Would You Lease Your Condo To An AirBnB “Host?”

AirBnB is just as amazing as it is awful.

It’s the source of so many exceptional benefits, and at the same time, the cause of so many problems.

A client of mine who owned (past tense, as he has liquidated almost everything…) upwards of twenty condos was a huge proponent of AirBnB.  His returns were through the roof, he said.  Imagine a condo that would ordinarily rent for $2,200 per month but for which he would gross upwards of triple the amount by renting nightly on AirBnb?

Of course, this requires a property manager, and not just “a” property manager, but “the” property manager, as in the best property manager that I have ever met in all my years in the business.  Before you ask – no, I can’t give out his contact info.  Property management companies will routinely take 20% of gross rents and most of them do nothing.  It’s a retainer and it doesn’t pay for anything.  But my client’s property manager was the most hands-on, well-connected, problem-solving manager I had ever met, and my client’s return on investment with his AirBnB rentals was a direct result of his property manager.

At one point last year, I went to sell one of his units and I found there was a $20,000 insurance claim pending for “flood damage.”

When I inquired with the property manager, he laughed and said, “Oh, yeah, some American kids were in town looking to party, probably got some stepped-on shit, Molly or K, got fucked up, tried to flush every towel in the condo down the toilet!”

He found it so amusing but that was literally my worst nightmare.

Over the years, I’ve often generalized that, “Tenants are far messier than owners,” to which I’ve had some pushback, but as I speak, we’re renovating a massive 1,700 square foot condo that’s been beaten to hell by three foreign students.  Imagine three people who spit toothpaste in the sink every night but never once run the water.  Don’t ask about the toilet…

So when it comes to AirBnb guests, would you expect any better than the generalizations about tenants, or any worse?

Google “AirBnB” and then any word of your choosing: issue, problem, nightmare, police, party, death, murder, et al, and I’m sure there will be no shortage of news stories.

As a guest, you love AirBnBn.  And VRBO, of course.  My wife has used both platforms to find us vacation properties in Muskoka, Thornbury, Prince Edward County, and even Florida.

But what about as a host?  Do you use the platform?

Many of you do.  Many of you swear by it.  Many of you profit handsomely from it, but many, if not most of you, are hands-on.

Now, let me throw a small wrinkle at you: what if you leased to somebody ELSE who wanted to AirBnB your property?

Come again?

I mean, what if you owned a condo in downtown Toronto and you didn’t choose to AirBnB the property, but rather sought out a long-term tenant.  And what if that long-term tenant wanted to be an AirBnB host?

Have you heard of this?

There are many different terms, phrases, and ways of explaining this.

“AirBnB reciprocal agreement,” is how one person put it to me.

Another asked, “Would your client be open to leasing to an AirBnB host?”

Essentially, you’d be leasing out your condo to somebody who would then be running it as an active AirBnB.

Last month, I received an offer on one of my listings from an individual who provided an above list price offer, without having seen the condo.  That sounded a bit too good to be true, and while the rental market is hot, this is a much larger, more expensvie condo.

They were completely up front about their intentions.  There was no attempt to deceive or even muddy the waters; they stated emphatically that they planned to rent out the condo on a short-term basis.

The individual provided a rental application and credit check, which is standard, but also went ahead and provided a personal T4 as well as a tax return of one of his companies.

He disclosed that he currently makes a $200,000 per year salary as an investment banker (and provided an employment letter to verify) as well as $350,000 from his AirBnB hosting company, property management company, and cleaning company.

This person was legit, and many in these cases are not.

To his credit, the agent did his job.  He sent me a lengthy email with every document needed, and then some, plus links to his Facebook, Instagram, and all his company websites.

He added this note:

As you may know exposure to damages can occur with traditional tenants. My client has the following measures in place:

Protection from three (3) layers of insurance

Damages that may occur in the landlord’s property are covered by insurance, so the tenant does not have to pay out of pocket:

1. Airbnb’s AirCover Insurance Program, $1,000,000 in liability insurance and damages coverage. https://www.airbnb.ca/aircover

2. Tenant will pay for a new home owners liability insurance policy that covers short term rentals. We have a special insurance agent that will issue this directly to the landlord. Attached to this email is a sample policy. It is an extremely comprehensive policy.

3. Commercial operators Insurance. If all else fails the tenants commercial insurance will cover potential damages from guests.

–

For those of you that are familiar with AirBnb, the above information is correct and accurate.

So in summary: this individual is well-qualified financially to carry a condo renting for $4,000 per month, has great credit, a steady job, and a secondary source of income.

There are lots of testimonials to support the success of his business ventures.

