Is starting an AirBnB business a good idea? London edition.
September 22, 2014 4:16 AM Subscribe
Is buying a small property (in London) for short term rentals on AirBnB a terrible idea?
Hi. I've come into a bit of money, and am thinking about investing it in property in London. (I know, returns on the stock market are awesome, I'm doing that too, but let's just keep this as a thought experiment in the name of diversification.) In London, I could afford to buy flat out a small studio in either an established area, or something maybe slightly bigger somewhere more up and coming. The kind of small space that might make a great AirBnB place for a few days, but perhaps not so nice long term living. Assume I have someone reliable to do the management of the property (opening up, etc.)
I've heard of people making money doing this on AirBnB, but I'm not even sure how to start thinking about whether this would be a good idea versus long term rental (or opting out of property altogether). London has a LOT of properties on AirBnB but many seem ridiculously expensive (perhaps they need to be so expensive to be profitable?) or don't look that good. Assume I have some skills in design that would make the place look smart.
How do I go about thinking about this? Does this sound like a terrible idea off the bat? What would be the factors to think about in identifying the right location/property? How could I make my chances for success higher? What do I need to consider that I'm not?
Thanks!
Hi. I've come into a bit of money, and am thinking about investing it in property in London. (I know, returns on the stock market are awesome, I'm doing that too, but let's just keep this as a thought experiment in the name of diversification.) In London, I could afford to buy flat out a small studio in either an established area, or something maybe slightly bigger somewhere more up and coming. The kind of small space that might make a great AirBnB place for a few days, but perhaps not so nice long term living. Assume I have someone reliable to do the management of the property (opening up, etc.)
I've heard of people making money doing this on AirBnB, but I'm not even sure how to start thinking about whether this would be a good idea versus long term rental (or opting out of property altogether). London has a LOT of properties on AirBnB but many seem ridiculously expensive (perhaps they need to be so expensive to be profitable?) or don't look that good. Assume I have some skills in design that would make the place look smart.
How do I go about thinking about this? Does this sound like a terrible idea off the bat? What would be the factors to think about in identifying the right location/property? How could I make my chances for success higher? What do I need to consider that I'm not?
Thanks!
Best answer: This fellow blogged about doing what you're thinking about doing, but he was in Las Vegas NV, USA, which I suspect is best case for making money on this sort of thing - Las Vegas is a highly desirable vacation market, but home prices were severely depressed by the US housing market implosion at the time he bought (he paid 40K USD for what looks like a nice flat)
posted by mr vino at 4:33 AM on September 22, 2014 [4 favorites]
posted by mr vino at 4:33 AM on September 22, 2014 [4 favorites]
This is an impossible question to answer. You would need to know what the gross yield would be the unit - so you would need to know what people have been able to rent units for in the neighborhood and then some sort of guestimate as to what the occupancy rate is (unless its prime West London - assume this is a meaningful issue) and then what is that relative to the cost of the apartment. If that number isn't several points higher than what it would cost you to finance the place - forget about it.
I'd be surprised if the numbers worked - but that's just a guess. Run the numbers - if it says you need an 80% occupancy rate at the prevailing price to earning 6% on a unit you finance at 4%, then you know it won't work.
posted by JPD at 4:40 AM on September 22, 2014
I'd be surprised if the numbers worked - but that's just a guess. Run the numbers - if it says you need an 80% occupancy rate at the prevailing price to earning 6% on a unit you finance at 4%, then you know it won't work.
posted by JPD at 4:40 AM on September 22, 2014
Response by poster: Yes, sorry for the impossible question! I suppose what I'm looking for is not so much -- will this work? -- but what kinds of questions I need to ask myself before taking any first steps. This is all very helpful!
posted by EtTuHealy at 4:48 AM on September 22, 2014
posted by EtTuHealy at 4:48 AM on September 22, 2014
Best answer: - but what kinds of questions I need to ask myself before taking any first steps.
