There is a bit of a gold rush of people investing in Airbnbs and vacation rentals this year (related to pandemic remote work, interest rates, and perhaps the company’s IPO). I’m not sure if people realize quite how risky the asset class is.

This point was hit home the other day when listening to a podcast where someone with less than a year’s investing experience mentioned they were closing on 5 new Airbnb properties this month. Then i heard a podcast featuring someone with 5 properties and only 30 days experience!

So I thought I’d come up with a bunch of risks regarding investing in Airbnbs and vacation rentals.

1. Regulatory risk. Virtually every US city has banned short term rentals. Most vacation areas face opposition to short term rentals, even in places where the whole economy is based on tourists coming & renting houses for decades (see Lake Tahoe, Palm Springs, lots of Florida).

(I'm going to name a bunch of other risks, but this regulatory risk is the big big big one)

2. Guest review risk. You could spend a million bucks on a beautiful house and after your first guest gives you a 1-star review because they didn’t like the mattress, you’ll be digging out of a hole for years. You're truly screwed!

3. Platform risk. You could get kicked off Airbnb or Vrbo for a variety of reasons and then you’re pretty much out of luck. There’s no other major channel in the US.

4. Occupancy risk. Most markets are seasonal and don’t sustain profitable operations during non covid time, regardless of much you love to vacation there. Lake Tahoe is freakin amazing, but no one visits there in the Spring or Fall (except this year).

5. Property management fees are super high and they do an average job. You’re faced with running a subscale hotel on your own, or paying someone 35% of the revenue who is going to deliver (at best) 4.7 stars of service to guests, not the 5 stars you might.

6. Cleaning is a logistical headache. In between each guest, a cleaning crew needs to come in and do an amazing job. Unless you're very organized and your team is amazing, a lot can go wrong!

7. Parties. The bigger the house, the more likely you run the risk of someone throwing a party that ruins your relationship with the neighborhood or destroys the place.

I chatted with someone the other day who has a handful of larger homes, and in one location a guest burned down the house, and in another their neighbor sued them because the home was a nuisance. If you rent out a big house, it'll happen!

8. It’s expensive! You’re constantly needing to invest in things like furniture and fixing things. The market is really competitive with great hosts, so be prepared to spend a lot of money to deliver a great experience. You can't Wayfair or IKEA your way into greatness!

9. Liability and insurance. You need specialized short term rental homeowner insurance which is more expensive. Also additional liability concerns exist since a lot can go wrong when people are vacation.

10. The numbers mostly don’t work. Most houses will not see enough occupancy at rates to turn a profit. The exception might be this year where travel patterns have been different than normal or if long term appreciation goes in your favor. These houses can bleed you dry!

I think there is some perception that that Airbnb (and maybe real estate investing in general) is some crazy profitable get rich quick endeavor, but that’s maybe 1 out of 100 homes you see listed on the site.

Okay that's it. I personally do think Airbnbs and vacation homes are a fun little niche people should consider as a potential investment or a way to fund a cool home. But be aware of the risk of the work!