And the landlord – my client, would be protected by multiple types of insurance.

So what happened?

Did my landlord accept the offer?

Not in a million years.

And I think a lot of other property owners in city would feel the exact same way.

But what is it about this idea that we don’t like?

The liability?  The potential for damage or conflict?

Or do we not like the idea of somebody renting out our $4,000 condo for $9,000?

On that note, how would the math have to work?

Let’s say the “host” is able to manage the property effectively and only experience a 15% vacancy rate.  Say there are an average of 25 nightly rentals each month, and say the price is $300.  That’s a gross revenue of $7,500.

But what about management and cleaning?  Surely that costs 20%, no?

That’s $1,500.  So the net is $6,000 per month.

What type of profit margin should a host expect?  Is it worthwhile to rent a condo for $4,000/month to turn around and lease it for $6,000 net?

Perhaps if the host has two dozen other properties just like it.

In this case, the “host” is likely using his own management and cleaning companies so the expenses generated by hosting would represent revenues generated by his other two companies.  I’m sure there are ways to keep costs down.

But what does this say for the owner of the condo?

On the one hand, the owner of the condo doesn’t care about the finances of the individual or corporation renting the unit.

On the other hand, if the project isn’t financially viable, then the tenant could default or seek to end the tenancy early.

So the owner must care about the marketability of the unit as a short-term and/or nightly rental, as well as the financials, and the “host’s” ability to manage effectively.

It sounds like the property owner now has a vested interest in the host’s business model, right?

Now, just to play devil’s advocate, you could say the same thing about the “traditional” tenants if the landlord rented to Jane and Jim.  The landlord would have a vested interest in Jane and Jim remaining gainfully employed so they can generate income to pay their rent.

But is the “concern” greater with the AirBnB host or with Jane & Jim?

I think that question is rhetorical, but I don’t know that the concern is only a financial one.

I believe, and this is based on conversations with my landlord-clients as well as colleagues, that most landlords simply don’t like idea of an AirBnB in their property, period.  If you pressed them on a “why,” they’d probably give you a “because.”

Why?

Because.

Because I don’t want people sleeping in my condo by the night.

Because I don’t want my property to turn into a party venue.

Because I don’t trust the hosts.

Because I don’t trust the renters.

Because I want to rent to “normal” tenants.

Because I just want to do this the old-fashioned way.

And maybe that last point is the real story here.  Maybe this is a case of people being afraid to try something new.

What if this condo, typically renting for $4,000 per month, could be rented for $5,000 per month – to an AirBnb host?

What if that “something new” meant more money for the condo owner?

Then it’s just a classic risk-reward equation, and ultimately the owner can weigh the pros (more money) against the cons (more perceived risk).

Although, the same equation is always present when you’re looking to rent out your condo or investment property, especially in a down-market.

With regards to the example I noted at the onset: they had this massive 3-bed, 3-bath condo listed for lease more than a year ago but had little interest.  Their agent at that time told them that they should rent to three foreign students, in lieu of allowing the condo to sit empty.

There’s the classic risk-reward equation.

You’ve got two options:

1) Rent the condo for $3,495 per month, on your $3,595/month list price, to three foreign students who are here studying for one year, but are all aged 18 to 20, unsupervised, and could potentially do anything they want to, and in, your condo.

2) Leave the condo on the market for $3,595/month or reduce to $3,495/month, or, hell, reduce to $3,395/month, but wait for “the right tenants.”

In the end, they took their agent’s advice, and leased the property to the three foreign students.

Two years later, the condo is in rough shape.

When I went into the condo to measure the kitchen stove (so we could replace the one that they ruined…), my measuring tape ended up with a thick coating of brown sludge that had built up on the stove.  Sludge, slime, whatever you want to call it, it was not from one use of the front burner.  It was from daily use of a stove that had never been cleaned in two years.  I kid you not, I couldn’t get the feeling of gukk off my fingertips.

I threw the measuring tape out.

This isn’t every tenant, nor is it every student.  But the point is: if you don’t choose your tenants carefully, you can end up with a damaged property, missed rent payments, or the liability of their actions that causes harm, physical or financial, to others.

There will always be a risk-reward equation with tenants, whether it’s your “traditional” renters or whether it’s an AirBnB host.

And while we know that higher risk comes with higher reward, I have yet to find a landlord out there that wants to take on the professional AirBnB host as a “tenant.”

As a business model, this seems to be gaining momentum.  I’ve had three more calls on this property from similar individuals and that’s because this building specifically allows short-term rentals, which is one of very few in the city that does.

Where there’s an opportunity for financial gain, there will be gain-seekers.

Who among you would take on this risk?

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