The BIGGEST PROBLEM with renting your home on Airbnb...

What's up you guys, it's Graham here. So here's a very common scenario that I see happening a lot, and a very stark warning for anyone out there who wants to rent their property on Airbnb.

The situation usually goes a little bit something like this: an investor's gonna be looking for a property to buy, but nothing on the market cash flows and makes money with a long-term lease. However, they start running the numbers. They realize that if they just furnish it and list it short-term on Airbnb, that they can make a ton of money starting from day one.

So they go ahead, they buy the property expecting to turn it into a short-term furnished rental and make bank. This happens all the time. Like, if you want to make a property cash flow and basically just be rolling in money all day long, or actually if you want to dis, basically start printing money and you live in an area which is moderately high in tourism, Airbnb is the best way to force cash flow.

Some people even take this a step further; if they don't have the down payment needed to buy real estate, instead what they will do is go and rent a property for one, two, or three years, furnish it, lease it short-term on Airbnb, and then profit the difference between what they're paying in rent and what that property makes them short-term.

This video is meant to explain how doing this can actually be a very risky and very bad idea. For everyone else who's always wanted my thoughts and opinions on renting an investment property on Airbnb, this is that video.

Now to start, there's nothing inherently bad or wrong about renting your property on Airbnb. In fact, I'm all for it, especially if you live in a tourist-dense location. It just makes sense. Like, if you can make quadruple the profit renting your home short-term on Airbnb and you're okay with some of the turnover, I think that's just the financially smart move to take.

However, there's a big distinction between that and what many other people do when they rent their property on Airbnb. Many people have started buying homes specifically with the intention of renting them out on Airbnb. They're buying these properties that would just never ordinarily cash flow, and they're starting to rely on Airbnb and other short-term rental websites to cover the costs associated with the home.

For example, let's say they buy a property. If it's going to cost them $2,200 a month between the mortgage, taxes, insurance, repairs, and everything else associated with that, and on a long-term lease, they would be lucky to get $1,800 a month. Now, any experienced long-term real estate investor would look at that property and they would call it a loser to its face and then just walk away.

Wait! Wait a second. Wait a second! Just hear me out on this one. Just hear me out. What if you just do some minimal work to the property, you lightly furnish it, and then you rent it on Airbnb? With that, you can make $3,600 a month. Now the property makes sense to buy.

As a real estate agent, this is something I saw so many people doing from 2013 to 2016. They were buying all of these loser properties, furnishing them, putting them up on Airbnb, and making so much money. Or they were also going and signing one, two, or three-year leases on these properties as well, doing the same thing and scaling up incredibly quickly just because of how much money they can make from doing this.

But naturally, anything that's this good and is profitable is going to be exploited and abused, and when that happens, the problems start coming up. First, we've had people start renting out illegal structures on Airbnb to make extra profit. Then, we had people trying to circumvent HOA regulations to rent out their condo short-term. And then you want people renting out their homes for massive parties on Airbnb. The list just goes on.

Now I say all of this as someone who has nothing against Airbnb. In fact, I'm actually all for it. But at the same time, it's really important to be realistic and understand that inevitably people will begin pushing the boundaries and pushing the limits of what they can and cannot do. This is where the issues start.

And because of these issues, this is where many investors also begin going wrong. The bad investors out there will buy or rent these properties with the expectation that the golden era of Airbnb is going to last forever, and they could just sit back and continuously enjoy these insane profits on a property that would never ordinarily cash flow. But all of that is likely coming to an end in many areas.

For example, here in Los Angeles, regulation has banned Airbnb rentals on rent-controlled units. You might ask yourself, why did this happen? My answer to this is because people realized they could circumvent rent control by putting their property up at Airbnb and at the same time make like three or four times the profit they would normally be able to make.

Here in Los Angeles, the popular tourist destination Santa Monica has had many, many issues with Airbnb. Now Santa Monica has cracked down and requires homeowners to be living in the home as a primary residence if they rent out their rooms. Many other areas have also followed suit, limiting the number of days a property could be rented for, requiring permits to be issued, and issuing fines if those requirements are not met.

Then guess what happens to all of those people who bought non-cash flowing properties with the expectation that they could just rent it out on Airbnb and make a profit? If your location cracks down and says, "Sorry, you can't rent your property on Airbnb anymore," good luck!

Look, that's why I mean you're screwed. The two options you have are either coming out of pocket on a property that never cash flowed from day one or selling the property to try to recoup as much of your investment back as possible. Relying on Airbnb is a very risky proposition in the event your city starts regulating what you can and cannot do, which chances are I believe it's probably going to be happening in many areas over the next one to three years.

Now part of the reason that cities are doing this is because they're just greedy and they want their fair share of transient occupancy tax, and some cities just end up making more money from the hotel industry, so they don't want anything else competing with that. When it comes to this, I think that's just incredibly short-sighted from the city's perspective.

