Real estate, if you’re the sort of fancy-pants who can afford it, is one of the better investments out there. Passive income is pretty much the best thing ever, and property value is more or less certain to increase over time. But about that passive income: What’s the best way to get it? Should you lease it? Or should you ride the zeitgeist and Airbnb it (even if it means — or maybe for the express purpose of — annoying the hell out of your neighbors)? Alongside Areeal Randall, a realtor in Los Angeles, we’re going to dig up some answers.
So, I’ve got a property. What’s gonna make me more money?
Think of it like that old real-estate cliché: Location, location, location. “If you have a cool spot on the beach in Venice, you’re going to make a ton of money Airbnbing your place out all summer long,” Randall says. “Or if you have a great place in the mountains in a ski town you’re going to make a ton of money doing that.” Even if you have a place close to the city center, or just to someplace that people want to visit, an Airbnb (or HomeAway, or VRBO, etc.) is probably a solid idea.
As for how much can you expect to make, if you’re considering an Airbnb, the best thing to do is look at all the properties around yours that are available. See how they compare to yours, what they rent for and their availability (from which you can roughly determine how often they’re booked). That’ll give you a rough idea of how feasible it is, and how much gross income you can make off of it.
If you’re considering going the more traditional rental route, it’s pretty easy to get a sense of the market: Just look on Craigslist, or wherever rentals are listed in your area.
Level with me: What’s the safer option?
The longer-term option is always the safer option. There’s always the chance you won’t be able to rent it out short-term — maybe you have a few slow weeks during the off-season or around holidays, or for no reason at all. But a 12-month lease is, yeah, 12 months of income.
“From my perspective, the clients who come through here in Beverly Hills, it’s all about the long term,” Randall says. “For people who are making a business out of it, Airbnb isn’t new anymore, but it’s new enough to where the laws are continually changing, which is scary for investors. They like consistency, and they’re all about a cap rate of what it’s going to cost them year by year and what they’re going to make back from it.” Which is to say that many investors/people tend toward a standard rental.
If I Airbnb, do I have to manage the all that shit myself?
Nah — you can hire a property manager if you want. That’s at least what Randall says people who make a career out of buying properties do, just like landlords with multiple properties. Prices really vary, but property managers will generally charge around 10 percent of the rental value, depending on how much work it takes.
How do the expenses compare?
Good point! You’ll be eating a lot more expenses if you Airbnb: It’s gotta be furnished, of course, and guests expect TV, WiFi, maybe a trendy reed diffuser in the bathroom and other amenities, along with the obvious things like water, electricity and trash.
But if you have a long-term tenant, they’re often responsible for most, if not all, of the above expenses, depending on what you and they agree to. Property insurance is the same no matter what you do with your property, according to Randall, and it’s a tax write-off for you.
Speaking of which, what else should I know about taxes?
Property taxes are also all the same, no matter what you do with the property. Some cities may charge a small annual tax for the “business use of property,” but most things you do to it are tax write-offs: insurance, maintenance, repair, etc.
Depending on the municipality, Airbnbs are often subject to what’s often known as a Transient Occupancy Tax — the same tax you’re often charged when you stay at a hotel. They all vary by the city or county, but they range from a couple percent or less to, say, 14 percent in San Francisco (that’s 14 percent of the room fee plus the cleaning fee). Airbnb collects it on your behalf, but the good news is, this tax is also a business write-off, according to Randall.
What did you mean earlier about the law constantly changing?
Well, in case you hadn’t noticed, Airbnb is generating a hell of a lot of backlash these days. Obviously the powerful hotel industry hates it, but Airbnb is also frequently blamed for driving up home prices, creating housing shortages in desirable (and already expensive) locales and even destroying the character of a place.
Cities and voters are responding: To use just one example, as of this month in L.A., people are only allowed to rent out a property that’s their primary residence (meaning they live there for at least six months a year), and they can only rent it for 120 days a year (though they can pay a lot more money if they want to rent it out more often). There are also fees involved to register your short-term rental property with the city; it’s $89 for L.A.
In San Diego, a law was passed last year (then rescinded a few months later, yet is again looming) restricting short-term rentals in a similar way to L.A. The annual registration fee to the city was going to be an eye-watering $949. Supposedly a lot of that fee was to pay for enforcement of all the restrictions, i.e., to go after the hordes who would no doubt try to skirt these laws.
It’s hard to know whether this is the beginning of something significant — Uber, electric scooters and social media all thrived in similar sort of Wild West, lawless gray areas. Just know that when it comes to laws regarding short-term rentals, proceed carefully — especially if you’re considering purchasing property. You don’t necessarily want to be an overleveraged owner of multiple Airbnb units in L.A. right about now.
What else should I consider?
Well, depending on how much you care, most neighbors fucking hate it when the home next to theirs becomes an Airbnb, so get used to fielding complaints from them. But that’s also on you: Be a good host, and remind your guests not to be assholes.
Are there other restrictions on Airbnbs?
Yes — many homeowner associations that govern condominium communities and elsewhere forbid rentals of 30 days or less. Some even prohibit rentals of less than a year. If your property is governed by an HOA, there’s a decent chance it might not be allowed, so read the bylaws (you were given a copy during escrow) to make sure.
So… sounds like a traditional rental is the way to go, right?
Not necessarily! Some people just like the whole vibe of being an Airbnb host. Or maybe your property is somewhere nice that’ll be booked up nearly seven nights a week, and isn’t governed by too many laws restricting short-term rentals, in which case, woo-hoo! Much of it obviously depends on your property, but it also depends on what you’re up for. Wanna make a lot of money even if it might mean changing dirty sheets and taking out someone else’s disgusting trash? Or do you want to simply live your life and wait for a check in the mail every 30 days? In the end, it’s a choose your own passive-income adventure.