Like my “Pros of Airbnb Investing” post, I tried to do another “Top 5” article but there were too many cons that I wanted to include. Please do your own thorough research and due diligence before investing in short term rentals. In fact, I’d recommend not ever investing explicitly for STR…only purchase properties that work as long term rental investments and then consider converting them to short term if it makes sense to do so. With that in mind, buckle up cause here are my top NINE cons of short term rental investments. Because of the length I’m gonna split this into two posts.
9) More Work to Manage
You’ve got to furnish the entire place. That involves a lot of little things that might not normally cross your mind: hangers in the closets, cooking utensils and basic spices, dishwashing sponges…the list goes on. You also must deal with connecting and maintaining electricity, water, sewage, internet, etc. These are all things your tenant would handle in a traditional rental.
Then you’ve got to communicate frequently with your guests. More and frequent communication leads to the best results on Airbnb. You’ll need to oversee turnovers with your cleaners (or do the cleaning yourself), and manage inventory for all necessary supplies: toiletries, paper towels, toilet paper even during pandemics, coffee/laundry detergent if you choose to provide it, and so forth. Then you’ve got the hassle of revenue management, ie, constantly tweaking your nightly rates to yield the maximum revenue. Hotels and airlines hire teams of data scientists and invest millions into this department, so it is not something to take lightly. Lastly, the financial accounting is much more messy and complex than a traditional rental. Keeping up with balancing the books is an art I have yet to master in an elegant manner.
8) Management Fees Are Higher
Ok, this really goes along with the previous one. But basically, if you don’t want the added responsibility and stress of handling all of those things yourself, you’ll want to hire a management company to do some, or all, of it for you. And as you can imagine, the costs are going to reflect this. Typical traditional property management fees are in the range of 10% of net revenue for ongoing, monthly management. Fees for short term rental management vary to a greater degree due to the wide range of tasks that may be needed and the fact that the industry is not as established, but I’d say 20-30% of net revenue is pretty standard. There are also companies/software services that help you with specific tasks like guest communication or revenue management, but of course these will cost you money as well.
7) Bad Guests
Granted, you can run into issues with bad tenants, but the chance of having bad short term guests is much higher. First of all you have the sheer number of guests versus a relatively few number of tenants over the lifetime of your rental property, and because of this, it is also much easier to screen prospective tenants carefully than it is to vet short term guests.
Really bad guests are not common, in our experience, but they do come in great numbers on the milder end of the spectrum. In the early days it surprised me how frequently people take/steal things: shampoo, paper towels, actual bath towels, bedsheets, chromecast dongles. This is just the tip of the iceberg but really nothing surprises me much anymore.
Also pretty common (though I don’t actually know how often this has happened to us) is guests lying about the number of people in their party. Hosts set a guest limit and/or charge for additional guests for a reason, so while not the worst thing imaginable, it is not cool to sneak in more people than were booked (or pets, which is probably a bit worse).
Then you’ve got the cheaters and scammers. They’ll try various schemes to get refunded for parts or all of their costs.. For the most part Airbnb does a good job of protecting itself and hosts from situations like this, but even when it does work out in the end it is an unnecessary waste of time and effort.
Finally, at the real extreme end you have guests who will trash a place or perform illicit activities. There have been some nightmare stories about parties, or worse, that ended in tens of thousands of dollars of damage. Our worst stories are minor in comparison, but we’ve had several instances of guests causing significant damage to property.
6) Higher Risk and Higher Insurance Costs
Naturally, with the number of guests and the high potential for at least occasional bad guests, there is a higher risk involved in operating a short term rental. With that risk comes correspondingly higher insurance premiums. Our property insurance costs at our houses are roughly 75-100% higher than they would be as traditional rentals. For our condo in Chicago, we also took responsibility for the increased cost of the condo building’s master policy to allow for short term rentals. After covering the difference, our insurance costs increased approximately 200%.
Even with insurance, remaining risk varies a great deal depending on the particular policies. So there are a number of supplemental products out there to further protect your property during each rental. We have never used them and rely solely on Airbnb’s famous Host Guarantee of $1M in property damage protection. We’ve actually found them to be helpful and responsive to most of our problems, however I’ll caution that we tend to forgive a lot of minor damage/issues and only make claims on more serious items, so our overall claim percentage vs number of stays is likely well below average.
5) Dependence on Third-Party Platforms
This issue has come up from time to time, but never has it been in the spotlight more than in recent weeks, as Airbnb hosts have taken pitchforks to the internet with complaints about the company. While we have had some issues with Airbnb (from disagreements in arbitration to frustrating technical glitches) overall Airbnb has been more host-friendly for us than the alternatives like booking.com, vrbo, homeaway, etc. That said, they take a sizable fee of our guests’ total price, and they do so with impunity. If we don’t like it, we are free to go elsewhere, but honestly there’s nowhere else to go. The rest of the major platforms take more or less the same cut, and they all implement similar guidelines and restrictions. So to operate a short term rental, you pretty much either have to play by their rules or go with a much smaller, boutique platform that will naturally limit the amount of business you’re able to do. The last option is to go at it independently, which is pretty much impossible without a magical marketing scheme or waiting to grow into a small hotel chain with a sizable customer base developed.
