Leasing homes to then sublet through Airbnb? Viable business?

[Eric Moeller]

Hey all!

I wanted to get this conversation started to see if any investors out there are currently sandwich leasing properties for the main purpose of subletting through Airbnb. 

I came across a landlord who is looking to rent her home here in San Diego for $2,700 a month. I ran the property through my Airbnb formula and I figured if I sublet this home through Airbnb I would be able to bring in $1,500 a month ABOVE rent, management and reserves. This is crazy to me and made me this would be a great model to explore. (yes, I considered vacancy, management, reserves, staging and local fees into my projections) 

Has anyone done this before? Have you leased a home with the purpose of subletting exclusively through Airbnb? What has worked? What was the biggest surprise? We're landlords kept in the dark or aware of the subletting? What is the benefit for the landlord? Did you cut them in on the profits? 

I have a million questions so lets get this one rolling....

Eric D. Moeller

Koda Homes

[Bruno C.]

@Eric Moeller one of my colleagues did this in Boston for a period of time and scaled pretty rapidly; got to a point where he had a property manager working for him 20hrs/week and had 15-20 units in this model. 

Pros: 

-If your market will support it (which from what you say it sounds as though it does), great. 

-You can go in with a minimal cash influx (furniture etc.) 

Some cons: 

-Higher property management costs (turnover, customer service, etc).

-Once landlords find out HOW much you're making, they will be trying to cut into your margins by raising the rent you owe them. 

-Tax structure gets dodgy city-city

How do you want to structure it the business? 

In general I think it's a great side hustle but it's a matter of time before municipalities at second-tier cities (San Diego, Boston, etc) start clamping down on this, especially renting out each room individually. I would consider that a huge risk, as at that point you truly are the same as a hotel, and will likely get taxed as such.

If you rent out multiple apartments/houses I think you have a better chance of keeping profits high and minimizing your risk with local laws - but I don't know much about SD occupancy laws.  It's definitely something that can be lucrative though and if you believe it's worth your time I'd do it. 

[Brian Lacey]

@Eric Moeller, love this idea! It's the equivalent of the Uber fleet that some Uberpreneurs have created.

Unfortunately, this idea is great, and like @Bruno C. said, this will be heavily legislated soon enough.

God forbid a primary market's monopoly on hotels be challenged.

[Mike Hanneman]

Are there really that many landlords that will let tenants sublet their leases? I would think that not many landlords know this is going on, but maybe...

[Thomas S.]

Biggest hurdle will be getting the landlord to allow you to do it. Without your landlords permission you will be in violation of your lease and likely evicted.

As a landlord I would never allow any tenant to do this with my property. I expect to fully screen every tenant/occupant.

[Gerald Demers]

My concern is about full disclosure and liability.  

First, full disclosure.  Are you telling the property manager your plan prior to moving in?  I suspect neither the property manager nor lease would allow this. I suspect you would have to not disclose and do it under the radar or inform them and create some sort of partnership.  

There are several stories of AirBB tenants trashing the place. What happens then?  Do you take responsibility and have insurance?  Will you be able to insure it; a building you don't own?  Or will you tell the landlord to keep the security deposit and run away?  

I am all for making cash, especially creatively.  I just don't believe in stepping away and leaving someone else to clean up my mess.  Can you do this in a way that protects everyone?  Can you create a solution that if you were the property manager, you would say yes to?  

Again, I cannot emphasize enough how much I appreciate creative and unconventional thinking to generate income.  

Gerald Demers

[Kim Bayless]

Sounds like good cash flow but be careful. Cities are starting to tax this at hotel rates, with hefty penalties for noncompliance. Also some condo buildings and communities have banned short term rentals, due to lots of renters that are loud and trash the place. The bans happened to me twice (I owned the property however). If they vote it in while you're stuck in a long term lease....big problem.

[George P.]

Any smart landlord will have a clause in his/her rental agreement that will prohibit subletting or require LL vetting of any subletee.

[Dan H.]

Our leases forbid subletting and even stipulate what qualifies as a house guest versus tenant.  So if one of my tenants did this he would get evicted and need to go to court to get deposit back as I would not refund it as tenant has prospered by breaking lease and placing property at a risk greater than what I was compensated  for. 

I think it is pretty standard lease language to not allow subletting. 

