A Complete Guide to Airbnb Finances | Everything You Need to Know!

A Complete Guide to Airbnb Finances | Everything You Need to Know!

There are many aspects to owning and running an Airbnb vacation rental. Finances are a significant and important part of it. It is also, for most people, the least fun aspect of operating a short term rental. As Airbnb grows and evolves, the financial aspects involved with launching and operating an Airbnb business have also become more complex. Here we discuss everything you need to know about Airbnb finances.

__ A complete guide to Airbnb finances__

  1. Is it financially profitable to be an Airbnb host?
  2. Should I buy a property or rent?
  3. How do I finance buying an Airbnb property?
  4. How do I know if I can afford an Airbnb loan?
  5. Can I sell my Airbnb property?
  6. Can I earn a dependable income from hosting on Airbnb?
  7. How much does it cost to operate an Airbnb vacation rental?
  8. What are the upfront costs of starting an Airbnb vacation rental?
  9. How do I track my Airbnb finances?
  10. How do I manage my Airbnb finances?
  11. How does Airbnb payment work?

Is it Financially Profitable to be an Airbnb Host?

According to Airbnb data from 2021, the typical Airbnb host brought in $13,800, an increase of 85% from pre-pandemic times. However, this is only an average and hosts can make much more and much less depending on where their Airbnb property is located, what type of residence it is, the season, and of course their hosting abilities and capacity.

Having an entrepreneurial mindset and educating oneself on how Airbnb and the overall market works and what guests want is the best way to grow occupancy, rates, and revenue and become a profitable Airbnb host.

Should I Buy a Property or Rent?

If it’s in a growth market then you may be looking at a greater investment paying out over time. It can also serve as a holiday home from which you also earn an income when you are not vacationing. However, if property prices are unlikely to appreciate in your neighborhood, then maybe you want to save up using the rental arbitrage or spare room rental model until you do. Choosing between the two also depends on the type of entrepreneur that you are. Some prefer to not be tied down by property and to be able to get into growing locations fast and get out quickly if needed while scaling faster. To others, the extra time is well worth the investment potential of owning property.

How Do I Finance the Purchase of an Airbnb Property?

If you are going the traditional and still more widely utilized route of purchasing/owning the residence which you plan to host with, then you will require an Airbnb loan, unless you have enough cash to pay for it all. An Airbnb loan is any type of financing that can be used to purchase a property for the purpose of using it as an Airbnb property. While banks and other financial institutions don’t offer a specific Airbnb loan, there are a number of means of securing financing to purchase your Airbnb rental property. The types of Airbnb financing available to you will depend on if this is to be your first or second home.

If you are purchasing your first home:

1. Mortgage

Getting a mortgage is the most common way of financing a property purchase. However, it can be harder to qualify for a mortgage if you are planning to rent out the property than if you were to reside in it. Because mortgaging a home that will be rented out is considered to be a bigger risk by lenders, you might be required to make a larger down payment, higher credit score, better DTI score (debt-to-income ratio), and additional savings.

In case you have purchased a home to reside in using a conventional mortgage and later decide to rent it out on Airbnb, you will likely have to inform your lender and make sure it is still valid or renegotiate the terms to take in the additional new risk.

Some of the mortgages available for rental property include:

  • Conventional mortgage

Available at fixed or adjustable-rate mortgage. Terms typically range from 10 to 30 years. Down payment and minimum credit score is required. You are not required to reside in the property.

  • FHA mortgage for a multi unit home

The property can have up to 4 units and you must live in one.

  • VA mortgage for a multi unit home

Doesn’t require a down payment or minimum credit score. Active duty service members, eligible spouses and veterans are eligible. The property can have up to 4 units and you must live in one.

A complete guide to Airbnb finances

2. Hard Money Loan

A hard money loan is a short-term, asset-based loan.

It is a fast way of obtaining financing and does not require you to meet high DTI or credit scores. Instead, the loan is approved based more on the value of the property being purchased. The borrower receives the money fast, in just days, and must repay with interest in a shorter period of time, usually just a few years. Because the lender takes on higher risk, the interest rates are usually higher. Some lenders may also ask for larger down payments. If the borrower is unable to pay off the loan, the lender takes ownership of the property.

