Should I buy this Airbnb apartment building?

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Sorry for the lack of posts Friday and yesterday; have been swamped with work, blah blah blah.

Anyway: Have been getting a lot of questions about a for-sale triplex which is described by the listing broker as an “Airbnb ‘cash cow’ in the heart of Silver Lake.” (I’m not linking to the listing, because I don’t want to embarrass the broker.)

The numbers seem pretty appealing; the broker touts $208,000 in gross AirBnB rental income vs. a listing price of $1.395MM. That’s a 6.7x GRM, which is obviously much more appealing than the 13-18x that seems to be the market for Silver Lake.

So, is this an appealing property? The answer is: Absolutely not. Why?

Check the zoning. It’s listed right there on the MLS… R2. Here’s a memo from the city discussing where AirBnB is legal. Too lazy to click? I’ll make it easy for you: It’s not legal in R2 zones.

Given that the existing use to which the building is put is illegal, I’m shocked at how it’s being marketed. After all, if someone buys this thing and then gets shut down by the city, the buyer is 100% certain to sue the listing broker for fraud. And the buyer would win.

Obviously, even given the above, there are some people who are going to be tempted to buy the property because the returns appear tasty. But they’re not as tasty as they appear. To understand why, you need to think about a hotel. On a per night basis, hotel rooms are way, way more expensive than apartments. Why?

Two reasons:

  1. Occupancy fluctuates, so the owner needs to be able to cover the nights the units are not rented; and
  2. With their constant visitor turn-over, hotels require considerably more work from the owner (and his staff)

Put another way, hotels have higher vacancy and higher operating costs than apartment buildings. So, GRM, a tool for comparing apartment building deals that assumes roughly equal vacancy and operating costs, is totally inappropriate for use in comparing a hotel to an apartment building. And yet that is what the listing for the above-referenced triplex does.

In real life, as a potential buyer of this thing, prudence demands that you underwrite it as a simple apartment deal (since that is what it will become if / when the city cracks down).  You have a couple of 1/1s and a 4/2. Call that $8k / month in rent if you rent the units conventionally. That’s $96k / year, meaning that this deal is a priced at 14.5x GRM… not the worst deal on the market, but certainly nothing our clients would ever buy.

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