Should I Airbnb my property? Looking at the same property with four different lenses

In our Portfolio Analysis sessions, one common question we receive is “Should I Airbnb my property?” As a follow-up to that question, we also hear, “Should I try to reduce the time on my mortgage to get to the end goal more quickly?”  So in response to these questions, we decided to model out one single investment property from one of our clients to see just how an Airbnb or added principal payments would impact the investment and the investor’s cashflow. 

This financial model explores four scenarios for a house hack using the same property. The four scenarios are:

• Room by room
• Airbnb
• Long term rental (single lease)
• Adding in extra principal payments with the cashflow 

Scenario #1: room by room rental

In the model, we take a look at an upstairs/downstairs single family home with a mother-in-law suite. This house is owned by one of our clients and was purchased in October of 2018. The house was originally a house hack that was acquired with 6% down for $375,000 at a 4.875% interest rate, costing the homeowner $1,843 in principal and interest payments. Once the house hacker moved out, the house was producing $4,055 in income and $13,100 in cashflow, after paying the mortgage and all operating expenses.  The house was rented as a room-by-room rental without a property manager.  That translates to an 8.55 cap rate. Wow!!  The beauty of room by room rentals. 

Scenario #2: Airbnb rental

Using this house, with the same interest rate, price and downpayment, we take a look at it as an Airbnb rental property.  We pulled data from AirDNA, looking at the city of Westminster, a nearby municipality to Northglenn. AirDNA showed an average nightly rate of $136 and approximately 280 nights rented per year. Since the property is in a suburban location and not a vacation destination, we pulled back and utilized an average nightly rate of $105 per night and 200 rented nights. That gave us an average of $1,800 of income per month, which resulted in approximately $11,000 of income loss at the end of the year. If we used the numbers provided by AirDNA, we saw a $2,200 cashflow at the year’s end.  

Scenario #3: long term rental (single lease)

In the third scenario, we moved the property from a room by room rental to a single lease, meaning one family or group of people on one lease.  Here, we used rent data from RentOMeter and assumed a year lease, with a monthly rental rate that is lower than room by room but also requires less management.  Here we are receiving $2,800 per month along with some bill backs for utilities, resulting in around $2,500 in annual cashflow, with a property manager at 8% of the income.  This allows the owner to be more hands off and work less on the property but sacrifices some cashflow, although without a property manager the income increases to over $5,000 per year but requires so additional hands on management.

Scenario #4: additional principal payments with the cashflow

Lastly, some house hackers want to know how they can reduce the amount of time they owe on their mortgage. Essentially, it would be ideal for them to take 10 years off of the mortgage timeline. To do that, we looked at paying down the note with extra annual payments of $4,500 each year for 20 years to terminate the note in 20 years.  In this case, the house would be rented room by room, leaving adequate cashflow to pay down the additional mortgage payments. In the modeling we did, we ran it with and without property management.  In both cases, there is enough to make the additional principal payments.  

Side by side comparison of 4 rental scenarios: room by room vs Airbnb vs single lease vs principal paydown

Rental Property Portfolio Analysis

Do you have questions about how to optimize your own rental property?

• Should I pay off, sell, or refinance my properties?
• Should I utilize a 1031 exchange or take cash off the table?
• The market is hot. Should I sell my properties?
• Should I sell my residential to buy commercial properties?
• Am I on track to achieve my retirement cashflow goals?

We created our Portfolio Analysis service to help investors answer these questions. We are offering complimentary introductory Portfolio Analysis sessions to better understand your investment goals and find a way to get you there. There are a limited number of sessions available for non-Envision Advisor clients, so sign up today!

Want to Get Started Building Your Own Rental Portfolio?

For information on how to get started investing in Denver, check out our 2021 Denver Real Estate Investing Guide. You can also sign up for our free Real Estate Investing Newsletter and download free real estate spreadsheets and toolkits.

YouTube Video: Should I Airbnb My Denver Property?