The idea of running your own hotel can seem glamorous: you spend most of your time working in elegant surroundings, get to meet interesting people from all over the country or even the world, and solve whatever problems your grateful customers may have. In addition to the prestige of being a business owner, you can introduce yourself as a hotelier, which is way classier than a butcher or glazing salesman. The only cooler businesses to open are probably a restaurant or nightclub.
So much for the fantasy. In practice, running a hotel, even one consisting of a single house or apartment, is very hard work, not least because you’re essentially on call 24/7. Ideally, you’ll see your guests enjoy the best entertainment, food, and drink your town has to offer, but you won’t be able to join in. Most customers are pleasant, but some will make you want to pull your hair out in frustration. Finally, a hotel or Airbnb property is far from a license to print money.
In short, becoming an Airbnb host can be a good source of cash, but this is not guaranteed. Most definitely, it should be approached just like any side hustle or business endeavor: with eyes open. There is a chance that you’ll simply lose some or all the money you invest just to get started; knowing about all the potential pitfalls beforehand will help you make a better decision on whether this game is worth the candle.
Table of Contents
- 1 What Kinds of Airbnbs Make Money?
- 2 It Can Take a Boatload of Cash to Get Started
- 3 Zoning, Regulations, and Keeping the Neighbors Happy
- 4 Day-to-Day Costs and Chores of Running an Airbnb
- 5 Renting by the Month, Earning by the Day
- 6 Insurance and Breakages
- 7 An Airbnb Host’s Income Is Inherently Unpredictable
- 8 Can You Rent Out a Property Without Going Through Airbnb?
- 9 How Do Taxes on Airbnbs Work?
- 10 An Airbnb Property Has to Be Run Like a Business
What Kinds of Airbnbs Make Money?
Never in the history of business has a “sure thing” existed. There’s always a risk that things simply won’t go as well as you predicted, even for reasons that don’t seem to make any sense to you. The best you can do is to evaluate your odds carefully, including by checking your potential Airbnb property against the following “bird’s eye view” characteristics:
- It and its location appeal to a certain type of guest. Families will prefer a house with a backyard in a quiet suburb, younger tourists and business travelers are usually looking for something centrally located.
- It’s comfortably near a major attraction like a theme park, university, sports stadium, or major business district. Your cabin in the sticks may be charming, but it’s unlikely that many people will be searching for accommodation in that area.
- Its amenities fit the market. You can find both mansions and studio apartments on Airbnb, and both potentially turn a profit. It all depends on what people are looking for. Backpacking students are generally happy with bunk beds, but wealthier travelers may look only for accommodations that compare well with a high-end hotel. Which type of clientele are you hoping to attract, and do enough of them visit your city?
- Any activity or experience offered by the host. Season tickets to cultural or sporting events, for instance, may make all the difference to someone’s choice of booking. Serving breakfast and offering to do laundry are major selling points as well.
It Can Take a Boatload of Cash to Get Started
A brand-new luxury hotel is typically lucky to see positive cash flow within its first five years after opening. There is just so much stuff they have to buy to get up and running: silverware, bedsheets, appliances, uniforms…the costs mount up incredibly quickly.
If you have a furnished space ready to go, either
- your own home while you’re on vacation,
- part of it, like a spare bedroom,
- a holiday or second home,
- or a property you bought with the intention of renting it out,
good for you. Even so, some upgrades may be necessary. Perhaps the walls could do with a lick of paint, it could be that you need to spend several hundred dollars on a new cooking range, or you may have to do some fairly major renovations to make your guests feel comfortable. If you’ve lived there for some time, you’ve probably become used to the place’s shortcomings, but remember that competition on Airbnb (as well as platforms like HomeToGo and Vrbo) is stiff. Something you don’t even notice yourself, like a musty carpet or slightly wonky shower, can easily tank your ratings and therefore your earning potential.
You’ll almost certainly have to buy additional furniture; new, high-quality mattresses are a minimum requirement. A security system, preferably keyless, is a good idea, as is upgrading the wi-fi and TV – your guests will expect both to be near the top of the line. Once you add in extra towels, conveniences like ironing boards and hair dryers, kitchen equipment, and so forth, you’re looking at a tidy sum. While you’re at it, you should also hire a professional photographer for the pictures you’ll put online to advertise your space. This will set you back about $150 but is well worth it considering their skill at presenting your space in the best possible light.
Don’t, however, scrimp too much. Little luxuries like an espresso machine in the kitchen and high-thread-count sheets on the bed may not seem like much, but can easily make the difference between guests feeling pampered or ignored.
Zoning, Regulations, and Keeping the Neighbors Happy
As you would expect, the traditional hotel industry doesn’t like the idea of competing with amateurs. Municipal authorities, meanwhile, are concerned with how Airbnbs take ordinary rental properties off the market, driving up the cost of living. Condo boards and homeowners’ organizations, for their part, often take a dim view of random strangers running around their neighborhoods. These factors, as well as ordinary business laws, create a few extra hurdles for anyone thinking of becoming an Airbnb host to make some extra money.
