downsides

5 Costly Pitfalls of Hosting on Airbnb

Holly Johnson — Fri, 08 Sep 2017 08:30:05 +0000

Renting out your spare room or property through Airbnb can be a great way to supplement your income. For example, New York City hosts earned a median income of $5,474 from the service from June 2015 to June 2016, according to Airbnb data. Other home-sharing services such as VRBO, HomeAway, and FlipKey all work in a similar way to connect property owners with renters through an online platform. (See also: Best Websites for Renting Out Your Extra Space)

Unfortunately, hosting on Airbnb or one of its competitors isn't just puppies, rainbows, and profits. While there is money to be made, renting out a home, an apartment, or even a room requires a lot more skill — and patience — than many realize. There's a lot that can go wrong any time you're working with the public at large. (See also: 13 Things I Learned From Renting Out My Home on Airbnb)

We reached out to several Airbnb hosts to find out the biggest hassles, the most annoying downsides, and the worst things that can go awry. Their insights provide some valuable lessons on what you should really expect if you get into this business.

1. Rude and unruly guests

Renting a home or room to an Airbnb guest is a lot like running a hotel. You'll get your share of polite and courteous renters who want to enjoy themselves without making their presence a hassle. But you'll also get people who will never be happy no matter what you do.

Airbnb host Zeona McIntyre owns properties in Boulder, Colorado and St. Louis, Missouri, and says she's experienced both the good and the bad. Some have even made her cry.

"Most guests are friendly, excited for their vacation, and really grateful that you are opening your home to them." says McIntyre. "A very small group of them are entitled, rude in exchanges, and unrealistic."

"I have had guests message me at all hours of the night, expecting an immediate response and I've had guests make me drive over in a snowstorm to change a light bulb."

If you ask any Airbnb host, you'll find that none of this is rare. In fact, dealing with an occasional bad egg is really just par for the course for any Airbnb host or landlord. Before you decide to rent a room or your home, make sure you're prepared to deal with whatever — or whoever — comes your way.

2. Bad reviews

One of the major components of any Airbnb business is customer reviews. While good reviews can help attract new renters, bad reviews can cause the opposite reaction. Either way, the review system is an integral part of the equation since it's the only way for new renters to learn what your rental experience is actually like.

As McIntyre notes, however, the review system can be a tough pill for a new owner to swallow — especially if you're transitioning a long-term rental into an Airbnb. With a long-term rental, your tenants tour the property ahead of time and know what they're getting into. With Airbnb, this is not the case.

"People all of a sudden feel empowered to critique your design sense, mattress choice, and even cleaning products," notes McIntyre. Occasionally, even simple choices like these cause renters to leave bad reviews when it's completely unwarranted.

"Constructive criticism makes us better, but it does not need to be hurtful or exaggerated," says McIntyre. But whether you like it or not, becoming an Airbnb host means learning to deal with negative feedback. (See also: This Is How You Rent Your Place on Airbnb — And Succeed)

3. More work than people realize

Too many people jump into their new Airbnb business with the false idea they're going to have it easy. List your Airbnb property for a profit, hire staff to keep it clean in between renters, and you can sit back and collect the checks, right?

Wrong. According to Airbnb host and real estate expert James Carlson, renting a home or even a room can be a lot more work than people realize. And, Carlson should know. Not only is he a realtor, but he runs several properties of his own and teaches classes on becoming a profitable Airbnb host.

Unless you hire out all the grunt work, you'll be doing laundry, cleaning kitchens, and making beds every few days. Not to mention being responsive to future guests and to your current guests' needs. "Remember, they don't have a concierge service," says Carlson. "You're it, so you need to be available."

Depending on the number of units you have, you end up putting fires out a lot, says McIntyre.

"If a unit is not as clean as it needs to be, you need to get another cleaner there right away. If a toilet plugs up and a guest is only in town for the weekend, they need it to be functioning," she says. "The key is not to lose your head."

Most of all, be prepared for an array of inconvenient situations. It's not a matter of "if" they'll happen, only "when."

4. Basic logistics

While unruly tenants and late-night calls can put a damper on your experience, sometimes it's the normal everyday logistics of running an Airbnb that cause the most hassle and stress.

Landlord and Airbnb host Elizabeth Colegrove, who owns multiple properties and blogs at TheReluctantLandlord.net, says some of the hardest problems to solve are the ones that should be simple but aren't.

"One of the biggest pains in the beginning was figuring out trash," notes Colegrove. "Tenants don't take the trash out to the curb and get really upset when there is trash left over from other people."

