Reader Question: We are a four-person group wanting your opinion on topics to consider when buying an Airbnb investment. We have invested in other commercial property types, but this would be our first bed and breakfast. The six units generate an eight-percent cap rate. 2019 was the first year in service. There are numerous significant attractions within 5-10 minutes by car, but Airbnb is a new category. What is your opinion about Airbnb projects as an investment?
Monty’s Answer: While there are differences in operating an Airbnb instead of apartments, I see Airbnb as a different operating model rather than a new category. Bed and breakfast operators have been around for many years, Airbnb’s reservation system organized them under one banner. Here are some questions to consider as you perform due diligence on the offering:
- When an investor changes course so early in the life of a project, is it a red flag event? Why sell a new cash-flowing project now? Also, they base the projections on a 35 percent down payment. I would ask a local commercial banker if they finance a six-unit apartment project the same way they would finance an Airbnb. Then I wonder if these units were rented as apartments if those rents would support the returns on the project. Having a Plan B may be a good idea.
- Street address. I would be more interested in the surrounding neighborhood than 5 – 10 minutes from major attractions. Is this building part of a larger project? If it is part of a larger project, is the larger project not working?
- Built-in 2019. Why would an investor sell an almost new building? A short rental history lacks the test of time. Are the numbers accurate, or are they a projection? Is it a pandemic-related sale or is the pandemic an excuse? Sales of new buildings means proceed with caution. In commercial real estate courses is a seminar titled “Buyers’ Reconstructed Statement,” where we learned to reexamine the seller’s information to determine if the seller is truthful. Two years old? Any engineering studies on soil conditions to determine if the soil will be stable long term with a four-story building weight?
- Is property management baked into the projections? What do the actual numbers for the past 90 days reveal? Airbnb properties require a lot more oversight and expense, like a hotel, and those extra costs should translate to higher returns. Old unkempt two families in a declining neighborhood can produce 15 – 20 percent and higher returns. I suspect a new Airbnb would have a better return than a new apartment building.
- If this property is on Airbnb, there will be reviews from customers. Sometimes, a check will create a new question.
- Here is an article about due diligence on an apartment project. It is not an Airbnb rental, but most of the exercises still apply.
- Have you toured the property? Are the comparable sales really comparable? Drive the comps.
Are you in a bubble? That is an excellent reason to sell as an investor, but it may not be a good reason to buy. If there is a significant correction, how would it affect your investment? For example, would people stop traveling? Here is an article from The Balance with more information.