Airbnb is a great way to earn extra money. It has become some of my clients’ side hustle. A few of my clients become full-time Airbnb operators.
We’ve heard how great Airbnb is and I’ve seen some crazy numbers.
One of our properties was vacant at the time. Erwin wanted to give it a try.
The property that we operate Airbnb from is a single-detached home in Hamilton mountain.
We spent roughly $15K to furnish the property, with used commercial-grade furniture and some help from a home stager.
We’ve been operating it as Airbnb for 2 months now.
Our property manager, who’s also an Airbnb operator and owner, has done an amazing job keeping this place full. Those renting out their properties would do well to find themselves an experienced property management company if they hope to keep the properties occupied whilst also avoiding dealing with tenants and the legal side of things.
Since we went live about 2 months ago, we only had 3 nights of vacancy.
Pretty good, isn’t it?
We’re also fully booked in the month of August. ?
We couldn’t have asked to work with a better property manager!
Cash should start rolling in, no?
Well, here’s a high-level comparison from the two months of Airbnb operation.
1. Eliminating the HST impact from cash flow
In Canada, if you rent out a property consecutively under 30 days, you’re required to charge HST on the rental.
Same concept as operating a hotel.
Airbnb platform does not allow you to charge HST. Guess what, your rent is inclusive of HST.
When you calculate your “cash flow”, make sure you need to set aside money for CRA. They want their sales tax cut first!
Some Airbnb operators intentionally keep their Airbnb income lower than $30K, to avoid paying HST.
In our situation, we just don’t qualify for the small supplier rule. ?
2. Adjusting for seasonality
As Canadians, we all know Canadian winter can be brutal.
Who would really want to come to Canada in the heart of winter?
We know that our busiest months would be summer.
We’re fully prepared that there will be some vacancies expected in the fall and winter.
As great as it is to have a fully rented Airbnb in July and August, a portion of the money will likely be used to offset against the vacancies in the winter.
We have to look at the operation for the entire year before we can be certain with the Airbnb financial performance.
3. Accounting for the property management fees
Most Airbnb property management charges 20% to manage the property.
Well deserved money. I don’t want to ever answer the question why the internet is so slow at 10 pm.
There’s a saying in the small business world, ‘if you don’t have ______ (certain role in your organization), you’re _______ (that role).’
If I didn’t have a great property manager, I would have been the property manager. We had decided that we didn’t want to be an Airbnb property manager.
This is non-negotiable and we knew that we had to budget for the PM fees.
Because of this property management fees, immediately our cash flow is 20% less than what some other investors, who operate their Airbnb personally.
4. Straight rental rent is high in the area vs. Airbnb rent
If we weren’t doing Airbnb, we would have rented out the property as straight rental.
My opportunity cost of operating Airbnb is the rent I would other earned from straight rental.
This house, as a single-family detached home, in today’s market, can likely be rented for $2,200 plus utilities.
My Airbnb numbers have to beat this $2,200, or else it would not worth the effort.
Specifically, my Airbnb numbers, after deducting HST, property management fees, utilities, lawn care & snow removal, have to beat the income I would otherwise earn from single-family home rental.
Otherwise, I would likely be better off operating the property as a single-family home.
5. Smaller multi-units (such as duplex/triplex) will give you higher cash flow
Our property is a single-family home. We can’t divide it into two units without spending a fortune.
We aren’t planning to divide it anyway.
As a result, we are renting three floors of space (including basement) for one fixed price.
Our rent is marginally better than someone who’s renting out a 2 bedroom unit on Airbnb.
Some of the people who operate Airbnb have multi-units, rent per square foot is a lot higher compared to ours.
They generate better cash flow, just because the rent on 2 bedroom unit on Airbnb is much proportionally higher than the rent from our 3+1 bedroom house on the Hamilton Mountain.
Although we’re not generating the income that some other investors are getting, we’re still happy with this Airbnb.
We have a great property manager (thanks Bryan) and I never had to call any trades to fix the property. ?
We have a good income, comparable to a single-family home rental.
Bonus, we don’t have to deal with the Landlord Tenant Board on this property!
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant