First Deal: A Househack via AirBnB - smart or not?

Question

Looking for feedback on my first real estate deal. I am planning to build an 800 sqft. loft apartment over my free-standing garage (at my primary residence) and turn it into a short-term rental marketed through AirBnB. Here's how i see it:

PROS:

i can manage this property by simply walking across my driveway, so its very practical.

even if it rents less than i think it will, i have built additional equity into my home

i can use a HELOC to create leverage and won't need to put out a lot of cash

Charlotte is a thriving city and other similar Air BnB's listings seem to do really well

CONS:

i don't think i can have an LLC own any part of my primary residence so there is some personal liability

i can't use a traditional first mortgage so the interest rate will be a little higher

since it's tied to the home i want to stay in, i can't really "cash out"

(i'm sure there are other CONS - please let me know what comes to mind, BP!)

I'm hoping that, using conservative estimates, the revenue will be sufficient to cover 30-50% of my primary mortgage. This seems like a pretty decent househack on a $500k+ property. My concern though is this: I think i can pretty closely pin down my expenses for this build and maintenance, but i'm not sure how to accurately predict revenue. Isn't there some resource through AirBnB that helps with these estimates? Again, any feedback (positive or constructive) is greatly appreciated!

Rebecca Dillon · Answer

I manage two AirBnb's with two more in the works. Some things to consider when having an AirBnB on your property- People are weird and you can't pick an choose so be prepared for people to knock on your door in the middle of the night if they need you. The way to avoid this is to have a super detailed manual. It also helps to have someone stay at the property prior to going "live" to give you feed back. Also in-regards to the LLC you might want to look into renting your space above the garage to your LLC and the LLC then rents out the space as an AirBnB.

Andy Thoms · Answer

Hi Kevin, I am a full time Airbnb operator and own one accessory dwelling unit that performs extremely well. Based on what I am reading so far, it sounds like it is going to be a smart investment. Here are a few things I would consider if it were me. Plan A - Short Term Rental1. Must meet regulatory compliance. What licensing is required, taxes, fees etc.. 2. Determine TOTAL acquisition including build out, furniture, towels, linens, everything.3. Estimate total expenses; gas, electric, cable, wifi, water, etc..4. Use Airdna and Airbnb to find comparables. Get a ballpark idea for 1) estimated occupancy 2) nightly rates. 5. Try to maximize sleeping capacity, if one bed (recommend Queen or King) for example, I would put in a sleeper sofa to increase occupancy to 4. 6. Run the numbers. Calculate the cash on cash return. 7. Even if they changed to 30 day rule, there may be plenty of demand for 30-180 day corporate tenants, traveling nurses etc.. Plan B - Rent it as a Long Term Rental1. Run the numbers to see if they make sense. If long term makes sense, than I would go for it. Equity: The addition will enhance the value of your home. If it costs 75k for the addition, will it add 50k, 75k, or 100k to the value of your home? Smaller Units: Studio and 1 bedroom units typcially generate higher returns for me than larger units and they are typcially easier to manage. Easier to turn, lower cleaning costs, higher return per square foot. Good luck with your venture. If you need a spreadsheet calculator to help you estimate returns, PM me. Thanks!

Kevin B. · Answer

Hi Heather,So where i am at on this is still trying to make the numbers work on the apartment construction over my garage. Apparently my design was too elaborate and the building cost was excessive for what i am trying to do. so i am now trying to water down the design to a cheaper build but still create an apartment that can be rented out for AirBnB. As for your concern, i think you could still enjoy your privacy and not have to be "on" if you have a separated entrance and can leave a key code or other method of entry that does not involve you having to play "hostess" in person. remember the main thing an AirBnB guest is expecting is a clean space to lay their head, not necessarily a new friend.

Heather O. · Answer

Have contemplated a similar set up here, because I live in an extremely high rent area (AirBnBing neighbours earn $1000/night for a 2/2). As much I enjoy relationship building with my long term tenants, and short term can be interesting; I don't feel comfortable inviting strangers onto my property. I appreciate that I can afford the privacy and secluded nature of my home and have a safe place to tune out a bit where I am not having to be "on". I am interested to follow your progress.

