Am I going to use this property as an Airbnb. So again first of all go to Airbnb go no more than two miles out start looking at how much these properties are renting for do like kind and what I mean by that is like if you have a three bedroom, two house, you know two, three bedroom, two bathroom house 1800 square feet, then look for something similar to that. Don’t go look for a five bedroom with a pool like don’t compare something that is not like kind, right and then start looking at pictures or understanding. You know this homes getting $500 a night because they did a full blown remodel they made it really look cool. They have a pool table. They have this app that this homes getting $300 a night because it’s oak cap
It’s just in a good location. Right? So feel that out. And then what you would want to do is potentially even contact Airbnb to talk to them about, you know how active these are. And then you can look at the calendar schedule and see how booked out they are. Right? Which is the other the point number three, if you have to have this in three points of what to do with Airbnb, how booked out are these houses? Are they super readily available? You know, and when, right so again, Old Town Scottsdale like spring is hot, hot, hot, hot, you can charge super top dollar like, unreasonable amount of money, because spring training is here, right? So a lot of people like a ton of people for the month of April and part of May in March. So half of March, all of April and half of May. That is I mean you can charge a ton like 3x right here in Scottsdale, Arizona, primarily because of spring and spring training. And so you want to also know the seasonality of these places. Right? That is a big seasonality, right? Having the fact that we’re in Arizona and snowbirds come here a lot, right? So obviously the winter is really seasonal. Summers aren’t great, right? And so lastly, the point number four would be mapped out the average costs right? Like in be conservative. If you see someone renting their Airbnb for $500 a night, maybe you put 400. Maybe you put 350. Because it’s probably averaging out over the year, you’d probably end up closer to 350 than 500. Makes sense. So you really want to just look at comps, the same way you would is if you’re flipping a home, what is comparable on Airbnb, how much does it cost a month? You know, how occupied is it? What is the calendar look like?
Not how much does it cost per month? How much it costs tonight, sorry, all over the board here, how much it costs a night? What’s the seasonality? How occupied is that? And then what are the other ones around there? What the condition of the actual remodel if there was a remodel now, then you do the simple math. So for example, if you are looking at buying home for you know, I’ll use the Scottsdale Airbnb idea is I’m buying it for 350 doesn’t need a single dollar like maybe I’ll put new carpet in there. So let’s call it a minute for 360. Can I make this a 2x? Multiple? Can I get a two or 3x? Multiple in terms of return right? Can I make six to $10,000 a month making this an Airbnb because that will be way more than I could for a long term rental. Now let’s talk about that. Let’s transition into why you’d maybe make this a long term rental. First of all, the consistent income right you have a lease for a year, you don’t have to really worry about seasonality, maybe you have a two year lease, you’d have to worry about spring or winter or summer in summer here is very difficult sometimes for Airbnb, not a lot of people love the summer here is hot. So you have that consistent income but it’s much lower. As I mentioned, if let’s just say I buy this for
350, I put some carpet into it, I’m into it for 360 let’s just make the argument is going to rent for 218 $100 a month, three grand a month. Now that’s a good little rental right? I got the 1% rule, right, I want to be all in and roughly get 1% of all in costs back monthly. So if I’m all in for 360 grand, I want to make sure that I’m making roughly $36,000 a year gross. Okay, that’s gross. So if I can do that it’s a good long term rental. So that’s point number one. The point number two will be consistency. Now Airbnb might get me a 2x month multiple, right? I might make $72,000 a year on that same property with Airbnb. But I might have some inconsistency in how I make it summer months might be really, really slow. So I have to cover those summer months mortgages and costs, things of that nature.
I might not make 72,000 maybe I only make 50,000 was that really worth the headache and issue that comes with having a short term rental, right, because you also need, you know, property management on the short term rental because you got to turn that home over every couple of days when new new tenants are coming in. So you need to really look at the growth and the net numbers and then you want to look at what kind of business model you’re looking to run. Airbnb is a much more Active Passive model right? Now, yes, Airbnb as a company handles a good portion of it. But you still need to manage, you know whether the housekeepers are doing the things that they need, whether the Airbnb property manager is doing the things that they need to be doing, there’s cost to all that. And so, a lot of times, it’s sexier to think I’m gonna buy this as an Airbnb, but people aren’t doing their due diligence to make sure it’s really that much more valuable, right that it really does actually make sense to do this. Now, we could go down a deep rabbit hole and talk about the taxes and what type of tax implications that Airbnb is versus a long term rental. And I think there’s a lot of confusion about how to use the ability of an Airbnb, right? So if I bought an Airbnb in Orlando, Florida, because my kid likes to go to Disney World, how often Am I able to use that, and the rules essentially are, I believe they’re 10% of booked time. Meaning if you have booked, you know, 300 days a year, you’re able to use it 30 days a year, right? Which is great. And that keeps it in a business model where you can get maximum tax write off, but instead of, you know, telling you all the things that my accountant has told me, I would tell you to talk to your accountant, which would be the last decision making effort on whether you keep something as a long term, or an Airbnb, let’s just use the example. Airbnb is to x gross revenue. From a long term rental, you like this idea, but you’re also going to be looking to get maximum tax write offs, you want to talk to your accountant about what’s going to help you more in the long run, not the short one year run. But the long run, having this as a long term rental, or this is an Airbnb, and weigh the pros and cons about the tax write offs. Whether it’s depreciation, whether it’s the usability of the actual home, you’re buying, I know a lot of people that you know, kind of work the system and essentially buy homes that they essentially want to live in, not live in, but visit a lot, right, like in pinetop, or in Sedona or whatnot. And they kind of work the system, meaning they might be a little bit breaking rules in terms of the IRS and listen, it is up to them to make those decisions. But I tell you when making this decision about long term rental versus short term, last point would be talk to your accountant about what are the tax liabilities issues and the best option for yourself going into buying that deal. So hopefully this helped. I know there’s a lot hopefully, you can take some of this and in at very least, the minimum I would hope is for you to call your accountant to know the pros and cons of both. And then for you to be able to buy some more rentals because I’m all about wholesaling your way to wealth, and that includes buying rentals. If you’re not yet subscribed to YouTube, go to youtube.com forward slash Justin Colby and watch these episodes live. Not live but watch him on YouTube. I look forward to seeing you guys on the next podcast. Peace