[Tim Davis]

In Florida for any short term rental you are required to collect sales tax for the state and the bed tax for the county.  There are fines and penalties if you get caught not complying.  They will eventually run a sting and crack down on Airbnb around here.  Be careful.

[George P.]

http://fusion.net/story/323415/landlords-who-monit...

This company finds people renting out Airbnbs without their landlords’ permission

[Andy Whitcomb]

@Eric Moeller  I have been doing this in Seattle, but it is more like a partnership with the property owner.  Everything is fully disclosed upfront, and we pay market rent PLUS a 20% profit share to the owner.  The only thing the property owner asks is that we run everything above the board and legit, so among other things, we have some serious insurance coverage on both property and liability.  It works great for us in Seattle, as we clear $15k a month in profit (during high season) AFTER all expenses (including rent and profit share).  The owners love it so much that they want us to take over two more homes in the area, and have offered to partner with us on buying more.   Of course, like many cities, Seattle is exploring legislature to limit or outright ban this sort of activity because the hotels have been greasing the pockets of the politicians.  So, we are keeping a close eye on that, and have even written it into our leases that if legislation changes to prohibit us, then we are not obligated to fulfill our lease term.  

[Eric Moeller]

@Andy Whitcomb - Congrats on your success with this! I just locked up my first few projects in the San Diego area for this model. 

Your numbers are incredible. Do you manage the units yourself or are you outsourcing most of the turnover duties? I'd love to chat with you more about your model and see if we can share ideas on expanding it out a bit. Would you be open to a quick phone call or email on this subject? 

[Andy Whitcomb]

Hi @Eric Moeller --  Currently we self-manage and it has been going pretty smoothly.  We have a cleaning lady who comes through and does the flips.  She is very thorough and is able to log in to our airbnb account so she knows when to come in and which rooms to clean.  As we expand to more properties we may expand her role into management as well, or work with a VR management company.  

I'd be happy to chat with you more.  I'll PM you my phone number.

[Blake Brose]

@Eric Moeller

I would be very careful with this type of business, if the home owner is understanding what you are doing, and the city is being paid the necessary taxes, I'd say its okay for now, but I can tell you that this should not be a business model that you place your livelihood on. They law will catch up to Airbnb and it is only a matter of time before cities learn how to start regulating these properties into certain zoning, and with software that can track you. 

[Alex C.]

@Eric Moeller I've had very similar experience in the LA market as @Andy Whitcomb Great work. Thanks for posting!

[Syed Lateef]

@Andy Whitcomb - I am looking to your exact business model in Chicago. How did you convince landlords to allow you to do it? I am going to start reaching out to landlords soon

[Andy Whitcomb]

@Syed Lateef The owners are friends of mine, and they own a lot of properties in the area, mostly apartment buildings.  I simply approached them about my idea and they were happy to work with me on it.  It helped that I had a personal relationship with them, but at the end of the day they're businessmen who look at the numbers. They get market rent, plus 22% profit share, and with me as the tenant they have less maintenance and overall headache, because I self-manage the property.  Keep in mind, also, that vacation rentals are not as hard on the property as standard rentals because of length of stay.  We clean and inspect between every guest, so any problems (which are rare) get addressed asap and never get out of control.

[Syed Lateef]

@Andy Whitcomb

That makes sense. I have an Airbnb unit in Chicago and adding 2 more units in Mid-May and June. This is all in properties i own. Its been a success so far. I am looking to grow to do it in other peoples properties 

[Andy Whitcomb]

@Syed Lateef thats great!  In my opinion, I'd say move forward but use caution.  As a few others have said here, this is a sensitive time for short term vacation rentals.  Make sure you have a backup plan for these properties, because there is a good chance that one of two things will happen:  either your city or municipality decides to clamp down on vacation rentals, making it very difficult or illegal to operate them profitably OR they don't, and everyone else starts doing it, causing the market to flood and prices to drop.  Just like any real estate investing, have at least backup plan and exit strategy.  