Though the short-term vacation industry is largely unregulated at a federal level, local ordinances and requirements can be difficult to navigate. They’re also subject to change at any time, perhaps making all that money you spent sprucing up your property come to naught.
You’ll therefore need to contact any local body that holds sway over how you can use your property and make a trip to City Hall to get clarification. The people there tend to be surprisingly helpful as long as you’re polite and patient; they will tell you whether you need a:
- Business license,
- Building inspection to ensure habitability, and/or
- A specific short-term rental permit.
Depending on where you live, you may also need to pay a special per-guest tax to the city in addition to your normal property taxes. Small businesses generally have to spend a greater proportion of their time and money on complying with various rules and regulations. There’s no easy way around this, though: in the long run, keeping on the right side of the law is almost always cheaper.
Day-to-Day Costs and Chores of Running an Airbnb
People with demanding day jobs should think twice about opening an Airbnb: if you cannot respond to phone calls and messages nearly instantly, you’re going to lose a lot of potential bookings. In addition, guests will expect you to be informed not only about the property you’re offering but also about things like local events and public transport.
You should expect to spend at least an hour per booking simply communicating, including with people who finally decide to stay elsewhere. In addition, depending on the guest, you may get frequent calls while they are staying with you on topics ranging from how to operate the washing machine to where to find good seafood.
You can, of course, hire someone to take care of some or all of your hosting duties. Specialized management companies generally charge at least 20% commission, though, while recruiting somebody off the street doesn’t necessarily mean that they’ll do the best possible job.
This isn’t the case with cleaning services. Cleaners may charge as much as $60 per hour, translating to about $200 for a mid-sized house, but generally achieve much better results than the average, poorly motivated Joe or Jane. Guests certainly have a right to expect cleanliness. Professional cleaning may still be too expensive to use between rentals of only a few days, though, so you should be prepared to do some of the tidying up yourself.
In general, about 15% of each rental should be put aside for repairs, maintenance, and replacing lost or broken items. Most hosts also supply their guests with little necessities and treats ranging from shampoo to chocolates – this makes up only a small fraction of the daily fee but improves their experience immensely. Finally, don’t forget about utilities: people love to take long, hot showers while traveling.
Renting by the Month, Earning by the Day
For the most part, this article assumes that you’re thinking of making extra cash by turning a property you already own into an Airbnb. Perhaps you’ve recently moved and kept your old apartment, or you have a couple of spare bedrooms since your kids moved out.
There is another, riskier way to make money from short-term vacation rentals, though. If, for example, you rent an apartment for $1,000 per month, rent it out for $100 a day through Airbnb twenty days out of thirty, and spend $20 a day on guest expenses, you’re coming out ahead by $600 every month.
Of course, if you only manage to secure bookings for less than 13 days out of the month, you’re losing money instead. Your landlord won’t care if demand for the property on Airbnb isn’t as high as you expected; the monthly rent will still be due. Breaking a lease can be expensive. If you choose to rent a house or apartment with the intention of turning it into a profitable Airbnb, you need to do your homework even more thoroughly – and definitely make sure that your lease terms as well as building/neighborhood rules don’t prevent you from offering short-term rentals.
Insurance and Breakages
If you’ve done any research on the question of whether becoming an Airbnb host is a good way to make money, you’ve probably come across more than a few accounts of rowdy guests. Groups often rent a house or condo for no other reason than to party like madmen for a week – why should they trash their own homes when yours is available?
Some of these stories can be enough to put you off becoming a short-term rental host no matter how much money you can potentially make. To make matters worse, Airbnb as well as some of its competitors offer up to a million dollars in insurance against liability (and another $1 million against damage) – but claiming this, or even a far lower amount, is incredibly tedious and difficult.
Ordinary homeowners’ insurance, particularly newer policies, also tends to carry exclusions related to short-term rentals, extra tenants, or practically any business activity. You don’t want to find out about these only once your claim has been rejected! In short, you will probably want to get business insurance, perhaps a package geared especially to Airbnb hosts, that includes business income coverage. This will provide you with continuing income even when you’re unable to rent out the property due to damage.
The alternative is to make a special effort to screen your guests, insist on a security deposit, take an inventory before and after every rental, and hope for the best. This does involve some extra risk but also reduces your costs per rental day.
An Airbnb Host’s Income Is Inherently Unpredictable
It’s easy to get suckered by averages. Usain Bolt and I, on average, can run 100 meters in under twenty seconds, but only one of us is Olympic material. In the case of Airbnb hosts, about half make more than $500 per month – but this isn’t every month, and you shouldn’t fool yourself into thinking that this median figure will apply to you.
