So Airbnb hit $1 Billion in revenue last quarter. Not all time, that was their revenue for the quarter alone. Airbnb is a huge deal for real estate and hospitality, but not because it has led to the downfall of the hotel industry. Instead, the home-sharing trend has become a factor in the value of having a home or apartment lease, and therefore, the value of residential and multifamily properties.
Buying a single-family home to use as an Airbnb rental is pretty simple. You use the same buying process, the same mortgage, and then you just rent and manage it as a short-term rental instead of offering it to a long-term tenant. Easy enough.
But the process isn’t so seamless to incorporate short-term rental income for a multifamily landlord. In the US, once you cross the threshold of 5 units on the property, you’re in commercial loan territory, and you can’t use that standard residential loan to fund acquisition of the property. Instead, you’ll need a commercial mortgage, and that may throw a wrench into a plan that includes using Airbnb to rent out units as a landlord (note: this is a different strategy than allowing steady tenants to rent out their unit on Airbnb).
Lenders underwrite commercial multifamily by predicting the annual net operating income (NOI) that the property will produce. That’s a fairly simple job when tenants agree to lease a space for a full year, and there is a large market of replacement tenants once they vacate. As long as the vacancies are staggered, the lender can extrapolate existing financials, or at least market comps, to predict net income with decent confidence.
Lenders have less confidence when those leases are month-to-month. In that case, there’s little confidence that the occupancy on the property will remain high, because the tenants aren’t committed.
Airbnb is way more risky for a bank than month-to-month tenants they already dislike. Real or not, a unit dedicated to short-term rentals over the internet will be considered as good as vacant to your typical multifamily banker, because it doesn’t fit their model of predicting annual income from each unit — or even monthly income.
There is, however, another underwriting methodology for short-term stays: it’s called hotels.
Underwriting for hotels uses a different set of metrics that are more geared toward short-term stays. Instead of predicting how many units are occupied on a monthly or annual basis, hospitality underwriting considers each available room as available daily inventory, and measures the utilization and revenue generated from that inventory.
The first stat that comes up for hospitality is Revenue Per Available Room (RevPAR). It’s calculated by multiplying Average Daily Rate by Occupancy. By using daily rates and occupancy, hospitality underwriting respects that revenue changes day to day, which is much more granular than the multifamily business.
Next is GOP PAR — gross operating profit per available room. Hospitality brings expenses with it that multifamily does not: things like housekeeping/turning over a room for the next guest. Whether you’re running an entire hotel, or a single Airbnb unit, there are hard and soft costs associated with managing it day-to-day.
Hospitality underwriting also respects the seasonal nature of the business. You can’t take a trailing three-month average of rents and occupancy and extrapolate it over the next year, like you can in multifamily. There are higher highs and lower lows expected as part of an annual cycle.
There are other metrics, like MPI, RGI, and MCPB that a hospitality lender will look for in the first minute of evaluating a deal as well. If this is your first time hearing about these metrics, that’s fine — you are likely a multifamily investor, not a hospitality investor. But that’s the point about sticking Airbnb into a multifamily investment plan. If you are not looking at those units as a hospitality play, then you’ll need to go back to the drawing board to understand that the underwriting is different for this asset class.
Instead of considering Airbnb management a direct piece of your multifamily investment plan, the better route may be to become an Airbnb-friendly landlord. Rent units to tenants that pursue additional income through home-sharing, and offer them perks that lead to an easy rental experience and less friction for guests, in exchange for a cut of the revenue. Airbnb has a “Friendly Buildings” program geared toward landlords and property managers that could boost your property’s chance of growing short-term rental income.
At least one major developer is going the extra mile in branding their properties as “Powered by Airbnb”, encouraging tenants to rent out their units. But be aware that not all tenants are very friendly to the concept.