How to Setup Your Investment Property and Mitigate Risk
Risk and reward–while this concept is certainly nothing new, the factors that affect the level of risk involved in an investment can fluctuate based on current events, or in this case, a global pandemic. Based on the current COVID-19outbreak, we are looking into how outbreaks and other potential risk factors can affect rental property income. For all property owners, it is important to examine the best ways to mitigate risks and prepare for the unknown.
As with any investment, there is almost always a level of unknown risk involved. The same is true for all property owners who rely on rental income from their properties. The past few weeks have shown that travel bans, public health scares, and other events such as natural disasters can all have a damaging effect on the income garnered through short-term and long-term rentals like Airbnb who have had countless cancellations due to the current climate.
Services, such as Airbnb and property management companies, provide a platform for property owners to list their units and homes so they can rent them out. Both management companies and Airbnb turn a profit off your earnings. The main difference between the two is that Airbnb is structured around short-term stays. For those of you who are worried about the impact this will have on your investments or future investments, we will begin by examining your options.
If you are interested in consistently having your investment property rented out long term, management companies are the clear winner. Not only do they have the marketing resources and bandwidth to find someone to fill the vacancy, but they know the legal action to take should a tenant miss a payment, or you run into certain building issues. Largely, having a steady stream of renters will offer you peace of mind. If there are issues that arise, management companies can take the lead and make the necessary arrangements to obtain repair quotes, monitor property maintenance, and so forth. Management companies are in it for financial gain the same way you are. If you make money, they make money.
When it comes to short-term rentals, Airbnb is the way to go. They have created a name for themselves in the short-term rental landscape, offering 1-2 night-only options, which would appeal to the group looking for a weekend getaway. Management companies typically do not offer this flexibility as the renters have stricter lease terms. The downside with this is you could go days, weeks, or potentially months without a steady stream of income. In this situation, all Airbnb property owners are required to cover all costs and upkeep regardless if they are receiving any source of income from the property. Even if there are no travel bans or global viruses, theoretically, your 1-2-night weekend rental may remain vacant during the weekday, losing 20 days of income. There is less certainty, opening up financial risks for Airbnb property owners.
Another key factor to note is the financial investment you would be making with the management company or Airbnb itself. When you post a listing on Airbnb, the company charges a 3% fee per booking, or you can pay an upfront sum for the year. In general, property management companies charge between 8 –12% of the monthly rental value of the property along with expenses. Part of the larger financial commitment stems from the fact that these companies employ a full staff to monitor, repair, and take charge of the day-to-day responsibilities. With Airbnb, you are the one keeping everything afloat.
If you are concerned about protecting your rental property investment or are interested in trying a new or different approach, consider the pros and cons of management companies versus sites like Airbnb. While it is impossible to predict all potential risks you might face, take time to run the numbers, consider the time commitment of each, and assess what option best suits your financial goals along with your schedule.
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