Build Air BnB Cottage in Backyard or Invest $ in another SFR?

[Ana Marie B.]

Hi BP! My husband and I own and occupy an SFR in the SF Bay Area. With real estate prices so high around here, we're unwilling to invest in another property until this bubble bursts. Therefore, we're thinking about the following options --

A.) Build a cottage/bath in our backyard (w/ full permits) and use it for short-term rental via Air BnB. Cost of construction would cost around $40-50k. We live 15-20 mins from SF and have bus/train stations close by.

B.) Put that $ toward another out-of-state investment (leaning toward SFR).

Curious what your thoughts are. Thanks in advance for your input!

[Jenna Y.]

Hello, we own two AirBNB vacation rentals, aiming to capture both cashflow AND appreciation in the CA market. Speaking from personal experience, managing them is not that big of a deal, as long as (1) you enjoy the limited interactions with guests (2) you have an effective infrastructure set up. 

This is roughly our time breakdown right now, managing two vacation rentals ourselves, both about 85% occupancy. At some point it will make sense to go with a property manager, but right now it's doable, enjoyable, and we are still deriving value from learning: 

- DAILY: About 5-10 minutes per property with individual inquiries and sending standardized guest responses.  Keep in mind though that you're on-call 24/7 - maybe about once a quarter we'll get an off-hours issue that needs to be addressed ASAP. If you don't want that possibility in your life at all, I would strongly recommend against managing a vacation rental yourself. Otherwise, A LOT can be addressed by judiciously pre-screening and then proactively managing guests. 

- WEEKLY: About 20-30 minutes per property on housekeeping logistics (arranging times and getting feedback with housekeepers, ordering stuff on Amazon Prime)

- MONTHLY: Probably about 2-3 hours on each property arranging maintenance-related upkeep, accounting, long-term planning (including yield management). 

- QUARTERLY: We dedicate three full work days for scheduled maintenance on-site. Right now we do this all ourselves because we really love our properties - making small improvements, planting new flowers, etc. That's not scalable, clearly, but it is fun for now!

A final thing - there needs to be a solid exit strategy - the numbers still need to make sense if you decided to rent it out long-term.