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

[Maegan Martin]

I’m interested in the Insurance aspect regarding leasing and the subletting. What companies would cover the liability of this type of deal? 

[Bac Nguyen]

@Maegan Martin I just used Foremost to get $1M in liability for my STR. They are the cheapest I can find compare to CBIZ and Proper insurance. The last two provide a lot of other options - like bed bugs, exterior coverage, etc.

[Paula Ke]

@Bac Nguyen - Hi. Just wondering why the Airbnb Liability Insurance isn't good enough and you have to get your own? 

[Deep Sharma]

Originally posted by @Paul Sandhu:

Originally posted by @Greg Scott:

Nice biz model. This is in KC MO?

No way.  This is in Coffeyville KS.  It's a Wild West Refinery town in the middle of nowhere.  I don't bat an eye when I see someone riding a horse or a riding mower down a street.

 Good One  :)

[Dinyah Rein]

I saw a lot of people asking about the details, a script, etc. This is what I'm wondering. I lucked into one landlord who is happy to have us renting out his place for STVR, and would like to find more, but so far I don't seem to have a proposal that will get me past the realtor who is carrying the listing to speak with the landlord. I'd really appreciate sharing about what's worked for others.

[Ken Latchers]

Put it this way. The starter of this thread started an international business teaching how to do this, and he teaches to no longer do this

[Paul Sandhu]

If something is too good to be true, it usually isn't.  In an efficient market, you can not make above normal returns in the long run.  You can in the short run.

[Krissie Cole]

Hello, I am looking for an addendum to the lease that stipulates that you can use as an Airbnb.  Can anyone help?

Thank you,

Krissie

[Syed Zaidi]

Fascinating discussion. So many creative ways to generate income. I have a few questions. 
1) How has covid19 affected this business model?
2) Wouldnt it be less moving parts if you just rented out the rooms individually to long term tenants ?
3) Why not just purchase properties to airbnb instead of renting from landlords?

[Paul Sandhu]

Originally posted by @Syed Zaidi:
Fascinating discussion. So many creative ways to generate income. I have a few questions. 
1) How has covid19 affected this business model?
2) Wouldnt it be less moving parts if you just rented out the rooms individually to long term tenants ?
3) Why not just purchase properties to airbnb instead of renting from landlords?

1. It's a bad model to begin with, so now it's even worse.

2. Not practical.

3. Ding Ding Ding!  We have a winna'.

[Dan H.]

Originally posted by @Paul Sandhu:

Originally posted by @Syed Zaidi:
Fascinating discussion. So many creative ways to generate income. I have a few questions. 
1) How has covid19 affected this business model?
2) Wouldnt it be less moving parts if you just rented out the rooms individually to long term tenants ?
3) Why not just purchase properties to airbnb instead of renting from landlords?

1. It's a bad model to begin with, so now it's even worse.

2. Not practical.

3. Ding Ding Ding!  We have a winna'.

#1 in our market, STRs were banned for 2.5 months. Our occupancy is still significantly below pre-Covid levels. We also have lowered rates slightly. We are out >$60k in lost STR rents and continuing to grow. 2019 we averaged ~$16k/month rent (small duplex at the beach). We will be below (probably significantly below) $11k/month average for 2020.

#2 I view both models as being labor intensive but the upside is likely a little higher with an STR then by the room rental when self managed.

#3 I’ll answer number 3 from the perspective of the person renting and then subletting. Then from the perspective of the owner.

Paul is in Kansas where I suspect it does not have large cost of entry. In my market, our STR property is worth ~$1.4m. Typical non owner occupied LTV is 75%. This implies a purchaser would need $350k plus closing costs and reserves to be able to purchase the property. However, if they can rent it LTR for $8k/month (about LTR market rent) then re-rent it as a STR for $16k/month (which is about what we got pre-Covid), there is a lot of money to be made assuming that they self manage. Note the typical cost of entry on a LTR rental in my market is 2 months rent (1st month plus security which is a month's rent). $16k is a lot less than $350k and there is no need to qualify for the $1.05m mortgage. My view is it is easy to see why, from the perspective of the person doing it.