Now, cities shouldn't be entirely profit-driven, but there are some legitimate reasons for this as well. In areas like Los Angeles that already have an extreme shortage of housing supply, Airbnb takes listings off the market that would ordinarily be on the market for long-term residents, further driving up the prices of housing.

It really incentivizes owners like me to take rent-controlled units off of the market and rent them out on Airbnb so I can just make double the profit. But that comes at the expense of driving up rental prices for everybody else because we're restricting inventory and taking it off the market in favor of renting it on Airbnb short-term.

Now, don't get me wrong here, because I'm all for doing whatever you want with the property that you own and I'm all for making as much profit as humanly possible, but there does need to be a line drawn as to when the boundaries might be crossed.

Now, in addition to taking inventory off the market, it's also bringing increased traffic to previously quiet neighborhoods. This is something I tend to agree with. For instance, I had a neighbor who rented out their home on Airbnb a few years ago, and while most people were totally fine and were great, every now and then you would get these crazy kids that come in and throw some wild party, leave trash everywhere, be really loud, don't give it just leave it a mess—the people spilling onto the streets—and like why would you want to deal with that?

No, don't get me wrong, because not everyone is like this, and you're just as likely to get a really bad neighbor who does all of this sort of stuff when they owned the home, so don't get me wrong on that. But the risk of this happening is a lot greater just given the more people who see and rent the home.

Even though many of us are driven by profits—and I know I certainly am—I still believe that we have a moral and ethical duty to really make sure that we do the best we can for the greater good of the entire community.

So, with that said—and yes, I've said a lot—here's how you can rent a property on Airbnb and not get screwed over by local regulation.

These are just my thoughts on renting an investment property on Airbnb in general. The first thing you've got to do, above anything else—and any good investor will tell you this—is that when you're buying a property, you should make sure that it cash flows without relying on Airbnb.

This is where most people begin going wrong when renting a property on Airbnb. They look at the numbers, they think the property makes a lot of money on Airbnb, so I'm just gonna rely on this. When doing so, you expose yourself to a lot of risk in the event that Airbnb eventually regulates that and you're left with a property that doesn't make any money, and therefore you lose money. I would say the chance of this happening over the next few years is pretty high.

Instead, you should really view Airbnb as just a way to supplement your income if you have the cash-flowing property, but you decide you can make way more money renting it on Airbnb, do it! By all means, put it up on Airbnb and ride that gravy train as long as you possibly can while still complying with local regulations. Then, in the event that something happens and you can no longer rent that property on Airbnb—like in many places now in Los Angeles—you know what? No worries on that; you already have a cash-flowing property to begin with.

Sure, I mean it would be nice to make a little bit more money, but you're not really gonna be hit that hard. The way you should look at Airbnb is really just like it's the icing on the cake and not the cake itself. Especially if you have too much icing on the cake, it just doesn't taste very good.

So if you can follow that, you're gonna be just fine. In addition to that, it's also very important to realize that the reason people make so much money on Airbnb is that oftentimes it's a lot of work. I know many people who run an Airbnb, and it's a constant hustle to make sure that everything is cleaned, the house is fully stocked, that all utensils are there, that nothing is broken, that everything is in working condition, and then dealing with tenants' issues as soon as they come in.

They have questions, they can't figure out something, has something works—there's a lot of little intricacies with every single property. And it's also very important to expect a lot of these things to happen so when you do it, you're not gonna be caught off guard.

For example, every single time I rent out one of my properties to a new tenant, the first week or two is always full of little questions and minor things about where something is located or how something works. So this won't turn on or little minor things. Now imagine having that every two to five days as a new guest comes in and stays at your house.

So it's a constant hustle. But with that said, if you're okay with a lot of that work, if you're okay with the turnover, if you comply with regulation, and you already own a cash-flowing property, but you can make more money on Airbnb, I say I'm all for it! Go ahead and do it and make those profits.

And again, anything that comes to making more money, I always encourage it, as long as it's legal. The big differentiation there is as long as you what you do is legal, and I'm all for it. But the big distinction here is that you shouldn't rely on Airbnb; otherwise, you're gonna have a bad time.

I really personally believe that the battle with Airbnb and city regulation has just begun, and we're going to see this continue over the next five to eight years. I have a feeling that we've gone from having basically no regulation to eventually we're gonna have too much regulation, and then homeowners are gonna be fighting against that. Then eventually we're gonna settle on a middle ground so that homeowners are happy, and the city is happy, and all the tourism and the guests and everybody's happy too.

Everyone will be happy; it's just going to take a lot of tinkering to figure all of that out. So anyway, that's just my thoughts. If you agree with me, if you disagree with me, if you have any personal experience with doing this, definitely comment down below.

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