So last week we talked about AirBnb. I told you kids about how I had a garage I was interested in converting into an apartment, which had the potential to do a 40% annual return. That, my friends, is the very definition of succulent.
I won’t likely pursue this, for a number of reasons. First off, I’m kinda lazy. I don’t want to go and babysit a unit like that. Go somewhere else, you damn kids. I prefer more passive sources of income. And perhaps most importantly, after a short discussion with someone who is reasonably aware of local zoning laws, I was told my chances to convert my garage were slim to none. Interestingly, however, my chances of converting it into a bedroom or home office were good. Perhaps I’ll keep that in mind for the future.
It’s easy to argue I’m going about the AirBnb business the wrong way. If I was serious about it, here’s what I’d do.
All about protecting capital
Most people don’t have thousands of dollars to spare, just sitting around to convert space into something that can be rented out. Hell, most people don’t have space for their mountains of crap, never mind guests. Actually, I take that back. Most of us have too much damn space. We just like stretching out, that’s all.
Think about all the expense of buying a condo to rent out this way. You’d have to scrounge up at least 5% down — although 20% is more likely — spend money on insurance, taxes, and all the furniture it takes to make such a place happen. In a market like Toronto or Montreal, you could be looking at $100,000 just to get started.
That’s nuts, especially when we consider the uncertainty surrounding these types of places. At this point, most cities don’t care much about folks renting out apartments like hotel rooms. This could change, especially in cities that have high local taxes on hotel stays. The government always gets their cut.
The far easier way is to simply rent a place on a monthly basis and then use it as your base of operations.
The biggest advantage is it lowers the cost of entry. All you need to come up with is first month’s rent, last month’s rent, and cash for furniture. Instead of spending $100,000 to start, you’re looking at a bill of less than $10,000. Hell, if you’re a Craigslist master, you probably won’t need much more than $5,000 to get going.
Just stay out of the intimate encounters page, champ. ACTUALLY NO TAKING A HOOKER BACK TO YOUR AIRBNB PLACE IS GENIUS.
It also allows you to be nimble. Pick a bad location? No problem. You’ll lose one or two months rent, max. That’s far less than paying some broker 5% of the value of a condo to get rid of it. Being nimble is a good thing.
Expansion potential is much better, too. Earnings from one unit can easily be reinvested in another, which allows you to start building up an empire with very little capital out of your own pocket. Landlords like it too; it’s much easier to sue a business guy with some assets than a random dirtbag who rents an apartment.
Or, better yet, partner with your local landlord. Offer to do all the work for 33% of the profits. Or 20% of the profits. Whatever works for you. It’s better to take an even lower return in that situation, simply because you have no capital at risk. It’s the same concept as using seller financing, which is the ticket.
Wrapping it up
I’m a little skeptical this whole AirBnb thing will continue forever. I have nothing against the concept, I just think local governments will eventually ask these folks to start coughing up the same taxes hoteliers pay. This immediately eliminates AirBnb’s competitive advantage.
But there’s nothing stopping you from getting on the gravy train. The best way to do so is to keep as much of your money firmly inside your wallet. Capital is precious; use it wisely.