All of our leases have a clause prohibiting subleasing. This is to ensure we know who is residing in our units (all adults have credit and criminal checks) but also to prevent sublease for STR (or LTR). If we want the unit as a STR, why would we desire an unprofessional PM to manage our valuable asset without us getting the additional revenue? It is much less risk and a better return for us to hire a professional/licensed PM and the additional STR profits go to us instead to an amateur PM who has little to lose as they have very low investment amount.

In our market, STR rentals were recently banned for 2.5 months. If someone had LTR our unit and then subleased it STR, how would they have been able to pay the LTR rent? They likely would have used the eviction ban to not pay after having profited from the STR sublease. I would be having the risk of the STR without the financial benefit.

I know a successful LL in Houston that allows some tenants to sublease his units as STR units. He gets slightly higher rent, but in my view not enough to justify the risk (we have discussed our views). So there are some LL that do allow STR sublease of their units. I believe this to be a small percentage and likely getting smaller.

Good luck

[Paul Sandhu]

Originally posted by @Dan H.:

Paul is in Kansas where I suspect it does not have large cost of entry. In my market, our STR property is worth ~$1.4m.

That is an understatement.  $12,500 will get you a decent 3BR house with CH/A with enough money left over to buy all the furniture, electronics and appliances.  It'll rent for $400-$600 a week.  The down side is that this town is full of meth heads and the unemployed.

[Jaeseok An]

@Eric Moeller Good to see you here! Seems you've explored this business model deeply past 4 years and made a good business out of this. 

[Syed Zaidi]

Originally posted by @Dan H.:

Originally posted by @Paul Sandhu:

Originally posted by @Syed Zaidi:
Fascinating discussion. So many creative ways to generate income. I have a few questions. 
1) How has covid19 affected this business model?
2) Wouldnt it be less moving parts if you just rented out the rooms individually to long term tenants ?
3) Why not just purchase properties to airbnb instead of renting from landlords?

1. It's a bad model to begin with, so now it's even worse.

2. Not practical.

3. Ding Ding Ding!  We have a winna'.

#1 in our market, STRs were banned for 2.5 months. Our occupancy is still significantly below pre-Covid levels. We also have lowered rates slightly. We are out >$60k in lost STR rents and continuing to grow. 2019 we averaged ~$16k/month rent (small duplex at the beach). We will be below (probably significantly below) $11k/month average for 2020.

#2 I view both models as being labor intensive but the upside is likely a little higher with an STR then by the room rental when self managed.

#3 I’ll answer number 3 from the perspective of the person renting and then subletting. Then from the perspective of the owner.

Paul is in Kansas where I suspect it does not have large cost of entry. In my market, our STR property is worth ~$1.4m. Typical non owner occupied LTV is 75%. This implies a purchaser would need $350k plus closing costs and reserves to be able to purchase the property. However, if they can rent it LTR for $8k/month (about LTR market rent) then re-rent it as a STR for $16k/month (which is about what we got pre-Covid), there is a lot of money to be made assuming that they self manage. Note the typical cost of entry on a LTR rental in my market is 2 months rent (1st month plus security which is a month's rent). $16k is a lot less than $350k and there is no need to qualify for the $1.05m mortgage. My view is it is easy to see why, from the perspective of the person doing it.

All of our leases have a clause prohibiting subleasing. This is to ensure we know who is residing in our units (all adults have credit and criminal checks) but also to prevent sublease for STR (or LTR). If we want the unit as a STR, why would we desire an unprofessional PM to manage our valuable asset without us getting the additional revenue? It is much less risk and a better return for us to hire a professional/licensed PM and the additional STR profits go to us instead to an amateur PM who has little to lose as they have very low investment amount.

In our market, STR rentals were recently banned for 2.5 months. If someone had LTR our unit and then subleased it STR, how would they have been able to pay the LTR rent? They likely would have used the eviction ban to not pay after having profited from the STR sublease. I would be having the risk of the STR without the financial benefit.

I know a successful LL in Houston that allows some tenants to sublease his units as STR units. He gets slightly higher rent, but in my view not enough to justify the risk (we have discussed our views). So there are some LL that do allow STR sublease of their units. I believe this to be a small percentage and likely getting smaller.

Good luck