Anyone who’s thinking of becoming an Airbnb host for extra cash should understand that their monthly income and expenses are going to be a rollercoaster. If the fridge in your rental property gives up the ghost, you simply have to replace it immediately even if this means taking out a personal loan. In much the same way, the amount of money you’ll have coming in is largely beyond your control. In certain locations, you may be able to charge top dollar for a few months out of the year but not get any bookings whatsoever in the off-season.
Then, of course, there are events like the covid pandemic and the weird weather we’ve been seeing on its heels. It could be that we’ll have a massive spike in tourism coming out of lockdown, or not. The moral of the story is that, while it’s indeed possible to make some money as an Airbnb host, you shouldn’t rely on that income in the same way as a salary. If steady earnings are more useful in your financial situation, seeking out long-term tenants may be more appropriate for you.
Can You Rent Out a Property Without Going Through Airbnb?
Airbnb’s fees are fairly stiff: you as host pay them 3% for every reservation made through their platform, the guest has to cough up an additional 15%, plus they charge 3% on all transactions not made in U.S. dollars. That’s a fifth of your revenue gone – and they offer very little real protection to their hosts in case of damages or canceled bookings. They can even remove a host’s listing from their website without any notice or explanation, potentially dealing a crippling blow to someone who relies on them for income.
On the other hand, they do offer access to an unparalleled user base, including profiles and reviews of guests. They’re very strict about not poaching guests by asking them to book privately and thereby avoiding Airbnb’s fees; according to their terms of service, you can’t even ask a guest for their email address unless this is necessary to ensure a pleasant stay.
You can, however, accept bookings from guests who didn’t find you on Airbnb as such. One possibility is simply to create your own website and drum up business yourself – this isn’t as difficult as you may think.
Another is to join a platform such as Vrbo (Vacation Rental By Owner), which focuses on suburban houses rather than city apartments, or Booking.com, which shows private rentals alongside traditional hotel rooms. Nothing in Airbnb’s terms of service prevents you from listing on other forums as well. These websites, of course, do charge fees similar to those of Airbnb. Each has its own wrinkles and, when it comes to customer service, there is no consensus on which is best. Remember, however, that the number of guest ratings you have affects how high up in search results you’ll be, making sticking with a single platform a potentially wise strategy.
How Do Taxes on Airbnbs Work?
Taxes are complex. If Congress and the IRS set out to design a bicycle, it would undoubtedly include seven wheels of different sizes, an aquarium, and a sundial that prevents you from pedaling between 3 and 3:12 p.m. every day. You can’t escape it, but knowing a little about how this contraption is put together can help you pay much less.
As one example, any house you live in for at least 14 days per year, or at least 10% of the time you rent it out, counts as your residence. This may well apply to either a holiday home or a house that’s partially converted to an Airbnb, and you don’t have to pay income tax on the rental income as long as you rent it out for less than 14 days in the year.
On the other hand, you need to rent out a property you use occasionally for more than 300 days per year – hard to do with an Airbnb – for it to no longer be classified as a residence. With anything under the 300 figure, you’re severely limited in what kind of expenses you can deduct from your income. Specifically, for residences, you can’t deduct more than you earn in rent, and many expenses have to be divided to reflect the proportion of time or space you rent out.
Assuming that your Airbnb property is not defined as a residence, the situation is much simpler: you can deduct all expenses related to renting it and must declare your earnings as supplemental income. Fortunately, Airbnb will send you a copy of your form Form 1099-K covering all rentals organized through them. It’s up to you, however, to keep meticulous records of all your expenses – not deducting everything you can means giving money away. Depending on where you live, Airbnb may also automatically deduct and pay your local taxes.
An Airbnb Property Has to Be Run Like a Business
With nearly 6 million properties available for rent (well over 500,000 of these in the U.S) and over $100 billion distributed to hosts over the years, Airbnb definitely has the potential to earn you some extra money. Though getting a property – which can even be something like a moored boat or treehouse – into acceptable shape can be pricey, advertising it on their platform is free. You can set your own prices, include services like tours and meals, and (within reason) choose which guests to accept.
Despite all these advantages, an Airbnb property is neither a guaranteed nor a truly passive source of income. Work at it strategically, and you can earn returns well in excess of traditional renting. Neglect it or your guests, and poor reviews and unexpected costs will sink you.
This means that your first step has to be drawing up a business plan – not the most exciting task, but one that’s often enlightening. This will generally be in two parts: one figuring out how much it will cost you to get started and how long it will take you to earn back your initial investment, plus another that tells you how much money your Airbnb will earn on an ongoing basis. You’ll find that these two are closely linked; making a change on one means altering the other.
Gathering all these figures, especially your various expected costs, may take a while, but you’ll find plenty of excellent resources online. You’ll likely find that it is indeed possible to make money by becoming an Airbnb host once all the numbers are tallied up. From this point on, success is all in the details: from marketing your listing to making sure the faucets don’t leak, diligent work is what will really pay off.