Caveat: I've never owned real estate, and live in the States, so grain of salt. But is sounds like you are open to questions that people can generate. I have thought about this, too, and here are some of the questions that I would absolutely hire a lawyer to answer,and probably do research with local real estate agents (published and/or in person):
-What percent of properties are rented out/occuppied in your area vs. not rented out rental unites (ie, to estimate the likelihood of renting it out or if there are months that it might not be occupied). Is this seasonal?
-Check the local rents for a similar unit. This would probably be with a local realtor or anywhere this is listed. The fear that I would have is that these organizations/apps might only occur for a limited amount of time. So estimate the local rents, too, and likelihood of having a tenant in teh place/how much they would pay per month, etc.
-What are the current laws/regulations/rules in your building for renting? I would be very concerned if it is against the rules and this loop is closed down quickly. Is there a possibility these rules can change in a building.
-What is your liability risk and what type of insurance should you get to protect yourself (I would not trust your app/service, but that's me). I would ask a lawyer/accountant.
-What are/would be your tax obligations?
-Do you have to register as a business?
-What would it cost to get a local person to clean, check someone in, etc.? What are costs of utilities? The insurance? (as in how much will you need to make to break even and/or come out ahead).
-Will you also have money set aside for paying a few months if it is unoccupied? Repairs? Etc? (probably more than a few months, but YMMV).
posted by Wolfster at 5:12 AM on September 22, 2014 [2 favorites]
Caveat: I've never owned real estate, and live in the States, so grain of salt. But is sounds like you are open to questions that people can generate. I have thought about this, too, and here are some of the questions that I would absolutely hire a lawyer to answer,and probably do research with local real estate agents (published and/or in person):
-What percent of properties are rented out/occuppied in your area vs. not rented out rental unites (ie, to estimate the likelihood of renting it out or if there are months that it might not be occupied). Is this seasonal?
-Check the local rents for a similar unit. This would probably be with a local realtor or anywhere this is listed. The fear that I would have is that these organizations/apps might only occur for a limited amount of time. So estimate the local rents, too, and likelihood of having a tenant in teh place/how much they would pay per month, etc.
-What are the current laws/regulations/rules in your building for renting? I would be very concerned if it is against the rules and this loop is closed down quickly. Is there a possibility these rules can change in a building.
-What is your liability risk and what type of insurance should you get to protect yourself (I would not trust your app/service, but that's me). I would ask a lawyer/accountant.
-What are/would be your tax obligations?
-Do you have to register as a business?
-What would it cost to get a local person to clean, check someone in, etc.? What are costs of utilities? The insurance? (as in how much will you need to make to break even and/or come out ahead).
-Will you also have money set aside for paying a few months if it is unoccupied? Repairs? Etc? (probably more than a few months, but YMMV).
posted by Wolfster at 5:12 AM on September 22, 2014 [2 favorites]
Some communities are starting to react strongly against this kind of business model, because transient populations (even well-heeled ones) weaken community in the traditional sense. Whether you agree or not, they are starting consider making it harder to own a place solely to (effectively) lease it on a night-by-night basis, without you also living there.
My first reaction on hearing about this was that nobody should be able to tell me what to do with my condo; then I started thinking about living next door to a house with different people in it every night, and I got a bit creeped out.
posted by amtho at 5:13 AM on September 22, 2014 [8 favorites]
My first reaction on hearing about this was that nobody should be able to tell me what to do with my condo; then I started thinking about living next door to a house with different people in it every night, and I got a bit creeped out.
posted by amtho at 5:13 AM on September 22, 2014 [8 favorites]
Stay in several AirBnb spots. See what's working for the folks doing it now. The one I stayed at recently was basically a hostel. Do you want to be a hands on hostel proprietor? Will you be there daily, doing the housecleaning or do you have a budget for hiring some kind of housecleaning staff?
posted by sammyo at 5:30 AM on September 22, 2014 [2 favorites]
posted by sammyo at 5:30 AM on September 22, 2014 [2 favorites]
Best answer: It looks like you have the business part of your question covered, so I want to second amtho's comment. I assume by "up and coming" you mean somewhere non-central and relatively affordable in North or South East London, i.e. somewhere already on the way to being gentrified. You should consider what your buying property in that community will bring to that community and whether you feel comfortable adding to the pricing out of current residents.