But, since her properties are mostly single family homes, there's no dumpster and turnovers aren't always around the time of trash day. To avoid miscommunication with tenants about the trash, Colegrove added a notice to her welcome packet so tenants knew they were required to take trash out to the outside bin. She also upped the fee she paid her cleaning company so they would take the trash to the curb on trash day.

Then, there are logistics that have to do with tenants themselves — for example, some tenants want to stay a single night but need to check out at 6 p.m. "Basically they want to pay for one night but get two days, which does not work for same-day turnovers with cleaning," says Colegrove. "We have had to get very strict on turnover and are even thinking about imposing a fine if not out by turnover."

5. Tax consequences

Abby Eisenkraft of Real Life Tax Advice is a tax professional who helps new Airbnb hosts prepare their taxes every year. She says that, especially the first year, Airbnb hosts are rarely prepared for the tax implications of running their business.

Eisenkraft says she's seen a few different scenarios play out over and over. First, many Airbnb hosts never set aside money to pay taxes on their Airbnb income. Unfortunately, this can mean owing more in taxes than they planned for. "They are always surprised — and many are tearful — when they see their tax bill," she says.

Second, new Airbnb hosts tend to be confused about what they can write off, so they try to write off personal expenses that have nothing to do with their Airbnb. Eisenkraft's job is explaining what they can and can't write off, and her answer doesn't always please her clients.

Lastly, new Airbnb hosts are typically surprised when they receive a Form 1099K in the mail showing their Airbnb income. Many falsely assumed their Airbnb business was "under the radar" and thus, not subject to taxes.

Obviously, assuming any of these things can be costly. Knowing about them in advance can help you decide whether you really want to have a short-term rental on your property, with your eyes wide open to both the costs and benefits.

Like this article? Pin it!

This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Times Buying a Home With Cash Is Bad for Your Budget

Dan Rafter — Thu, 22 Jun 2017 08:30:16 +0000

Buying a home with cash is usually considered a smart financial move, if you can swing it. That's because taking out a mortgage loan to finance your home requires you to pay a ton of interest, even in today's low-interest rate environment. With cash, you don't have to worry about interest at all.

For example, let's say you take out a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 3.93 percent. You'll pay more than $140,000 in interest if you take the full three decades to pay back your loan. If you pay in cash, that $140,000 stays in your pocket.

What could possibly be the downside of paying this way? Here are a few possibilities.

1. When making an all-cash offer will deplete your savings

If you can afford to buy that $300,000 home with cash, that's great. But if that purchase leaves you with little or no money in your savings, it can put you in financial jeopardy.

It's important to have cash reserves to handle life's emergencies. What if you lose your job? You might wish you still had some of those savings available.

Remember, your investment in your home is largely illiquid. To access it, you'll have to sell your home or take out a home-equity loan or line of credit. Neither option is as appealing as having cash reserves on hand.

If you do have plenty of cash — but not enough to have funds leftover after buying a home — consider coming up with an extra-large down payment instead. This way, you can reduce your mortgage while keeping some cash on hand.

2. When your cash is earning you money

Are your cash savings earning you plenty of big returns? Then it might not make sense to take a big chunk of this money and invest it in a house. Yes, it's nice not to have to make a mortgage payment each month. But you'll have to determine if the return that your invested dollars are generating outweighs the savings in interest you'd get by avoiding a mortgage.

3. When you'll miss out on a tax break

Homeowners can deduct the amount of interest they pay on their mortgage loans each year. This tax break is more valuable during the earliest years of a mortgage, when homeowners are paying the most interest.

You'll have to determine how valuable this tax break is to you. If you do need to reduce your tax bill each year, using some of your cash to come up with a bigger down payment and then taking out a mortgage to finance the rest of your home purchase might make the most sense.

4. When your home's value might fall

There was a time when no one thought homes could lose value over a seven- or 10-year period. Then came 2007 and 2008, when home values suddenly plummeted.

There's a lesson here: There is no guarantee that your home will increase in value after you buy it. There's also no guarantee that it won't lose value.

The hope is that after buying your home in an all-cash offer, the property will become even more valuable. When it's time to sell, you'll earn a profit. But there is no guarantee that this will happen. And if you do have to sell your home at a loss one day, that money you invested in it will be lost.

5. When you'll miss out on great interest rates

Mortgage interest rates have risen, but they are still at historic lows. The Freddie Mac Primary Mortgage Market Survey says that the average interest rate on a 30-year, fixed-rate mortgage was 3.89 percent as of June 8, 2017. The average rate on a 15-year, fixed-rate mortgage was 3.16 percent. Those are great rates.

