REAL ESTATE
Air B-n-Bubble
As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology, and several previous Real Estate blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance. Commercial real estate has seen its own crisis as well, highly affecting small businesses with office vacancy and plunging values. The situation appears to be only getting worse, with an increasing number of defaults and loans coming due.
As a result, many investors had turned to purchasing properties to convert to Air BnB’s to produce income. These properties are generally single family, or even 2-unit homes, which offer short-term stays for less than the cost of a hotel, and no need for tenant leases. Air BnB’s are convenient to those who are vacationing, or visiting an area for business and/or other temporary needs. The majority of the time they are well kept homes, with many rooms and conveniences for larger parties.
Advantages to owning an Air BnB include the ability to adjust price according to supply and demand on a daily/weekly basis, no leases, no evictions, and much less regulation and taxes than a conventional hotel. Disadvantages appeared to be limited to the need to consistently schedule guests, cleaning after each check out, and key exchanges. Although a solid, reliable, longer-term tenant may require less effort and steadier income, the Air BnB often offers greater income potential, despite periodic vacancies.
The number of Air BnB’s exploded over recent years due to the income opportunity it provides, especially in popular vacation destinations and major cities. Large parties are given the opportunity to stay in one residence with several bedrooms, as opposed to renting several hotel rooms with mainly one bedroom and bathroom. They also sometimes provide yards, grills, and other amenities for large gatherings, making them more desirable for short-term lodging. This increase in potential income also boosted home prices in some areas.
However, Air BnB is an actual business entity with rules and regulations, which include licensing, zoning, fees, and occupancy limitations. At the outset, they were generally unregulated, with no oversight. There were a few issues that arose as a result, including strict cancellation policies, a lack of transparency, and high cleaning fees, all of which were unfavorable to the potential guest. Large complaints and lawsuits by hotel ownership (much like taxi company’s complaints regarding Uber and Lyft), has caused the industry to undergo a heavy restructuring.
New regulations and rules changes have recently put a damper on this type of investment. They are being outlawed in some locations, and platform control has been instituted effective this past Spring. One major rule that has now been implemented is the restriction of only 90 days per calendar year that the property can be rented. This comprises of only 3 of the 12 months per year, whether the stays are consecutive, or scattered. Additional regulations including the use of Property Management Systems (PMS), and the use of only the Air BnB platform for bookings, cancellations, re-schedules, reviews, payments, outside website links, and sharing customer emails. These new centralized restrictions have led to a decline in business and many Air BnB closures around the globe, as hotels have used these changes to their advantage to regain their edge.
These properties are not as desirable as a result, and the re-sale values have also plunged. This once booming industry now faces headwinds that need to carefully researched by those considering this investment.
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
