Denver Long-term Rental vs. Airbnb?

Question

James Carlson · Answer

Wow. Thanks for the shout out, @Bill S. @Michael Greenberg and @Craig Curelop .

Yeah, @Sam Cain , I get this question from a lot from clients. The short-and-sweet answer is that yes, in the right location, with the right furnishings, good photos and great customer service, you can pull in significantly more revenue with Airbnb or short-term rentals (STRs) in Denver than you can with a conventional long-term rental. In my experience it was 2-3x.

The long-and-dirty answer is ...

Unfortunately, in Denver there is a pretty big obstacle to operating a full-time STR. The new Denver Airbnb law allows you to rent out a place short-term only if it's your primary residence. That means you can't rent out an investment property, and you can't rent out the other side of a duplex. If you find a home with a basement apartment or a carriage house out back, that's gold because those uses are considered accessory to your primary residence and are allowed under Denver's Airbnb law. Otherwise, it's tough to do this full-time.

But let's pretend you can run an Airbnb full-time. As an example, back in the wild west days of Airbnb in Denver, I leased a studio apartment in Capitol Hill. It was 400sf and had a balcony. I paid $1,200 in rent. I threw down $3,500 to furnish it, and I was pulling in between $3,000 and $4,000 in revenue from about mid-April to late October. That's pretty good cash flow. If I were doing that now, I would rent out the space from November through April to a traveling nurse to have a steady income during the slow months. I know people doing even better than that. There's a guy in Wash Park who lives in his bungalow's basement apartment and rents out the top and he's pulling in $6,000-$7,000 a month. (Now, that is a very nice 3-bedroom space with an amazing backyard garden area.) I used to think it had to be in the heart of Denver to work, but I've got some clients who rented out a bedroom in their Lakewood home and made enough in one year to buy their first investment property.

Not much has changed in terms of demand since my experience with that studio. When I talk with Airbnb, they say that Denver is one of the hottest markets for short-term rentals and that they don't have nearly enough hosts to fill the demand.

There are resources to determine price. Airdna.co (not "com"), and Mashvisor offer some data, but you have to pay for the good info. I prefer the old-fashioned method. I go to Airbnb and look for homes similar in size, quality, furnishings and location. Make sure they're actually getting booked. (No sense in basing your price off a home that isn't getting booked.) Don't use the calendar to gauge occupancy. That could look full because the host is using the space themselves. I go to the reviews and see if they've had at least a handful of reviews in the past month. If so, then great. Once you have a good sense of the market price for your unit, drop it by 20% to start. When guests are looking at two comparable homes -- yours and another -- and one has reviews and one does not, they'll go with the reviewed one. That is, unless you're 20% lower in price. Once you get a few good reviews, then start increasing your price steadily until you see demand drop off.

That's more than you asked for, I imagine. I'm giving a little talk about  the Airbnb laws in Denver tonight, if you're interested.

Bill S. · Answer

@James Carlson is the man for that in Denver. He has seminars and knows the market. You should talk to him.

James Carlson · Answer

@Frankie Woods We aim to please here! Always appreciate the kind words. Thanks.

@Jessica Stewart ... I will also say that there are some people out there -- including some past clients of mine -- that have gone another "creative" route with their Airbnb in Denver. Because tenants are allowed, we set up a search for them to find a home with a basement apartment or carriage house. They installed a full-time tenant in the basement unit for a discount rent. That tenant then got the short-term rental license through the city of Denver. And then they have hammered out a revenue sharing agreement.

Now, has this been tested by the courts? Nope. So it will be interesting to see if the city decides to come down on this at some point, but as of now, this is a legal avenue some are pursuing.

***** big disclaimer **** I am NOT a lawyer and you should seek legal advice if you're considering doing anything with a short-term rental.

Sam Cain · Answer

Hey guys! So I wanted to give a follow up from our original post. We decided to go with the short term strategy and let’s just say it was the right call. 11 months ago I bought a 1 bed 1 bath SFH for 300k in my name as a primary residence. We added a second bedroom to make it a 2 bed 1 bath. It’s expected to bring in $2400 for the month of June in rental income.  2 bed 1 bath SFH in that area are averaging 1600 a month. My fiancée bought her SFH primary residence that we live in currently

Paul Sandhu · Answer

That's brilliant.  I usually find creative ways to solve my problems but never thought of something like that.

My most creative problem solver was a  broken brush hog in a pasture.  I welded the middle 3 point hitch with 3 car batteries, some jumper cables, vice grip pliers and 1/8" 6014 welding rods.

James Carlson · Answer

@Jessica Stewart

That is a good question and one we hear often at our Airbnb classes in Denver and Colorado Springs. First things, first, we are talking about doing this Airbnb/short-term rental in the city limits of Denver, right? (I see you're profile says Highlands Ranch, which is governed by something else.)

Assuming it's Denver, here are the short and long answers.

SHORT ANSWER

What you're talking about it technically legal but only if you actually are going to live there. But it could quickly be shut down if your neighbors complain and push the issue with the city.

LONG ANSWER

The city does not currently enforce the primary residence rule proactively. They rely solely on complaints. If your neighbors don't complain, you're probably fine. But if they do complain, having a lease with your name on it is a thin defense if they actually take you to court.

As of March of this year, there had been 6 cases filed by the city attorney's office on this topic. (Probably more by now.) All six defendants relinquished their license and paid a fine. The process is important here. A neighbor complains. The city attorney's office will send you a notice saying you're in violation. You'll respond showing the lease and say, no, I'm a tenant. The neighbor might still insist to the city attorney's office that all they see are rolling suitcases in and out. At that point, they may set a hearing date, and you'd have to show up and basically testify. At that point, you're toast because you don't want to lie in that situation.

I applaud your savvy, and I certainly know people who are doing what you're talking about, but you better have some risk tolerance -- as well as a plan B for that property.

Craig Curelop · Answer

@James Carlson is THE man.... and it just so happens... he's in Denver.

He actually helped me through the process of getting my AirBnb listed. It all depends on what you're looking for. AirBnb can offer higher returns than a long term rental, but it's a lot more work.

Like the answer to almost any question, it depends on your goals. If you are willing to hustle a little more for higher returns, AirBnb might be what you choose. If you want some up front work and then coast for a year, long term rentals might be more beneficial.

Also note that long term rentals are a lot more predictable in terms of rental income. AirBnb suffers from seasonality.

Michael Greenberg · Answer

Yep I agree with @Bill S.,  @James Carlson is your man in Denver!  Legislation issues in Denver county but he's got a strong understanding.

James Carlson · Answer

@Paul Sandhu

I agree, quite ingenious. It's only as brilliant as the city allows them to be. Is it within the letter of the law? I think so (though I'm no lawyer.) But whether it's within the spirit of the law, is another question. If the city ever learns about people doing this model, it will be interesting to see how they handle it.

Frankie Woods · Answer

I love this thread!  Thank @James Carlson for the detailed explanation.  This is good information in any market!

Denver Long-term Rental vs. Airbnb?

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