For most homeowner’s in the Bay Area, your home is your largest asset. The great thing about owning a home from a financial perspective is that it is an appreciating asset (goes up in value over time) from which you get utility (you get to live in it!), and you get a tax benefit from itemizing mortgage interest (on debt up to $1.1million) and property taxes.
Wouldn’t it be great if you could get even more out of your house? Would if you could turn it into a cash flow machine? You can do this by renting out your house through services like Airbnb. Listings are growing exponentially with about 1.2million worldwide and 25 million guests. There are only about 100 listings in the Mill Valley area. As an Airbnb host and guest, I find this surprising. Over the last year, we have rented our house out to five very nice families and earned about $7,750 in tax free income.
Interested in earning some tax-free money while you are out of town? Here is how it works:
Lifecycle of Booking on Airbnb. A guest sends you a booking request. The host reviews the guest’s profile and decides whether or not to accept the request. You can modify, negotiate and learn more about the guest via Airbnb’s portal. Airbnb collects payment from the guest when you accept the booking; however, Airbnb pays you 24 hours after the guest checks in. After the guest leaves, the host and the guest get the opportunity to review and rate each other. This makes the community and reviews very robust over time, and gives each party a chance to make a well-informed decision about whether to book or accept.
Cost of Using Airbnb. Listing your house is free. Taking bookings is free. Airbnb takes 3-5% (depending on how strict your cancellation policy is for your listing) of your total rental rate. Strict is 5% and all others are 3%. Since Airbnb takes the payment at booking, they pull out the 3-5% fee before paying you out 24 hours after the guest checks in. For example, if you rent your house out for a weekend at $500 per night plus a cleaning fee of $100 (set by you), the guest pays $1,110 at booking. Airbnb pays you $1,076 24 hours after the guest checks in.
Two Way Review System. Unlike VRBO and other services, not only can guests review the host but the host reviews the guests. You and your guests have two weeks to leave a review once it is public. Since reviews are transaction based, there are no “fake” reviews. The reviews appear right on the listing or profile pages. The community relies on honest and transparent reviews. The more 5-star reviews you get, the higher your listing is placed in search results.
Liability Protection. Airbnb provides $1million of (US) Host Protection Insurance to cover Third Party/Neighbor Claims for Bodily Injury or Property Damage. (All homeowners should have their own Umbrella Policy for $1million, which costs ~$300 per year).
Tax Free Income. The IRS allows you to rent out your home for up to 14 days without reporting or paying any tax on that income. If you rent your home out more than 14 days, you have to report that income and pay taxes on it. However, your home is still not considered a rental property and you can continue to itemize mortgage interest and property taxes on your tax return. You can also deduct certain rental expenses from the reported income.
Biggest Obstacle. The biggest obstacle for homeowners to overcome is the thought of having other people stay in your home. I know some people that say they will never be comfortable with the idea of strangers sleeping in their bed. If that is the case, do not host (obviously). If you are concerned about your “stuff” and how to get your house ready for guests, this is a good opportunity to look around your home and see if your stuff is cluttering your life. Purging unwanted toys and clutter can be relieving, and knowing that you are going to earn money from renting out your home can be a good motivator.
Finally, do not over think this process. Take your valuables and most private items and put them in bins in a locked closet. We all want clean houses, so here is an excuse to hire a cleaning person or do it yourself (and cover it with the cleaning fee). All of the guests we have had have left our home spotless! Designate a set of guests sheets and towels as well if it makes you feel more comfortable.
Getting Started. Now that you know the process, getting started is easy. You need some attractive pictures of your home and to spend about 30 minutes building your listing profile. Make sure to describe as much about your home and location as possible. Put yourself in the guests’ shoes and think about what makes your listing special. You can set available dates on your host calendar, but people may still contact you about other dates. Once you post your listing and get a request, response time is important. The quicker the better since your stats on response time are shown on your listing (whether you decline or accept).
Lessons Learned. One big lesson that I have learned over the last year is that while monetizing our largest asset and getting that cash flow is exciting, we will only rent out our house when we have a planned vacation. In the beginning I got excited and accepted booking requests for random dates. As a result, we have had to come up with trips to vacate our own house for guests. Usually, I pick an inexpensive place or go camping and make a nice profit but it is still work to get our house ready for guests.
The money we made this year has paid for most of our travel and the helped save for increasing property tax bills. Next year we plan to get a paid vacation to Korea and Japan!