Hard money lenders are usually private investors or lending companies rather than banks.

3. Short Term Rental Loan

A number of lenders such as Kram Capital are now offering dedicated short term rental loans or Airbnb Financing. This type of loan does not require proof of income to qualify. However it is targeted exclusively to investment property so hosts cannot live on the property being purchased. Property type, credit score, loan-to-value ratio, and down payment percentage are all important factors to qualify for Airbnb financing.

If you are purchasing your second home:

A loan for a second home is considered riskier than that for a first home. This is even more so if you are planning on renting it out as a vacation rental.

1. Mortgage

You will have to show a high credit score and put down a down payment of at least 20%. If you are able to pay a larger down payment than that is required of you, show savings, and experience as a landlord/host, you can improve your chances of obtaining a mortgage.

Some of the mortgage types available to you are:

  • Conventional mortgage

  • FHA mortgage

  • VA mortgage

2. Airbnb Refinance

If you are already an Airbnb host and looking to add a second property to your portfolio, then you may qualify for Airbnb Refinance. In 2018, Airbnb partnered with a number of financial institutions to allow hosts to use their Airbnb proof of income to qualify for refinancing with participating lenders.

3. Home Equity Loan

A home equity loan allows you to borrow up to 80% of the equity of your first home as a lump payment to purchase your second property. You will however be charged higher interest rates than refinance and have to pay back the sum over a fixed term. You must have sufficient equity in your first home to qualify.

4. Home Equity Line of Credit

This is a line of credit that is secured by your home, allowing you to borrow against your equity in your home while using the property as collateral. As you continue to make payments you can also borrow further, up to the credit limit agreed upon and throughout your draw period (usually about 10 years).

5. Short Term Rental Loan

A number of lenders such as Kram Capital are now offering dedicated short term rental loans or Airbnb Financing. This type of loan does not require proof of income to qualify. However it is targeted exclusively to investment property so hosts cannot live on the property being purchased. Property type, credit score, loan-to-value ratio, and down payment percentage are all important factors to qualify for Airbnb financing.

Most lenders consider renting a property as a short term vacation rental as more risky than renting it out in the long-term. Depending on how your bank and the city/county/state in which the property is located defines the term, you can also consider renting the property on the long term at first before moving to shorter stays. More and more travelers are choosing longer stays on Airbnb and you can also choose to list on other more niche online booking sites that specifically cater to longer stays and market to renters like college students.

A complete guide to Airbnb finances

How Do I Know I Can Afford an Airbnb Loan?

Always make sure you can afford the terms of the loan you are hoping to obtain. Even if you get approved for the loan, crunch the numbers on your own. Whether it’s your first property or second, don’t count on the rental income from the property you are obtaining a loan to purchase. You can’t ever be completely sure if your new Airbnb vacation rental will make adequate income from the get go or even at all. Make sure you can afford the payment terms on your own rather than the new income you are hoping to earn.

Furthermore, if your Airbnb loan for a second property holds as collateral your first, you stand to lose both homes if you are unable to pay off your loan.

Can I Sell My Airbnb Property?

Yes you can. If you are looking to retire from hosting or simply want to not host a particular listing anymore, you can absolutely sell your Airbnb property, successfully and profitably, including furnishings, guest list, and the rest of the business. What you cannot do is sell your Airbnb account as Airbnb does not permit transferring accounts.

Can I Expect to Earn a Dependable Income from Hosting on Airbnb?

Many hosts who are new to short term rentals and come from conventional job backgrounds where they received a steady paycheck every month, can find it surprising at first to learn that earning income as an Airbnb vacation rental involves far more variability.

Even if you plan to rent year-round, you will find variability in occupancy and the rates you can charge. These fluctuations depend on the season (high or low), if a big-draw event like the British Fireworks Championship in Plymouth or the Fourth of July or Labor Day Weekend is taking place. Income earned in high profit months may be required to tide over low occupancy times.

What are the Costs of Operating an Airbnb Vacation Rental?

The costs of running a short term vacation rental can be broken down into two main components:

  • Upfront costs

These are the costs associated with starting a new Airbnb vacation rental.