Also, you should be aware that the government currently has legislation (although it is being reconsidered) against short-term letting (i.e. under 3 months) which will earn you a fine of £20,000 if you are caught.
posted by fight or flight at 5:35 AM on September 22, 2014 [7 favorites]
Also, you should be aware that the government currently has legislation (although it is being reconsidered) against short-term letting (i.e. under 3 months) which will earn you a fine of £20,000 if you are caught.
posted by fight or flight at 5:35 AM on September 22, 2014 [7 favorites]
Best answer: Legality is your fundamental concern. Then bear in mind that property in many parts of London, especially flats, is leasehold and not freehold, and subject to whatever additional restrictions and costs the freeholder of the building stipulates in the lease. Only then can you start thinking about yield.
posted by holgate at 6:40 AM on September 22, 2014 [1 favorite]
posted by holgate at 6:40 AM on September 22, 2014 [1 favorite]
You need to first work out the monthly cost of upkeep for the unit, including property taxes, income taxes, utilities, fees, etc., factor in the cost of future repairs and cleanings, plus your mortgage payment. When you get that figure, you can take a look at what people on AirBnB charge per night for a unit like the one you're considering, and see if you can actually make any money at it.
posted by deathpanels at 7:11 AM on September 22, 2014 [2 favorites]
posted by deathpanels at 7:11 AM on September 22, 2014 [2 favorites]
Can you afford to budget for upkeep/repairs, especially if something goes haywire/the guests destroy the place/somebody breaks the couch?
posted by thomas j wise at 8:35 AM on September 22, 2014
posted by thomas j wise at 8:35 AM on September 22, 2014
It's probably a good idea to look at the long term here if you're considering buying a property you have no intention of actually living in. The whole AirBnB business model seems to be an ephemeral thing which depends on a bunch of specific economic conditions to work out.
What happens if your jurisdiction enacts much stricter laws against this sort of thing, or begins hard-line enforcing the restrictions that already exist?
What happens if the economy gets better and people start just staying in hotels again like they used to?
What happens if airfares go up and budget travel is no longer a huge sector of the economy?
What happens when (not if) AirBnB as a company goes under/the vogue for "house sharing" ends?
What happens if it turns out "up and coming" neighborhood doesn't translate to easy AirBnB cash? I live in an "up and coming" neighborhood of Los Angeles. The idea that I could turn a profit renting out my apartment on AirBnB is laughable. Friends have come to visit me here and opted to stay in already established/nice/cool neighborhoods more centrally located to tourist attractions, not "up and coming" neighborhoods.
posted by Sara C. at 8:41 AM on September 22, 2014 [1 favorite]
What happens if your jurisdiction enacts much stricter laws against this sort of thing, or begins hard-line enforcing the restrictions that already exist?
What happens if the economy gets better and people start just staying in hotels again like they used to?
What happens if airfares go up and budget travel is no longer a huge sector of the economy?
What happens when (not if) AirBnB as a company goes under/the vogue for "house sharing" ends?
What happens if it turns out "up and coming" neighborhood doesn't translate to easy AirBnB cash? I live in an "up and coming" neighborhood of Los Angeles. The idea that I could turn a profit renting out my apartment on AirBnB is laughable. Friends have come to visit me here and opted to stay in already established/nice/cool neighborhoods more centrally located to tourist attractions, not "up and coming" neighborhoods.
posted by Sara C. at 8:41 AM on September 22, 2014 [1 favorite]
What do I need to consider that I'm not?