Kevin B. · Answer

All very good insight @Sebastian E. Your point about the city possibly limiting STR's to 30 nights a year and potentially sinking my business is a very valid concern, but I feel that worst case scenario i could just rent it out a year at a time. That would reduce the revenue and eliminate the possibility of having it occasionally available for the in-laws, but at least it would be a viable "out" to recoup the initial investment. For any of you who are experienced with AirBnB, is it a viable strategy to set your rate slightly above market rate and try to market to more business/higher end travelers? Since the build-out is still in the design phase i can make changes, but was planning to create a higher end space (with finishes/appliances/furnishings, etc) that could justify a slightly higher rate. That could also reduce the risk of the potential tenants that could disturb neighbors.. and also maybe set the listing apart from all of the dime-a-dozen room-for-rent spaces. This space will have a W/D, full kitchen and large balcony, not to mention the private entrance and wooded surroundings.

Sebastian E. · Answer

Hey@Kevin B. I spent some time in NC for college and have a bunch of friends in Charlotte working in finance there. I think it's a great market for Airbnb. One other option you can look into is trying to see if you can get repeat bookings from folks who have regular consulting gigs with the banks. This could lock in some revenue.I have an Airbnb in my market. I have had a lot of success with it so far (it's been up since March). From my work on it I have come to realize that there are essentially two types of Airbnb hosts. There are those who simply want a little supplemental income who tend to have inconsistent revenue because they don't really treat it like a business. They end up trading their time for money and it turns out if you don't have good systems that return ends up being not so great and you have to put up with quite a bit of BS. There are ways that I have learned to mitigate these risks but it's a matter of probability that you will eventually get someone who is awful at some point.Then there are the people who run their Airbnb's like a business. They are ruthless about creating systems (I am happy to go over these in more detail), and the user experience of their listings tends to be higher end with no clutter and very clean. Cleanliness is extremely important. Do not skimp on this one. You may think that putting up some cool art work or unique furniture that you like will be appealing but what people really want is something simple and minimalistic that has clean lines and very little clutter. Danish modern Ikea style works well.As for the downsides:There is always the regulatory risk that CLT could come down on the Airbnb hosts. There are few different ways cities and municipalities have dealt with this so far. -Either they say you can't rent out your whole place (in which case your listing would be safe because it could be characterized as an extra room for rent).-They enforce the hotel tax of approximately 10% which is actually paid for by the guest-They put a limit on how many nights you can rent it (say 30 days a year). This for example would essentially sink you business case because you wouldn't be able to recoup your initial build out.-The require you to get some additional license like a basic business license and register your dwelling as a short term rental (this is the case in my market). -I would also add in to this that there is a risk in Airbnb'ing at your personal residence because if someone comes to your property and does something to piss off your neighbors then you have to deal with that fall out. Neighbors in nicer areas (based on your property price it seems like yours is one) usually don't like this kind of activity, so while you may be fine from and HOA perspective there are other ways that your neighbors can make your life difficult.-Lastly don't forget that you will have to pay income tax at your normal income tax rate as these revenues will pass through to your personal income tax. You can deduct some of the set up expenses but I would talk to a CPA about how and whether you can deduct the renovation expenses from that income. Good luck with it and happy house hacking :)Seb

Kevin B. · Answer

very interesting idea regarding the LLC, @Rebecca Dillon. i'll look into that.As for the HOA, luckily it's an older neighborhood so we don't have one. Really my biggest reluctance has been around the fact that we are in the burbs, not the center city - but i think AirBnB's still do well out here. We're still close to shopping, restaurants, airport, uptown - just not actually in uptown. The flip-side to that however is we have a wooded lot, a firepit and lot's of privacy.. great for a "retreat" experience.

Matthew Tringali · Answer

We manage AirBNB properties and we use AirDNA to do our research. It is a very helpful tool. As someone else said, check your HOA, they almost all exclude short term rentals.

Ben Leybovich · Answer

Yes, though NC is touch and go as it relates to regulatory things. Research your HOA. I live the strategy, though, considering this is precisely what I am doing :)Works well!

Kevin B. · Answer

Thanks for the feedback. I've been looking on AirDNA since i posted this and it seems like useful info for revenue research.At the end of the day, the rental income will always be somewhat unpredictable i guess until the listing goes live. I think taking the risk and riding the AirBnB wave it's hot is probably worth the gamble..