Coryanne Hicks
·5 min read
Home to beautiful beaches and a nesting ground for sea turtles, Topsail Island is a popular family getaway spot in North Carolina.
While eyeing up that steady stream of vacationers, local resident Cathy had a bright idea for how to turn a profit for herself — but she wanted to get some outside advice first.
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Cathy recently called into The Ramsey Show to get the radio personality’s input on whether she should buy property to turn into a vacation rental in order to capitalize on those seasonal visitors. She and her husband already have a rental unit that pays them $1,700 per month, but she could borrow against their primary residence to get a $280,000 property she could turn into an Airbnb.
To that, host Dave Ramsey promptly cautioned her not to ruin her life.
"No, you won't," Ramsey said when she ran the Airbnb idea past him. "You have a very good life. Don't go screw that up with an Airbnb."
What Ramsey's worried about
Listing your home on a short-term rental site like Airbnb or Vrbo sounds like a great idea in theory. Nightly per-room rates have risen 36% since 2019 with an average of more than $200 per night in North America. That's more than $6,000 per month if you can rent the room every night.
At first blush, it sounds like a passive income dream, but running a short-term rental property can quickly turn into a nightmare.
"This is not: ‘I'm going to just go to the mailbox and collect a bunch of checks,’" Ramsey says. "Airbnb is a lot of work."
Maintaining an Airbnb is essentially like operating a small business, Ramsey says. Much like running a hotel, Airbnbs demand intense involvement and oversight: you’re responsible for keeping the place clean, making repairs and being available to renters for emergencies or questions.
On top of that, you’re generally dealing with new, unfamiliar tenants every few days.
"They'll destroy your property," Ramsey says. And while you’re stuck doing the clean up, you may have to contend with angry neighbors complaining about noise. And there's always the chance you may run into other unexpected issues renting your place out.
Finally, there’s a growing backlash in certain cities against short-term rental properties — especially in downtown cores or high-tourism areas. Some cities are starting to restrict the type of eligible dwellings, require costly licenses, impose additional taxes and only allow you to rent out your primary residence.
Even if your area doesn’t currently have restrictions on rentals, the laws could change — leaving you on the hook for a home you suddenly can’t rent out.
Read more: 'It's not taxed at all': Warren Buffett shares the 'best investment' you can make when battling inflation
Alternatives to Airbnb
Airbnbs may not be the get-rich-quick plan you’d hope for, but that doesn't mean you can't earn passive income on any property. If you want to make money on residential housing, Ramsey suggests "buy[ing] cheap houses in bad ends of town."
A low-income rental provides a higher return on investment rent-to-value than high-end rentals in nicer areas, he says. Ramsey himself purchased a house for $11,000 many years ago that paid a monthly rent of $1,500.
However, that route also involves a lot of trouble: he recalls collecting rent personally on the doorsteps of his tenants’ homes weekly. And don't forget, it was Ramsey's ventures in real estate that led to him filing bankruptcy at one point.
And borrowing against your primary residence for an investment opportunity could be risky — especially with mortgage rates as high as they are these days. With recent changes made to Fannie Mae rules, it's become even easier to dip into real estate investing, but the more lax requirements could land overleveraged landlords in hot water.
For those who want to make some extra cash being a landlord, there are alternative options that don’t involve the risks of dealing with tenants directly. Real estate investment trusts (REITs), for example are publicly traded companies that own income-producing real estate like apartment buildings, shopping centers and office towers. They collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.
You could also consider crowdfunding platforms, where you can buy a percentage of physical real estate — from rental properties to commercial properties. Some options are targeted at accredited investors, sometimes with higher minimum investments that can reach tens of thousands of dollars.
If you’re not an accredited investor, many platforms let you invest small sums, even as low as $100.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