The ethical angle? London's overpopulated, and people are moving to it faster than the infrastructure can adapt. The middle classes are being priced out of anywhere slightly central, and the poor are already relegated to its edges. Communities have been broken apart, and replaced with a transient population that's uninvested in their locale. Every time something culturally interesting happens in it, the trend is commodified, and as the rich move in to buy a slice of the action, its originators are forced out.
It might just be me, but bearing all that in mind, buying a property as an investment, that you don't intend to use, but instead to lease on a short term basis via a 'disruptive' company that I doubt contributes much to the city by way of tax, seems pretty immoral.
posted by Ned G at 9:06 AM on September 22, 2014 [10 favorites]
The ethical angle? London's overpopulated, and people are moving to it faster than the infrastructure can adapt. The middle classes are being priced out of anywhere slightly central, and the poor are already relegated to its edges. Communities have been broken apart, and replaced with a transient population that's uninvested in their locale. Every time something culturally interesting happens in it, the trend is commodified, and as the rich move in to buy a slice of the action, its originators are forced out.
It might just be me, but bearing all that in mind, buying a property as an investment, that you don't intend to use, but instead to lease on a short term basis via a 'disruptive' company that I doubt contributes much to the city by way of tax, seems pretty immoral.
posted by Ned G at 9:06 AM on September 22, 2014 [10 favorites]
One minor point in addition to the much more useful information above: As you evaluate London properties (your potential competition) on Airbnb, keep in mind that until very recently, a person writing a negative review of an apartment could receive in retaliation a negative review from the owner.
That risk could encourage renters who realized their landlords are flakes or worse to avoid leaving a review at all, which I have been guilty of twice. Rather than say the place had issues and the landlord was a jerk, I just didn't leave a review, because the jerk landlord could retaliate. If others had the same concern, that might help explain why almost all reviews are positive.
Airbnb recently changed the system so that the renter and landlord don't see each other's reviews until both are simultaneously published. The last place I rented, ending in August, was reviewed under the new rules. So I would take reviews published before July 2014 or so with a big grain of salt. The reviews could be good sources of ideas for features that people like, but they might not be a reliable way to gauge the quality of what's currently on the market.
posted by ceiba at 10:09 AM on September 22, 2014 [1 favorite]
That risk could encourage renters who realized their landlords are flakes or worse to avoid leaving a review at all, which I have been guilty of twice. Rather than say the place had issues and the landlord was a jerk, I just didn't leave a review, because the jerk landlord could retaliate. If others had the same concern, that might help explain why almost all reviews are positive.
Airbnb recently changed the system so that the renter and landlord don't see each other's reviews until both are simultaneously published. The last place I rented, ending in August, was reviewed under the new rules. So I would take reviews published before July 2014 or so with a big grain of salt. The reviews could be good sources of ideas for features that people like, but they might not be a reliable way to gauge the quality of what's currently on the market.
posted by ceiba at 10:09 AM on September 22, 2014 [1 favorite]
What do I need to consider that I'm not?
That AirBnB is a parasitic company that takes advantage of loopholes in existing law to cheat communities out of legitimate tax revenue and to expose guests and landlords alike to legal, safety, and other risks? That one by one cities are waking up and cracking down on this parasitic business model and the same is sure to happen in London? That your "investment" might be devalued overnight by simple legislative fiat? That your neighbors will hate you?
That's what I'd be considering.
posted by spitbull at 4:54 PM on September 22, 2014 [5 favorites]
That AirBnB is a parasitic company that takes advantage of loopholes in existing law to cheat communities out of legitimate tax revenue and to expose guests and landlords alike to legal, safety, and other risks? That one by one cities are waking up and cracking down on this parasitic business model and the same is sure to happen in London? That your "investment" might be devalued overnight by simple legislative fiat? That your neighbors will hate you?
That's what I'd be considering.
posted by spitbull at 4:54 PM on September 22, 2014 [5 favorites]
This thread is closed to new comments.
Talk to a lawyer and an accountant.
posted by taff at 4:28 AM on September 22, 2014 [1 favorite]