  • Running costs

These are the continuing costs associated with operating an Airbnb vacation rental day-to-day.

A complete guide to Airbnb finances

How Do I Calculate My Upfront Costs of Starting an Airbnb Vacation Rental?

If you have a residence that is good to go, you won’t have to spend on renovation. However, it is likely to require some redecoration to better fit the types of travelers you are hoping to attract. There are also upfront costs related to regional regulations, etc. Here are the main upfront costs generally associated with starting an Airbnb vacation rental business.

1. Licenses, Permits, and Registration

Depending on where your Airbnb property is located, you may be required to obtain a short term rental license, permit, business registration or all three prior to beginning your vacation rental operations. While these don’t generally take too long, they do require a fee, and are usually renewed annually.

2. Tenancy Deposit

If you are opting for rental arbitrage rather than purchasing a property, then know that some landlords require a tenancy deposit paid upfront. This usually amounts to the value of a few months’ rent and is returned back to the renter at the end of the rental period if the rental agreement has not been broken in any form. In the UK, landlords are required to place the deposit in a government approved tenancy deposit scheme (TDP) if the home is being rented on an assured shorthold tenancy. If you are not renting the residence on an assured shorthold tenancy, the landlord can accept valuable items such as a car or watch as a deposit instead of money.

3. Vacation Rental Software

Opting for vacation rental software like Hostaway will yield dividends in the short and long terms. By streamlining and automating operations, it saves you time and effort and significantly reduces the size of the vacation rental team you have to build. You can devote the necessary time and energy for the big picture work required of your role while the rest of your operations run with minimum intervention.

4. Marketing

Marketing your short term rental is really important, particularly when you are trying to get the word out on its existence and competing against tried and tested vacation rentals in the same area. Relying on a proven professional to market your Airbnb on platforms such as Instagram, Pinterest, and Twitter is prudent. Even if you are competent to do it yourself, there are other costs associated with online advertising.

5. Education

If you are absolutely new to the Airbnb space, then you may consider following a tried and tested short term rental course to help you get off the ground and into growing occupancy and revenue without repeating the mistakes of many first-timers.

6. Website

Having your vacation rental website ready in order to generate direct bookings from the get-go will help you generate more income, establish your sales pipeline from the start, and grow faster. It also provides additional credibility to your business having only just started.

7. Furnishings

Even if the residence comes furnished, you will probably have to invest in at least some new pieces. Guests will not appreciate furniture that is on the verge of collapsing or those that look too old. You can however check with a handyman about getting some pieces polished and looking new.

New mattresses are a must as you want to make sure guests experience great sleep. Cranky guests are very unlikely to leave you a good review and bad reviews could break your business before it can even get off the ground.

8. Décor

Investing in at least a few tasteful pieces to elevate the space is a must. No guest who feels like they are staying in a drab place is going to leave 5 stars. A guest who feels like they are staying in a place more luxurious than they thought they were paying for on the other hand will leave feeling they got the better end of the deal and happy to leave great reviews.

9. Self Check-in

Most guests prefer the ease, privacy, and security of self check-in. It can be cheaper to install smart locks at the beginning rather than waiting till later. What’s more, a guest is more likely to choose a new listing knowing it has self check in.

10. Wi-Fi

Unless your property is a tent cabin in a truly remote location catering to guests looking to completely get away, all segments of guests expect to have wi-fi access in the Airbnb they are staying in. Make sure your wi-fi speed is fast and that your package is not going to run out half way through a stay.

A complete guide to Airbnb finances

11. Work Space

If you are hoping to cater to corporate travelers, digital nomads, college students, or other guests who are also looking to work from the space, then make sure you set up a workspace in a quiet corner of the residence. Invest in good lighting, an ergonomic chair, a work-friendly table, and maybe even some shelves.

12. Inventory

From bed linens and towels to toiletries like shampoo and conditioner and toilet paper, stocking up more than you think you will need is recommended. There are also kitchen staples like an electric kettle, a tea/coffee service, cutlery, paper towels, etc.

13. TV

Not all hosts provide a TV or cable/streaming options but if you choose to do so, they will also factor in to your upfront costs.