[Syed Lateef]

@Andy Whitcomb

Totally understand. My backup plan is just rent out the units to long term tenants as i have now. I have 5 units in 1 property and i am going to make 2 MAYBE 3 of them as Airbnb and other 2 as long term rentals. I just hope the laws dont change in middle of winter because then that will be a problem. Not the end of the world but will be a  problem

Also ill have the front end investment of furniture that i will have a surplus off. Its just i like the extra cash the Airbnb gives me to be able to play with and make other moves

[Andy Whitcomb]

@Syed Lateef Yes, furniture is a big upfront expense, but totally worth it.  I own a furniture company, so I use all of my own product. Unfortunately that seems to make it more expensive because my furniture isn't cheap (even my cost is quite a bit).  I know quite a few people who are quite happy just renting furniture from one of the big box rental companies.  It's not my style, because I'm a designer and very picky, but it works for lots of others.  It's worth looking into, especially if you just want to do a 6 month trial run.

[J. Martin]

@Eric Moeller,

Yes, quite a few people are using this model. 
If you haven't checked it out yet, Scott Shattford, CEO of AirDNA.com, literally wrote the book on exactly how to do this. You can get the book free on their site my signing up for a free subscription to their newsletter. Some people tell the landlords. Some do not. I always do. You will hear from most people on BP (who are not doing it) that it cannot be done - landlords won't let you. regulatory environment too difficult. guests will light your house on fire. etc. etc. etc. Most people probably said these same things about UBER when they first started. Owners won't want strangers riding in their cars. It might not be legal. Riders can trash your car. etc etc. etc. Know the laws and the consequences.

Major issues you may run into include:
- Short-term rental regulations from local municipalities [hint: read the regs right at the top of the law and see what activities the regulations apply to. It won't be applicable to all furnished rentals or any particular website.. ;)
- HOA restrictions (or future restrictions) as @Kim Bayless pointed out. 
- Yes, as others stated, you are responsible for collecting any TOT (transient occupancy tax) and submitting appropriately. (Airbnb already does this for you in some areas.)
- More vacancy than you expected maybe
- This is a business that increases and decreases with the economic/business cycle. Things are about as good as they get. So watch your *** on the next downturn... 

I recommend the Guesty short term property management software if you scale up. Will save you a lot of time and errors. And can add your cleaners to get texts or emails at certain times relative to check out or check in dates/times, without giving them access to your Airbnb account (3% of revenue)

@Mike Hanneman , @Thomas S. yes, owners are doing it. Focus on the value proposition to the landlord.. why does it make sense for them? Sometimes owners just want guaranteed rent, a low-headache tenant that doesn't call them, want to pre-lease multiple units undergoing construction, etc. etc.

@Bruno 

@Bruno C., preach it! I'm just about there in the Bay Area..

@Brian Lacey, you bring up a good point. Do you know what rentals are exempt from short term rental regulations? 

@Andy Whitcomb, good for you :)  Am I reading correctly? $15K/mo in profit? Even during high season, this is very good. Are you renting for $600-$1,000/night. I would think that after you subtract paying market rent, utilities, vacancy, etc, it would be tough to clear $15K in NET profit in one month, unless it's a big, baller house, or running it like a hostel with 10+ beds in the house.. Any tips for us getting less than $15K/mo in net profit on a single property? I know one guy doing about $25k/mo gross on a big hacker house in SF Bay Area, but still only nets about $10k/mo in high season after paying market rents for the use of the property, and everything else.. 

@Syed Lateef, if you're already making good money on regular long-term rentals, your risk should be pretty well covered. It's always there if you need it, but you can pump out the extra money while the going is good.. 

[Arlen Chou]

@Andy Whitcomb your paying market rent PLUS 20%, that is great for the owner! I might have to put some more thought into this... ;-)

[Andy Whitcomb]

@J. Martin

Yes, in July and August of last year we grossed $27k and net $15k per month, but that was at the highest point of our busy season. We also lost $1000 in February (because who wants to visit seattle in February?), so the average is around $5k/mo.  

Ours is a large 6bdrm house in the heart of Capitol Hill/downtown seattle and we rent it as a whole house rental and fill in the gaps with individual room rentals.  It works pretty good. Also, we have a lady that cleans and manages guest inquiries, so it is pretty much hands off. 

[J. Martin]

Originally posted by @Arlen Chou:

@Andy Whitcomb your paying market rent PLUS 20%, that is great for the owner! I might have to put some more thought into this... ;-)

 Arlen, these are vacation rentals for under 30 days, so there's more margin. If you want to allow that, let me know and let's talk ;) hehe Also, it's a baller 6-bedroom house in downtown. Get me one and let's do it!! :)