Thinking about converting your investment condo into an Airbnb rental property?
You've come to the right place.
We are going to discuss in detail the reasons why condos are uniquely suited to thrive as Airbnb rentals.
But more importantly, we are going to explore how you can analyze whether your specific condo is a good candidate for Airbnb and how to maximize your profit potential using Airbnb.
Finally, we can't talk about the merits of an investment strategy without an equally robust discussion of its risks and drawbacks. We cover that too.
On that note, let's get started!
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Why Condos Can Make Great Airbnb Rentals
Condos Have Lower Fixed Costs
If you purchased a condo, particularly a 1 bedroom condo, you probably paid far less for it than someone in your area who bought a single-family house. That lower cost means that your monthly mortgage payment is lower too.
Given your lower fixed costs, it only makes sense that you might be able to generate a profit more easily. I am not saying that you will make a profit – that is going to depend on a lot of factors, which we will get into a bit later.
All I am saying is that you have a much lower bar to hit profitability when your fixed costs are lower. In essence, you are better positioned to succeed because you are not saddled with a huge mortgage.
Condos do have HOA fees, which can increase your fixed costs per month. But the condo association uses those fees to cover high ticket items like the roof and exterior of the building. I think it's a wash.
The HOA fees also often cover some (or all) of the utilities.
Why is this relevant? Because when you rent out to traditional renters, they usually pay the utility costs. But when you convert to an Airbnb rental, you have to cover the utility costs.
So utilities wind up being are an extra cost for people who own single family homes that convert to Airbnb. But as a condo owner, you may be spared some of that extra expense because it's already rolled into your condo dues.
Condos Are Self-Contained Dwelling Units
Condos offer Airbnb tenants the luxury of an entire dwelling unit at a fraction of the price of renting out an entire house. This is important because the data shows that you can charge more for offering an entire dwelling vs. a private room or shared room.
Boston University's School of Hospitality Administration conducted a study that found that entire homes and private rooms enjoyed prices that were, respectively, 141% and 28% higher than shared rooms.
For a condo, the premium is probably somewhere between the two figures because you are not really offering an entire house, but you offering something much better than a private room in your house.
Condo Locations Can Be Airbnb Suitable
Condos tend to be located in or near city centers. This makes them promising candidates for Airbnb.
If your condo is located near a major city or better yet a tourist destination, it could be an ideal candidate for Airbnb.
It is hard to overstate how big a role location plays in whether your condo will be successful as an Airbnb. It's a critical factor.
This research article published in MDPI (an organization publishing scholarly works) covers the importance of location, positive reviews, and other factors to Airbnb listing prices.
Note: You need to download the article after you go to the link.
So what if your condo is not located near a large city or tourist destination – should you give up hope? No – in fact, there is a very easy way to determine whether your specific condo is a good Airbnb prospect. We discuss that and more in Section 6.
Condos Have Great Amenities
Remember that you are often competing against hotels when you list your condo on Airbnb. There is a reason why the hotel industry has been waging a huge battle against Airbnb since its inception.
But condos have some real advantages when compared with hotels. They offer larger living spaces, a full kitchen, and may include a range of appliances, including washers and dryers.
These features matter. For example, if you provide a washer and dryer, you can command a premium on your list price of 6% and 10% respectively according to that Boston University article I referenced earlier.
Condos also typically come with great amenities including a pool, clubhouse, and fitness center. Some even come with basketball courts, tennis courts, and discounts on golf (one of my condos actually offers this because it is right next to a golf course).
These can all be terrific selling points and can help your Airbnb listing stand out.
Condos are Smaller – No Large Gatherings
This one's a little tongue in cheek but I couldn't resist.
We've all heard the horror stories.
One of the fears that people using Airbnb have is that the renters will throw raucous parties and trash their place. If you are renting out a large house, that is certainly something to be concerned about.
This was becoming a big enough issue that Airbnb announced a global party ban.
So people are not supposed to do this. Of course, not everyone is going to follow the rules.
If you are listing a small condo surrounded on all sides by other condo residents, the chance of a big party happening in your condo is very slim Let’s face it – you just can’t fit that many people into that small a space.
And if they try, believe me, you will find out about it quickly from the neighboring residents.
Will My Condo Will Be a Profitable Airbnb?
Ok, we’ve gone through some of the reasons why your condo can be a great Airbnb rental, but the big question is, will it actually be profitable?
There is no way to guarantee profitability, but you can get information that will help you analyze whether there is a good market for Airbnb in your area.
There are even tools that allow you to target your specific condo to check if it would be a good candidate for Airbnb.
Mashvisor is a leader in this space. They have really robust tools that are specifically designed for analyzing potential Airbnb rentals. In particular, they have an Airbnb profit calculator that generates predictive figures for a property by putting in the various costs associated with your condo.
They will then use their predictive analytics to give you the results, which include the following:
Cap Rate: This is the estimated return that the condo may generate based on its market value. Not really relevant if you already own the condo, but if you are in the market to buy one as an Airbnb rental, this is a good rate to know.
Airbnb Occupancy Rate: This is the projected rate at which the condo will be rented out compared with the total number of days the condo is available as a rental.