14. Noise Monitoring

Installing noise monitoring devices is a good option, helping you prevent leaving a bad first impression on your new neighbors.

15. Guest Screening

Investing in a screening service for bad guests will help prevent property damage, unjustified bad reviews, and irate neighbors.

16. Smart Home Equipment

If you choose to make your Airbnb property a smart home to reap the benefits of automation and greater control over your home, you will have to invest in smart devices such as smart thermostats, smart lights, smart locks, smart doorbells, smart speakers, etc.

17. Additional Amenities

There are always more amenities you can provide but what you opt for will depend on the type of guests you want to attract and your budget. From ironing boards and workstations to swimming pools and hot tubs, amenity costs can vary widely.

18. Photographer

Standout photographs are essential for converting Airbnb users who discover your listing to bookers and hiring a professional Airbnb photographer is the best way to produce them. They also impact your Airbnb search ranking.

19. Branding

From your Airbnb listing description to search engine optimized website copy and branding collateral such as logo, you may consider hiring a professional or agency to take care of it for you.

20. Safety Check

Get an expert professional to conduct a safety check of the entire house, checking for everything from fire hazards to built environment and hygiene requirements. Even if the city or county in which your Airbnb property is located doesn’t require one, ensuring your vacation rental is safe for guests will protect you from future lawsuits. And if your city does conduct an inspection of its own, it is still better to make sure you are fully compliant and ready to pass the inspection rather than fail and not be permitted to operate at all.

A complete guide to Airbnb finances

How Do I Track and Manage My Airbnb Finances?

You can choose to use a series of Excel or Google Sheets documents to track and manage your finances but the less complicated and more efficient option, particularly if you have more than one listing, is to use dedicated software. There are a number of accounting software options available to short term vacation rental hosts and property managers to keep track of and manage their short term rental finances, just make sure it plugs into your property management system. Some options include:

QuickBooks

QuickBooks is a popular financial software designed for small businesses that allows users to track their income and expenses, pay employees and contractors, and keep abreast of the full financial picture of the business.

BookingTrust

BookingTrust offers host and trust accounting software and account management services designed specifically for short term vacation rentals.

Ximplifi

Ximplifi offers VRAccounting, a full-suite of vacation rental accounting and CFO advisory service; VRPlatform, an accounting plug-in for your property management system; and VRConsult, for implementing and optimizing leading finance applications.

Having a separate bank account for your Airbnb listing is another easy and effective way to manage your earnings. Some people even have different accounts for different properties while others have different accounts for each booking channel that they list their property on. Ensuring you receive instant notifications can make tracking your earnings even simpler.

What Do I Track to Manage My Airbnb Finances?

1. Airbnb Loan Payment

If you have taken any type of loan to pay for the purchase of a property from which to run your vacation rental, then you will most likely be required to make monthly payments. It is important that you keep on top of this as missed payments can result in your property being foreclosed on, spelling the end of your business and investments.

2. Rent

If you have chosen rental arbitrage, then make sure to pay your landlord the due rent on time and without fault. Don’t make your landlord have to remind you your rent is due. Making sure your landlord is happy renting out to you is crucial to the sustainability of your Airbnb business.

3. HOA Fees

Depending on the ownership of your Airbnb property and the type of property you are using, you may be due fees to a homeowners’ association, co-op, condo board, etc. Pay on time and help keep your neighbors happy.

4. General Maintenance

There are recurring costs incurred in maintaining your vacation rental property to the level that your guests expect. These include labor costs of your vacation rental staff; service fees for services such as cleaning and property management; utilities including power, water, internet; and a wide range of inventory from toilet paper to toiletries and fresh flowers. There are also costs of maintenance such as mowing the lawn, cleaning the pool, and repairs of furnishings, etc.

A complete guide to Airbnb finances

5. Airbnb Host Fees

While Airbnb, Vrbo, and many other booking platforms don’t charge a fee to join and list with them, they do charge a fee for each booking made. For example, Airbnb charges a commission of 3% of every booking or 14-16%, Vrbo 5% or $499/yr, and Booking.com ~15%. Take this into account when estimating your future revenue and income

6. Software

From the cost of your vacation rental software/PMS to data analytics, dynamic pricing, self check-in, accounting, guest screening, etc, the hosting tools you use will incur monthly, quarterly or yearly fees.

