Companies Like Airbnb and HomeAway are Changing the Real Estate Revenue Game

Companies Like Airbnb and HomeAway are Changing the Real Estate Revenue Game

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Since it was founded in 2008, Airbnb has revolutionized the way that people find vacation rentals. Instead of booking a room at a commercially-owned hotel, bed and breakfast or rental home, people can book rooms, apartments and homes from individual home and property owners.

Table of Contents - Companies Like Airbnb and HomeAway are Changing the Real Estate Revenue Game

Together with HomeAway—founded in 2004—Airbnb has developed an annual revenue of over $3 billion. There’s no denying the impact these companies have made when it comes to how people book rentals, but their incredible growth has generated a lot of concern among real estate stakeholders because of the impact on real estate revenue.

Gives and takes

There has been a mixed response to Airbnb and HomeAway ever since they were first founded.

Lots of investors supported these companies because of their innovative approach to short-term rentals. They both give individual property owners, as well as commercial property owners, a platform to reach millions of users who are looking for lodging. On the other hand, they threaten the profitability of traditional hotels and they have also contributed to rising rent prices and, in extreme cases, decreased housing availability for residents.

To understand how Airbnb and HomeAway are affecting real estate revenue, it’s important to consider the growth pattern of these companies and how the market has responded.

The concept of Airbnb, HomeAway and similar rental platforms is rooted in maximizing profitability for individual property owners while expanding rental options for users. Airbnb has touted its potential to provide middle-class families with a passive source of income by renting out a room in their home, for example.

While there are plenty of examples of individual property owners who have supplemented their income by listing on the Airbnb platform, there has been a proliferation of commercial property owners leveraging the popularity of Airbnb to fill their rentals. This might not seem like a problem at first glance, but there are several serious implications with this trend.

Impact on rental prices

When a hotel sets up shop in a city, it adds units that are specifically designated for short-term stays. A hotel’s effect on residential vacancies and rent prices is negligible at most. A property owner who lists their rentals on Airbnb, on the other hand, is often taking units off of the traditional rental market to profit from a short-term rental market.

The appeal of Airbnb and HomeAway to property owners is easy to understand. For one thing, owners don’t have to commit to a long-term tenant. A homeowner who has a separate addition, for example, can rent their space on Airbnb for five nights a month at $150 a night and make an extra $750 of income a month. This homeowner doesn’t have to deal with the hassle of a full-time renter, but they can still profit by renting out their extra space.

Short-term rentals are also more profitable than long-term rentals in some cases. Let’s say a property owner has a complex with 30 apartment units in Toronto. That property owner can rent all of those units out to tenants at $1,400 a month, but if that property owner reserves 10 of those units and lists them on Airbnb for $180 a night, they only have to book guests for a total of 8 nights a month to exceed the amount they would make from a long-term rental tenant.

Because of the profitability potential of apartments on short-term rental platforms, many property owners have removed a significant portion of their rental units from the market to list them on sites like HomeAway and Airbnb.

Or, take a market like New York City for example, where there are over 3 million housing units. On average, the vacancy rate at a residential property or apartment complex is about 3.5 percent, compared with the United States national average of about 7 percent. Over 8,000 units in New York City have been listed on the Airbnb platform by commercial property owners. If these units were on the general rental market instead of the short-term rental market, the vacancy rate in New York City would increase to 4 percent. Even this small increase in housing availability would lower rents for people living in New York City.

The combination of lower vacancy rates and increased prices makes it more difficult for residents to access housing units. While numerous factors are affecting rental availability in large cities, Airbnb and HomeAway certainly play a part in limiting housing supply for prospective renters.

Effects on mortgages

Airbnb and HomeAway aren’t just affecting the rental market in cities around the globe, they’re also having an impact on single-family residential properties. Commercial and individual property owners alike can monetize single-family homes through platforms like HomeAway and Airbnb. Because of the increased profitability potential of homes thanks to Airbnb and HomeAway, home values have increased in some markets.

Airbnb has been shown to positively affect property prices in some of the biggest cities across the world. Homeowners can make an additional profit from their home by listing rooms, apartments or additions on Airbnb, which means that homes in popular cities like London and Amsterdam become more valuable.

This is a positive thing for current property owners and some investors who want to park capital in a growing market, but it negatively affects prospective middle-class property buyers who are unable to afford increasingly expensive homes in markets where Airbnb and HomeAway have a large presence.

Response to Airbnb and HomeAway

In light of all of the effects that Airbnb, HomeAway and other platforms are having on the real estate market as a whole, private and public entities around the world have made efforts to control how these companies operate and limit the use of the platforms by high-volume property owners.

In some cities, these platforms have been banned completely because of the effect they have on the real estate market. Many cities and hospitality businesses have launched campaigns to shed some light on the increased use of short-term rental platforms by commercial property owners who are taking rentals off the housing market. In response to the heat Airbnb has taken in recent years, the company agreed to begin paying hotel taxes to mitigate its negative impact on the real estate market.

Still, despite the company’s willingness to pay hotel taxes, many investors, hospitality companies and government entities are unhappy with Airbnb’s model and what it means for real estate revenue. In the coming months and years, we can expect more back and forth from short-term rental properties and real estate industry stakeholders.

These short-term rental platforms are still relatively new players in the industry and it’s impossible to predict how they will play out in the long run. However, considering the appeal of Airbnb and HomeAway to individual and commercial property owners, as well as platform users, it’s unlikely this rental strategy will go away anytime soon.

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.