Money-losing Airbnb hosts have three options

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Airbnb won’t release its third-quarter results until November 1, but some hosts have seen a sharp drop in bookings in recent months. If short-term bookings dry up, it could spell trouble for anyone who relies on Airbnb revenue to meet the cost of owning a second home.

It’s understandable if a sudden drop in rents has taken hosts by surprise. In recent years, investing in vacation rentals has seemed like an excellent way to generate additional income. Yes, there are borrowing and maintenance costs, and your capital is tied up in real estate. But mortgage rates were low and real estate values ​​seemed to continue to rise.

Even so, there are at least four major risks every Airbnb host must consider if they still expect to make money from their property when the economy slows.

First, there is the risk of making overly optimistic financial assumptions. Cost of sales, unexpected cancellations and downtime in less popular seasons would weigh on revenue projections. For example, a host can only rent out a property for 100 days per year. The projected costs must also include the cost of hiring a professional property manager at say 15% if you don’t manage the rental yourself and Airbnb’s fee at around 14%. It’s also easy to underestimate the cost of maintaining properties. Being a top host means decorating the space like a corporate hotel, with new linens, furniture, and snazzy coffeemakers. Short-term guests weigh down a property and incur higher maintenance costs than usual.

The second risk is a sudden collapse in demand. Tourism is particularly vulnerable to catastrophic events such as hurricanes, wildfires and even algal blooms. Tourists have many options; If a destination is suddenly less attractive, they can easily cancel their trip or shorten their stay.

Which brings me to risk number three: political risk. As short-term rental platforms have experienced rapid growth, local governments have been pushed by hotels and housing advocates to set limits. For example, New York has enacted laws restricting short-term rentals, making it difficult for hosts to rent rooms in apartment buildings. Other cities have followed suit.

Finally, there is an oversupply. Maybe you have a great seat in an attractive location; However, if supply outstrips demand, rents could plummet or there could be a lack of bookings. In big cities with high housing costs, lots of hotels and many other Airbnb hosts, it’s harder to get a markup.

Smaller cities are not necessarily the better choice. I remember visiting Sedona, Arizona in late January 2020 and chatting with a couple from New Jersey who were also enchanted by the red rock wonderland. They were very tempted to buy a house and rent it out through Airbnb for the weeks they would not be there. But Sedona is one of the worst places to be an Airbnb host, according to AirDNA, an analytics company that ranks the best places to invest in short-term rentals. It already rates Sedona poorly due to high house prices, low demand, and a large number of offers in the market.

Hosts who want to go out of business have three options: sell, rent to a long-term tenant, or move in.

Property prices are falling, but supply is still tight, so depending on the property’s appreciation, selling may not be a bad option. Long-term leasing of the property might be the best choice in some markets, especially where rental rates are high. Moving in is a very personal decision with many associated costs.

Of course, not every Airbnb host rents out their vacation home. Some rent out their only home and use the extra income to balance their budgets. I know a family from LA – two adults and two teenagers – who move in with friends and rent out their house when they need school clothes or a car repair. A more predictable source of income might be a long-term roommate, but that comes with legal complications — long-term renters have more rights — as well as privacy considerations.

Even as Airbnb itself reports another quarter with impressive earnings, if the hosting math isn’t working out for you, maybe it’s time to cut your losses.

More from the Bloomberg Opinion:

• Do you feel trapped? Sometimes your 401(k) can help: Alexis Leondis

• Do you think homeowners will stay? Austin suggests otherwise: Jonathan Levin

• I might buy because the rent is just too high: Erin Lowry

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She is a co-author of “Rescuing Retirement” and a board member of the Economic Policy Institute.

More stories like this are available on bloomberg.com/opinion

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