Instead of investing a big chunk of your cash in a home, it might make more sense to take that same money and make a different investment that will generate bigger returns. You can then apply for a mortgage loan with the shortest possible term and enjoy interest rates that are still at near-historic lows.

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Downsides of a Reverse Mortgage

Qiana Chavaia — Fri, 15 Jan 2016 14:00:03 +0000

A Home Equity Conversion Reverse Mortgage (HECM), more commonly known as a reverse mortgage, is often used as a means of income for retirees. For those age 62 or older, these loans can provide guaranteed income during retirement (See also: 6 Ways to Guarantee Income in Retirement).

Though there are some similarities, reverse mortgages are not to be confused with home equity loans. Here, borrowers have to meet a minimum age restriction, hold the deed to their home, or have a relatively low balance that can be paid-off with a new loan. The home is then used as collateral for a new mortgage loan, up to $625,500 (or the lesser of the appraised value). But, instead of making monthly payments to the lender, the lender makes monthly payments to you, drawing on your home equity. It's a bit like purchasing an annuity using your home's value.

Sounds good, right? Not so fast. Reverse mortgages come with some significant drawbacks for certain borrowers. Consider these negatives before taking out a reverse mortgage.

Downsides of Reverse Mortgages

On the surface, reverse mortgages probably sound like a pretty decent idea since the bank pays you, right? Well, in a report published by the Consumer Financial Protection Bureau (CFPB), between December 2011 to December 2014, the agency processed approximately 1,200 consumer complaints arising from reverse mortgages. Borrowers reported "confusion and frustration over the terms" and "problems with loans servicing" as culprits causing them to face foreclosure.

1. Unable to Refinance and Misleading Terms

It appears many borrowers enter into loan agreements without fully understanding the terms of the loan. Among the complaints received by the CFPB from borrowers and their family members was not being able to renegotiate. Borrowers felt they were paying a high interest rate and were being overcharged. Others said they did not realize their adjustable interest rate would increase so quickly.

2. High Upfront Costs and Interest Rates

In comparison to the costs for obtaining a regular home loan, reverse mortgage costs are higher due to the way loans are structured. They also have higher interest charges. Interest rates on reverse mortgages tend to be 1.5% higher than regular home loans. Final costs include closing costs, lender fees, mortgage insurance premiums, and finance charges.

3. A Burden on Heirs

Home equity loans aren't a great choice if you intend on leaving your home as part of an inheritance. That's because these loans not only draw on the value of your home equity, but they're also due immediately upon your death. If your plan is to leave the property to your heirs, they will have the option of paying the loan in full or paying 95% of the balance (if they wish for it to remain in the family). If they're unable to settle the debt with their own funds, the asset must be sold in order to repay the lender. Once the debt is settled, any remaining proceeds will go to the estate.

But reverse mortgages are also due whenever you decide to sell the home — so if your retirement plans involve living anywhere other than your current residence, you'll have to fork over the balance of the loan as soon as you sell.

4. Facing Foreclosure When an Older Spouse Dies

When determining a borrower's eligibility for a reverse mortgage, age is crucial for two reasons:

The borrower must be 62 or older, and
The older a borrower is, the greater the loan amount he or she qualifies for.

For this reason, many couples agree to only include the name of the older spouse on closing documents, not aware that the surviving spouse could face foreclosure if the other dies. According to CFPB, consumers reported that loan originators falsely assured them they would be able to add the younger spouse to the loan at a future date. Make sure you read the fine print and clarify this concern before signing on the dotted line.

5. Difficulty Qualifying for Other Loan Types

Borrowers cannot refinance a reverse mortgage. Reverse mortgages may also have a negative impact on a borrower's ability to qualify for other types of loans. Over time, the accrued interest on reverse mortgages drain any remaining equity in your home. Worse, some homeowners complained that they were unaware of the terms of these types of loans. Before entering into an agreement, seek the counsel of a trusted third-party reverse mortgage professional. Hud.gov offers a directory of HECM counseling agencies, however turning to members of your community to find a referral is recommended.

Additionally, the CFPB report mentioned consumer concerns of encountering difficulty when attempting to repay loans. This included lenders failing to keep accurate records, and obstacles when attempting to prevent foreclosure — such as slow response times (critical during foreclosure), unresponsiveness, and receiving erroneous information or instructions.

While a reverse mortgage can be a good source of cash flow during retirement, it nonetheless requires careful consideration for the critical reasons listed above. If you're still interested in a reverse mortgage, do your homework, and understand the resources at your disposal. (For example, on March 2, 2015, The Federal Housing Authority implemented new policies to its HECM Financial Assessment to address consumer complaints.)

Have you considered a reverse mortgage? Why or why not?

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: