Homes
Investing in Airbnb: What you need to know
Monday June 05 2023
Mainstream hotels are being given a run for their money by Airbnbs. FILE PHOTO | NMG
The digital economy continues to disrupt many traditional business models. From online media houses to social media, to digital taxi-hailing platforms, to accommodation – the list is endless. One of the areas where Kenyans have invested heavily is online-supported short-term rentals, popularly known as Airbnbs.
Airbnb is an American multinational that operates as an online marketplace for short-term homestays and serviced accommodation, also called vacation rentals.
Airbnb is considered the market leader in the homestay business, although there are multiple platforms that offer similar or related services, including Booking.com, VRBO, and Agoda, among others.
The history
To understand how Airbnbs work, we will refer to the story of how the American company was started. The year is 2007 – Brian Chesky, Nathan Blecharczyk, and Joe Gebbia had just graduated from college and were struggling with paying rent for their shared apartment in San Francisco.
Around the same time, the Industrial Designers Society of America held a conference in San Francisco, and most of the hotel rooms were fully booked. Chesky and his team decided to create space in their apartment by inflating air mattresses and cost-sharing with guests – at a lower rate than the hotels were charging. Their idea birthed the now Airbnb company, with over six million listings worldwide.
In Kenya, Airbnbs have particularly become popular over the past decade – making it a regional hub. Until 2015, there were only 1,400 Airbnbs in Kenya, about 700 of them in Nairobi. In that year, Chesky came to Kenya as part of US President Barack Obama’s business entourage – the visit helped open up more visibility for the company, and by 2018, the number of listings had clocked past 6,500.
Today, there are more than 6.6 million listings worldwide and more than four million hosts globally, according to the company’s Q4 2022 letter to shareholders. In Kenya, there are over 10,000 listings on the platform.
Competitive rivalry
The growth of Airbnbs has come amid declining rental prices in uptown estates in Nairobi – prompting some landlords to use the vacant units as short-term rentals. According to the HassConsult Property Index for Quarter 1, 2023, the average rent for residential space decreased by 1.2 percent in March 2023, the sharpest decline since 2018, when the prices fell by 2.5 percent.
Detached homes recorded the largest price decline, dropping 2.5 percent, followed by the semi-detached with a 3.2 percent decline.
“We have noticed a trend where Airbnbs are picking up in middle-class estates, but also in the upmarket areas of Karen, Lavington, and Runda. Some landlords prefer them because they offer better returns and are much easier to manage. A 3-bedroom cottage in Karen will fetch from Sh15,000 to Sh35,000 a night. The long-term monthly rent would be around Ksh100,000,” Alfred Simmantoi, a property agent in Karen, notes.
Despite their growing popularity, Airbnbs have been unwelcome in some quarters. The Kenya Association of Hotelkeepers and Caterers (KAHC) has been calling for Airbnbs in Mombasa to be subjected to the same tax and levies that apply to hotels.
At a stakeholder engagement forum organised by the County Government of Kwale in May 2023, the association decried declining business due to competition from short-term rentals, which are able to compete on price – since they are exempt from some of the taxes such as the tourism levy and licencing from the Tourism Regulatory Authority (TRA).
What location works best for an Airbnb?
The homestay business is a real estate investment. Thus, location is an important factor for business success. People do not just visit homestays for the sake of it – they often pick those that offer a certain experience or those that allow them affordable hospitality as they go about their business or social errands.
The location of an Airbnb has to be strategic and tailored to meet the targeted customers. For example, some Airbnbs in Kenya are located in tourism-heavy areas such as the coast, Mt Kenya, Naivasha, and other areas because where there is demand for accommodation, and the hotels fail to meet the demand – either due to low space, poor service, or costs that are too high.
As a rule of thumb, ten nights should be enough to settle your operational costs, including rent, cleaning, and advertising.
Other units are located in urban areas targeting business people who need a private space for meetings or layovers. The ideal location changes based on the target group.
For example, urban travellers may consider factors such as the availability of taxis, airports, railway stations, home offices, etc. The location amenities will vary markedly for travellers who are seeking a vacation experience – say, in Mombasa, close to the beaches, malls, nightclubs, etc.
Regina Maina, an advertising executive who doubles up as an Airbnb host in Nairobi, recalls that her first Airbnb was her personal house in Roysambu. Her work required frequent travel, which meant the one-bedroom unit would go unoccupied for weeks.
“I realised that this would be a great business opportunity if I listed the house. When I finally decided to have the house fully dedicated to the business, I had to relocate to Ngong Road to accommodate many of the amenities that my clients frequently asked for,” she remarked.
What you need to start an Airbnb
The homestay business service is pretty straightforward to start. All you need is a room or house with the basic amenities needed to accommodate your guests comfortably.
“Most hosts I know started off by listing their own homes, particularly those who travel a lot. But there are also many units that are started with the business in mind. As long as your location works, you just need to tastefully furnish the unit. You can do it yourself or hire someone who has an eye for great interiors,” Ms Maina says.
“I have seen normal rental houses transformed into Airbnbs in a matter of two days. It’s just a matter of furnishing the house to make it functional. The caretaker’s job shifts from managing long-term clients to managing short-term guests, say with check-in or assistance with shopping and finding local restaurants,” Simmantoi commented.
Another host remarked that the business is more like hosting a visiting relative, but since they are paying for the service, you must ensure the amenities are up to standard and serve a specific clientele. You could use a house you own or live in – or rent one for this specific purpose. The choice of the type of accommodation is largely a strategic business choice.
In the US and Europe, it is common to find units where the space is shared between the host and the guest, such as a two-bedroom unit with one bedroom on Airbnb. However, in Kenya, the trend is yet to pick up. A spot check on the Airbnb platform shows only about 25 percent of the listings are shared rooms.
Thus, most people who operate the business in Kenya have a dedicated unit where guests have the entire space to themselves.
After picking the unit, the next step is to furnish it tastefully in line with your business model. The type of furnishing is also a strategic business choice and has to match the location, target audience and pricing model.
Suppose you are targeting international travellers, for example, where your competition is 3- and 4-star hotels. In that case, your furnishing will need to be more premium and high-end compared to a person who is targeting domestic tourists who are turned off by the quality of services in local lodgings.
How do I make money?
The trick to making money is to get the pricing model right. The pricing model is a shifting target that requires you to keep adjusting until you find the right fix. However, as you price your room or home, consider the following:
Airbnb (the website) charges a brokerage commission of about three percent of the total paid by the guest. Thus, if you have listed your property at Sh10,000 per night, about Sh300 will automatically be deducted by Airbnb.
The website also has great tools that suggest to you a competitive price for your listing based on the performance of units that are similar to yours.
This writer, who is also an Airbnb host in Nairobi and Mombasa, relies on the Airbnb pricing tool whenever there is a surge or reduction in demand. The smart tool is able to tell when there is little traffic in your area and advise you to lower the pricing. Whenever there is a surge, you will equally get some tips on what a competitive nightly price looks like.
How often are Kenyan Airbnbs booked?
Experts advise that while you hope for a 100 percent occupancy, do not price your unit on this assumption. Make sure that you are able to break even – even when the occupancy rate is low.
According to Phyllis Mutie, a businesswoman who has been operating Airbnb units in Naivasha and Nairobi for the past six years, the pricing is largely dependent on the costs associated with running the business and the prevailing rates in the market.
“As a rule of thumb, ten nights should be enough to settle your operational costs, including rent, cleaning, and advertising. If you are listing a unit you fully own, say an apartment that you bought, you will have more flexibility in the pricing – compared to those who rent to list.”
Nelson Kahuthia, an Airbnb host in Nyali, Diani, and Mtwapa, notes that the hospitality business is seasonal, and the pricing has to reflect this reality.
“We seek to maximise income during the peak season, and ensure we remain afloat in the low season. Thus, you may find a 3-bedroom unit going for Sh25,000 a night during the Christmas week, but as soon as we cross the year, the price falls to Sh10,000. In June and July, you may find the same house going for Sh5,000 a night.
An example of a peak season is the festive season for Airbnb units on the Kenyan Coast, which also face a downtime between May and July. Some units, however, are so unique that they are able to get nearly 100 percent occupancy throughout the year – some units being fully booked for up to six months in advance.
Are Airbnbs taxed?
For the longest time, Airbnbs were not formally incorporated into the tax system unless for hosts who run their units as registered limited liability companies.
However, in January 2021, the Kenya Revenue Authority started implementing the digital service tax that requires online businesses to pay VAT for services rendered in Kenya.
Since then, Airbnb automatically deducts 16 percent VAT on top of its three per cent commission. Since most Airbnbs in Kenya are run as individual units, the owner is also responsible for submitting income tax while filing their individual returns.
President William Ruto, in April 2023, indicated the intention to scrap the digital service tax. The directive is reflected in the proposed Finance Bill 2023.
Challenges of running an Airbnb
Like any business, the Airbnb business has a fair share of its challenges. They will often vary with the business model and the level of attention that the owner is able to dedicate.
A conversation with hosts, many of whom run them on a fairly small scale, unveiled the dominant challenges, including unruly guest behaviour, management and cleaning of the units, insecurity, inconsistency in guest flows, and competition from other businesses.
Unruly guest behaviour is a complex and broad challenge that also incorporates other challenges, such as high maintenance costs and evictions by landlords. The main premise of the Airbnb business is that the guest will treat your space the same way they would treat their homes.
However, human beings, and some Kenyans, have peculiar behaviour that may change the dynamics. For example, Caroline Kendi, an Airbnb host in Nairobi, has been evicted twice due to guests’ misconduct.
“The first time, two guests booked my unit, but more than eight people showed up. They made so much noise throughout the night that tenants asked management to intervene, and I was given an eviction letter. I decided to have a strict policy on the number of guests, but in my second unit, one of the guests became drunk and invaded a neighbour’s house. The neighbour threatened to sue the management, and that is how I was asked to vacate,” she recalled.
Some other hosts have complained of guests using resources carelessly, eating away the profit margins. One Airbnb host recently went viral after complaining that some guests had booked her budget apartments – only to start boiling cereals and other gas-consuming meals. There have also been cases of guests defecating on the sofas and other common areas, destroying electronics, and escaping before making payments.
“Some guests can be unreasonable, and that can drive you out of business. I once had Sh5,000 worth of electricity tokens depleted within two days because guests were misusing amenities such as AC and electricity.”
“It helps that I am always around the house, so I came up with mitigation structures where I load a reasonable amount in tokens at the beginning of the guest’s stay, and if they deplete, they self-cater,” Claver Juma, a host in Shanzu intimated.
By Tony Mukere
Money254.com helps consumers and business owners to search, compare and apply for financial products in Kenya.