IS HOSTING TOO RISKY?
From The Man tryin' to get you down (i.e. local politics), Insurance Companies trying to tell you how to live your life, to that Rowdy Guest, though renting via Airbnb or Vrbo has a significant financial upside, there are some real risks to consider.
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There are some real risks, and though manageable, are unwise to ignore. Here are some of the different risks I considered, and how I reasoned through or mitigated them.
What if...
What if no guests show up?
In my situation, after I finished my renovation, I knew I wanted to furnish all of the guest rooms regardless of if I were renting them as short-term rentals, or on standard 12-month leases. The only additional expense was therefore about $1000 in the extra small items such as towels, bed sheets, and bulk purchase of mini-shampoos, toothbrushes, etc.
Doing my “homework” on the Airbnb market in the area, and learning the ins-and-outs of the business took a few weeks of evening-work (which is a large part of why I built this website). Once I had gathered all of the information, it took me about a week of evenings to make the listings how I wanted them. The details that went into this analysis are covered in How Much Will I Make?
So – given the potential financial upside, I determined it was worth giving it a shot. Worst case – I would have learned some new things, have a nicely furnished home, and a lifetime supply of mini-shampoos and toothbrushes of marginal quality. Also, based on the booked rates I estimated in my neighborhood, it seemed very unlikely that I would “build it and no one would come”.
Will I lose my homeowners insurance?
Losing your homeowners insurance is a more real risk than I suspect many people realize. Several months into hosting I called my insurance company to get clarification on the policy. I never specifically said that I was hosting, but several months later I received a letter saying they had “dropped me” because they had determined that I was renting rooms via Airbnb. Because I had stopped hosting by this time, I called them back, let them know I had quit, and they immediately resumed my coverage. Nonetheless, this did bring to light that it was a real risk. Airbnb does guarantee a good amount of coverage if something happens to your home, but I’ve never been completely clear about how non-guest-related damages would be covered. My concern was that if there was damage not covered by Airbnb or Vrbo, I could be caught in an place wherein no one would cover an event that would typically be covered by a homeowners policy.
Even though insurance specifically for short-term rentals is more expensive, in my estimation, given the potential downside of catastrophic loss, it is worth carrying. In my case, however, because I was renting three rooms independently, I couldn’t find a company that was willing to cover me without going to a full-on commercial license. In addition to being much more expensive, I would have had to become an “official” bed and breakfast, which would have meant bringing my home up to commercial code and registering/having inspections from the town. In my case, since I almost always had at least one room occupied by a guest, I determined that I would roll the dice and trust that the Airbnb policy would protect me, but in truth it made me little bit nervous.
So, if you are going to host, I’d recommend looking for a non-standard policy that is specifically designed for short-term rentals.
What if I get a nightmare guest?
Given that the nightmare guest has unfortunately been the case for some hosts, I reasoned that it was an acceptably small percentage of Airbnb guests. The platform does provide some level of accountability, and if I got a “bad apple”, I could always turn the “instant book” option off and begin screening guests before accepting their reservation. I did my best to write the listing in such a way that it was apparent that I would also be resident in the home while they stayed there, and so that it sounded “boring” to people who were mostly looking for a place to party. In addition, I went the extra step of putting locks on my bedroom door as well as the guestroom doors.
What if someone causes non-catastrophic damage?
What if a guest damages something in my home below the deductible amount of $8,000 for my standard homeowners’ policy (if they even cover it), and may be a battle to get reimbursed by AirBnB? For example, smashing a hole in drywall or a door, breaking a window, ruining a set of sheets or towel? I assumed these risks were approximately equal for renting via AirBnB or having roommates, especially since I would be occupying the property in both cases.
Since this type of “low-dollar” damage is below the deductible amount on my homeowners’ policy (and may not be covered anyway), I would be relying entirely on Airbnb being a good actor and reimbursing me for this damage. Nonetheless, if something drastic were to happen, it could affect my ability to host until the damage was fixed, and either fixing the damage myself or hiring someone to fix it would be very time-consuming. In order to keep the operation “running smoothly”, I stocked extras of many things a guest could damage. In either case, I accepted that occasionally replacing small items people destroyed would be the cost of doing business. Though I was mentally prepared for more serious damage to the property, my only mitigation was in trying to get the types of guests who were less likely to be destructive.
Of the 310 groups of people I hosted, nobody caused damage to the house, or was deliberately destructive of any large-value item. One elderly couple completely mangled an ironing board (I have zero idea how and really didn’t want to ask), but told me and offered to buy a new one. Several people ruined towels or washcloths by using them to remove makeup, but those were very minor items to replace.
What if the house burns down, or there is some other catastrophic loss?
As discussed above, because most homeowners’ insurance policies explicitly forbids short-term rentals, I think catastrophic loss is a real (though unlikely) risk. The Airbnb website does say that homeowners are covered for up to $1M in damage, but as far as I could tell there is some gray area that made me a little uneasy. I reasoned that because I almost always had a guest in my home, I would almost always be covered by Airbnb’s “guarantee”, and that because I did my best to get well-behaved guests, the likelihood of catastrophic loss was low enough that it was worth the potential upside. All that being said, because I never was able to secure a policy specifically for short-terms rentals, the possibility of catastrophic loss always did make me a little uneasy.
What if renting rooms on Airbnb or Vrbo is or becomes illegal in my town?
Before you jump into hosting, be certain to check regulations in your area, both at the town and neighborhood level. Because hosting has rapidly increased in popularity, most towns now have official policies in place to govern hosting, and cover these clearly on the town’s website. An increasing number of towns and cities are “cracking down” on people renting homes they don’t live in via Airbnb or Vrbo, and far fewer towns/cities are disallowing it for homes that people reside in full time. Because some areas are getting more aggressive with regulation, and may require you to get a “permit” of sorts, I wouldn’t recommend that anyone just hopes to “fly under the radar”. If you get caught and need to cease operations immediately, you could face a steep fine, and you’ll need to cancel upcoming guests.