7. Insurance

While Airbnb AirCover provides hosts with a certain amount of protection, it is always advisable to get vacation rental insurance to ensure complete protection. This is particularly important if your property and/or business is at risk of factors not covered by AirCover such as insurance against natural disasters.

8. Property Tax

In the US, property taxes are levied by each state but collected by local governments such as the county, city, town level, etc. In England and Wales, Stamp Duty Land Tax (SLDT) must be paid for property bought for above £125,000. If the property is a second home, the rate is 3% above the standard rate unless the property was purchased for less than £40,000.

9. License/Permit Renewals

Many towns, cities, counties, and/or states now require vacation rental operators to acquire a short term rental license or permit as well as register as a business. Generally, these must be renewed annually, and prior to expiration, if you are to continue to run your business.

10. Short Term Rental Taxes

Most cities, townships, counties, and/or states impose taxes on short term rental bookings. These are usually calculated per total booking cost (i.e. including cleaning and other fees) and hosts are required to collect and remit the taxes to the relevant government authority. Airbnb collects and remits taxes on behalf of hosts in many parts of the US and some other countries. These can include transient occupancy tax and sales tax.

11. Income Tax

Like any other individual, Airbnb hosts too are obliged to pay tax on the income they earn. The type of tax or tax bracket under which they fall however can depend on the amount of income they earn, how many days they rent out the property, if they have additional streams of income, etc. However some expenses are tax deductible, depending on the tax bracket to which your business belongs.

12. Miscellaneous Expenses

There are always additional expenses that crop up such as having to replace an item of furniture or requiring a new router. Being prepared in anticipation of such expenses is important.

13. Emergency Expenses

Always be prepared for emergency expenses that cannot be foreseen, like your cooker exploding or having to repair the roof due to damage from a hurricane.

A Complete Guide to Airbnb Finances

How Does Airbnb Payment Work?

Basically, guests pay Airbnb and Airbnb pays you, minus its fee. Hosts receive the payment within 24 hours of guests’ arrival if they paid via credit or debit card. If the host chooses to get paid via Paypal or Payoneer prepaid debit card, they will receive payment within one business day. If they choose bank transfer it will take 7 business days. For those hosting long term stays, i.e. 28 days or longer, Airbnb will pay in monthly installments, beginning 24 hours after the guest first arrives.

Guests are allowed to notify Airbnb of a problem that warrants a refund within 24 hours of check-in and if the host does not respond Airbnb can provide the guest with a complete or partial refund.

Airbnb can also impose a payment refund if the host cancels a reservation at the last minute, misrepresents the listing, doesn’t leave the key or provide the correct key code to the smart lock, doesn’t provide a clean and hygienic space, and any other violation of Airbnb’s hospitality standards.

Can I Expect to Earn a Steady Stream of Income from Listing on Airbnb?

As a first time Airbnb host, it is important that you manage your expectation of income from the get-go. Unlike with a regular job which pays you a fixed amount every month on a set date, income from a vacation rental is seasonal. Expect higher revenue during peak seasons or special events and less revenue during off seasons and dead periods.

Another factor to take into account is the period of time between earning revenue and receiving it. A good rule of thumb to remember is that usually payments due to you come in later and payments you must make are immediate.

Managing your expenses and maximizing your profit through the ebb and flow of vacation rental revenue is essential for success.

How do I Price My Airbnb Vacation Rental for Greater Revenue?

Understanding your expenses (as shown above) will enable you to figure out the minimum price you can charge a guest. This benchmark together with a dynamic pricing tool that suits your listing channels and portfolio will do the hard work of optimizing your pricing based on real-time data points to ensure your prices are both competitive and profitable.

Does My Minimum Night Policy Affect the Revenue I Generate?

Your minimum night policy definitely impacts the maximization of your Airbnb vacation rental revenue. The best minimum night policy is a dynamic one that changes with market demand, season, events as well as the type of your property and destination.

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