Balancing The Pros and Cons of Home-Sharing and Leasehold Tenancy
You own rental property and your goal is to maximize profits. Does it make more sense to rent to traditional tenants, with a one-year lease and long term commitment, or to try your hand at potentially higher earnings on a home sharing platform like Airbnb, VRBO, or Flipkey? As real estate investment professionals, Nexus Property Management® is supportive of most things that provide value and flexibility for property owners. There’s no doubt it’s great to have options and the allure of pulling in anywhere from $100 to $400 a night (depending on your location) is too attractive not to look into. There are benefits to both approaches and like so many investment decisions, this one also comes down to your personal appetite: larger short term gains and the higher risk that comes with it; or more reliable income and greater consistency with much fewer headaches.
OLD RELIABLE: THE LEASEHOLD TENANT MODEL
Nexus has been able to grow quickly and efficiently because the tried and true model that focuses on long term tenancy and centers around building loyalty through prompt and consistent service works when done with fidelity. Nexus currently manages over 1000 units in Southern New England because this model is a win-win-win for property owners, the company, and tenants alike.
Owners have shared that more than anything else they value the stability and security that comes with leased tenants. You provide a quality place to live and your tenants, who you’ve hopefully had the opportunity to do full background checks on, will in turn maintain and take care of that property because it’s their home. So many of our tenants take pride in the space that they are able to call their own and it shows in their upkeep of common areas and prompt reporting of any maintenance needs that ultimately help mitigate larger risks down the road (think leaky pipe in the basement that doesn’t lead to mold or flooding because your first floor tenant spotted it while doing laundry). This relationship creates comfort for all parties and allows you to control your property and manage risk as much as possible. In short, this setup is much more manageable and decreases risk as much as possible.
THE HOME-SHARING OPTION: A.K.A. LISTING IT ON AIRBNB
With a leased tenant you’re receiving rent monthly. With Airbnb or one of the many other options out there, you could pull in a couple hundred bucks a night. If your property is in a high demand area, renting out for just 7 or 8 days could bring in just as much as you’d typically get in a full month if you’d gone the leased tenant route. There are typical vacation destinations where this model makes a lot of sense. In many cities, offering your unit as a cheaper option than area hotels can also be very successful. There is plenty of monetary upside... if you’ve got the right location.
Airbnb requires 3% of your profit, including cleaning fees. Speaking of cleaning fees, this is another area where you can increase your nightly bottom line. A recent airbnb search for a night in Providence, RI asked for $80 rent for what appeared to be a pretty nice place...and an additional $95 cleaning fee.
Where the Airbnb model can exceed traditional rentals in terms of potential payoff, it also brings with it many more risks. For one, insurance issues can lead to headaches even before you get your first tenants. In many cases, property owners have learned the hard way that their homeowners insurance doesn’t cover home sharing. In some states, you may be required to purchase business insurance in addition to your homeowner’s policy. There is plenty of upside with Airbnb and VRBO but all home sharing options come with additional challenges. Definitely be sure to do your homework because as you’ll read in a moment, things can get ugly when you’re renting to random people who often just need a place to crash for a night.
SECOND HAND EXPERIENCE: “SORRY BUT NEXUS NO LONGER MANAGES YOUR PROPERTY”
The following story exemplifies how important it is to think about long term factors and to avoid just focusing on upfront profits.
Nexus Vice President of Franchise Sales, Greg Rice, owned and renovated high-end luxury lofts in downtown Pawtucket, Rhode Island. There were four units that brought in $1200 to $1400 each a month. For five years, Nexus managed the property and like any property there were issues here and there, but nothing that couldn’t be easily managed. In 2020, Greg sold the property and shortly after one of the tenants decided to leave. Now with one vacancy, the property owner decided to list that unit on Airbnb...why not? Great location and an opportunity to pull in maybe $250 a night...what could go wrong?
Well, it wasn’t long before police were being called. Multiple times, police responded to late night music and partying which were accompanied by broken windows, drug use, and violence. There were reports of prostitution, unsupervised children, and unsupervised pets. The property owner had lost control of this unit which led to immediate costs in terms of fixing damages and potential liability. Even worse was the fact that the other three tenants were knocking on our door asking for solutions. They no longer wanted to stay but there was nothing we could do for them. The attraction of short term profits may indeed cost the owner what would’ve been a safe and reliable $3,900 times however many months it might take to refill those units should the tenants leave.
THE STORY REMAINS THE SAME: THINK LONG TERM LIKE SMART INVESTORS DO
We get into real estate investment because we want to increase our returns. Profit is the goal but it can’t stand alone and it can’t trump the variables that lead to more consistency and predictability. Real estate investment requires discipline and patience. For properties to be more manageable you need more control and there is no better way to achieve that than with a lease. The VR (Vacation Rental) Industry is what has led to Airbnb becoming a $31 million behemoth. If you’re in the vacation rental game then exploring this route makes a lot of sense. But if you’re not in a location where demand will offset all the headaches and uncertainty that can come with home sharing, sticking to the long game and locking in the tenants you want with a lease is the best way to add consistent profit to your real estate portfolio.
Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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