Rental Income: This is the potential rental income that your condo can make as an Airbnb rental vs. a traditional rental (so you can compare and decide which is better for you)
Cash Flow: This shows how much profit you are expected to keep from your Airbnb rental income after you have paid all expenses.
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Tips For Maximizing Profit
Ok, you’ve run through the projected numbers and they look good. Are there any ways to enhance your chances for success?
Of course there are!
First, you should get a professional photographer to take pictures of your condo and all its great amenities. You need to present your property in the best possible light, so don’t skimp on this step.
As I mentioned before, positive tenant reviews are a big factor in the success of your Airbnb rental. This means that you should try your best to make sure their experience is as perfect as possible.
Your condo should be spotless and everything should be in working order when they move in. You should be highly responsive when issues arise. And it doesn’t hurt to be warm in your communications with your tenants and to try to make them feel welcome while they are staying at your place.
There is a lot more to deal with when you are using your condo as an Airbnb rental vs. a traditional long term rental, so you may want to find a qualified and well-regarded company that specializes in managing Airbnb rentals.
They do cost some money, so you should factor that into your plans. Source: hostfully
But remember your reviews are really important, so if you don't have the time or desire to deal with all of the work and issues associated with running an Airbnb rental business, you should definitely consider hiring a management company. It will save you money in the long run.
Risks of Renting Out Condos Through Airbnb
You should watch out for these things when renting out your investment condo through Airbnb:
1. Make sure your condo association allows short term rentals, like Airbnb
2. Make sure local rules do not prohibit short term rentals
3. Be prepared to spend money on furnishing the unit
4. Make sure occupancy taxes are handled appropriately
5. Be prepared for unpredictable rents
6. Control access to your unit through electronic locks
7. Make sure you are adequately insured against loss
Condo Association Rules
First, you need to confirm that your condo association permits Airbnb rentals. Even if you are allowed to rent out your condo to long term tenants, that does not mean your condo association rules permit short term rentals.
You need to check that out before proceeding.
Local Government Rules
Second, you should confirm that your local government allows short term rentals. A simple google search on “short term rental” or “short term lodging” rules in your city should pull it up.
Even if the rules permit it, they may require you to apply for a zoning permit and charge you a fee and they may impose limitations on your Airbnb activities.
These could include only renting out your condo through Airbnb if you are living in it (so basically just renting out a room). There may also be restrictions on how many days in the year you can rent out your condo as a short term rental.
This is just an example of restrictions I have seen (my county requires all of these). You should read your local rules carefully so you know for sure what is allowed and what isn’t.
If you are converting your condo from a long term rental to an Airbnb, you probably have an unfurnished unit. As you can imagine, that won’t work for Airbnb.
You will need to furnish it and include all of the other items that a tenant would typically expect in an Airbnb rental. This could cost you thousands of dollars, so you need to factor that into your decision.
Depending on your condo’s location, you may be required to collect occupancy taxes from your Airbnb renters. While Airbnb tries to automatically take care of this for you, their process does not cover everything.
So if you happen to live in an area where Airbnb does not automatically collect this for you, then you will have to take care of this yourself.
This Airbnb page gives you an overview of all of this and shows you the process for determining which taxes have been collected by Airbnb and which you need to collect.
Rents Are Less Predictable
You are going from a long term rental where your tenant is contractually committed to pay you the same amount every month to an Airbnb rental where you have no idea how much you may get that month. That can be quite the adjustment.
You are trading predictability for hopefully bigger profits, so it may be worth it, but get ready for a bit of a roller coaster ride each month (and make sure you have enough cash reserves if the ride is rockier than expected during any given month).
Control Access To Your Unit
When you Airbnb, you are getting a lot of people coming through your rental over the course of a year (or several years). It makes sense to get an electronic lock on your door that can be opened with a code (which you can change anytime).
You don’t want to be dealing with keys when that many people are coming through!
If you have been renting out your condo, you probably have an HO-6 policy. This essentially insures against liability claims and property loss for your condo (typically covering items within the walls of your condo).
Airbnb also provides “Host Protection Insurance” (covering bodily injury and property damage claims by guests) and a “Host Guarantee” (covering property damage to your condo caused by guests). They will cover up to $1 million under each program.
That's seems pretty nice!
A final word: Converting your condo from a long term rental to an Airbnb rental may affect your existing HO-6 policy, so you should discuss this with your insurance provider.
Condos have many features that can make them great Airbnb rentals, including lower fixed costs, a private dwelling at a reasonable price, locations near city centers, and great amenities.
But as with any investment strategy, there are risks and drawbacks involved with renting through Airbnb, including loss of committed rents, start-up costs, and rules and regulations that may limit your ability to profitably operate your Airbnb business.
Further reading: If you are interested in learning more about these types of opportunities, check out my series on real estate investing. You'll find tons of little-known investment strategies that you can use to start and grow your real estate portfolio, including investing through lease options and buying properties with your IRA and HSA.
If you are struggling to start real estate investing because you don't have enough money, check out my articles on 15 now money down real estate strategies and how to invest in real estate at every price range.