Airbnb is an online community marketplace that connects people looking to rent their homes with people who are looking for accommodations. Airbnb users include hosts and travelers: hosts list and rent out their unused spaces, and travelers search for and book accommodations in 192 countries worldwide. A diminution of "air mattress B&B,” Airbnb has grown from appealing to couch-surfing budget-conscious tourists to business travelers seeking a more memorable experience that allows for a different level of collaboration amongst colleagues. Last year Airbnb raised $1.5 billion in funds that brought the value of the company to about $25.5 billion. This made it worth more than the Chicago, Ill.-based Hyatt Hotels Corp (NYSE:H) and the Parsippany-Troy Hills, N.J.-based Wyndham Worldwide Corp (NYSE:WYN), respectively.
For more on companies that are shaking up their respective industries, check out How do ride sharing companies like Uber make money?
While questions about the substantial valuation have dominated Airbnb-related news in the past, many people are asking whether or not Airbnb is something that could work for them. Here, we look at Airbnb - what it is, how it works, and the pros and cons of using this online rental marketplace.
What is Airbnb?
According to Airbnb, they provide “a trusted community marketplace for people to list, discover, and book unique accommodations around the world ….” Airbnb hosts list their properties - which can be single rooms, a suite of rooms, apartments, moored yachts, houseboats, entire houses or even a castle - on the Airbnb website. It's free to create a listing, and hosts decide how much to charge per night, per week or per month. Each listing allows hosts to promote properties through titles, descriptions, photographs with captions and a user profile where potential guests can get to know a bit about the hosts.
Travelers (or "guests") search the available database of properties by entering details about when and where they'd like to travel. Travelers can further refine searches by making selections for:
- Room type - entire place, private room or shared room
- Price - range from minimum to maximum
- Size - number of bedrooms, bathrooms and/or beds
- Amenities - wireless Internet, TV, kitchen, pool, pets, etc.
- Property type - standard properties such as apartments, houses and bed & breakfasts, as well as non-standard accommodations such as castles, caves, igloos and tipis
- Host language - English, Spanish, French, etc., including sign language
- Keywords - if the traveler is looking for something specific, such as "oceanfront" or "close to Le Louvre"
How it Works
Travelers can search the database of properties at any time, but need to create an Airbnb profile to book any reservations. Travelers can contact hosts using an online form that appears on each listing page, and can submit a reservation request by clicking the "Book It" button and entering payment details via a secure payment system. Travelers pay a guest service fee of 6-12% on top of the reservation to cover services such as customer support and the Host Guarantee. Airbnb supports several payment methods, including major credit cards (Visa, MasterCard, AMEX, Discover, and JCB), PayPal, Google Wallet (on the Airbnb Android App for the U.S. only) and some debit cards that can be processed as credit. Travelers are not charged until the host confirms the reservation.
Once a traveler pays and the host confirms the reservation, Airbnb holds the payment for 24 hours after check-in before releasing the funds to the host. Available payout methods and currencies differ by country, but hosts are paid via automated clearing house (ACH)/Direct Deposit, bank transfer/international wire, PayPal, Western Union, paper checks (in the U.S. and Canada only), and Payoneer. Airbnb takes a 3% service fee from the host for each reservation to cover the cost of processing the transaction. This fee is in addition to the 6-12% paid for guest service fees.
Another fee you might come across is a value-added tax (VAT) (applicable to hosts and guests from the European Union, Switzerland, and Norway). Also, if you pay for a booking in a currency different than the one the host has chosen in the listing, you’ll be subject to varying Airbnb’s exchange rates.
Pros and Cons
Airbnb can benefit both hosts and travelers. Hosts get to meet people from around the world while making a little extra money, and travelers can often stay for less than the cost of a hotel room. In addition, many travelers enjoy accommodations that offer a different experience from standard hotels. Many users find the personalized service, both from hosts and from Airbnb's customer service, makes for a good experience. Airbnb-user Julie Richards, a college advisor with Swain County Schools in North Carolina says, "Airbnb has fantastic listings, fair prices and their staff are very eager to help and easy to reach by phone or email." Richard adds, "We have booked three different places through Airbnb, and so far I've been happy with their service and ease of [using the] website."
While Airbnb has primarily served budget-minded tourists, it has been attracting a larger share of business travelers. This is due in part to cost - companies can save money on conferences, meetings and retreats. But the attractiveness of staying in someone else's home goes beyond the travel expense report. These properties allow travelers to trade in the cookie-cutter hotel experience for one that offers colleagues a unique and comfortable space in which to connect and collaborate.
Despite the benefits, there are concerns for both hosts and guests. Perhaps the biggest risk for hosts is that their property will get damaged. While most transactions occur without incident, there are stories of entire houses being trashed by dozens of party-goers when the Airbnb hosts thought they were renting to a quiet suburban family, or an instance when a host came home to find his property had been damaged, items had been stolen and the place was littered with meth pipes.
While Airbnb states on its website that "you're unlikely to experience any issues with property damage," their Host Guarantee program "provides protection for up to $1,000,000 in damages to covered property in the rare event of guest damage, in eligible countries." The Host Guarantee program does give peace of mind to Airbnb hosts, but it's important to read the terms and conditions to fully understand what's covered, what's not covered (things such as cash, rare artwork, jewelry and pets aren’t covered) and the steps a host must take to seek payment under the Host Guarantee. In addition, hosts should understand their homeowner’s, renter’s, and/or umbrella insurance coverage, and speak with a qualified insurance agent about any questions or concerns.
The biggest concerns for guests may be that the property does not match the description, or that the host is unresponsive to guest needs. In one case, a man had rented an apartment in a European city through Airbnb, and the apartment's real owner showed up wondering who was in his apartment. Both hosts and guests can help limit risks by using Airbnb features including Verified IDs, profiles, reviews, messaging, secure payment platform and the Host Guarantee.
Hosts Should Know State and Local Laws
Of special concern to hosts are state and local laws that may limit or prohibit the renting of property. In New York, for example, it's illegal to sublet a single-family home, apartment or room for fewer than 30 days if you aren't living there. Other cities and states have similar restrictions that could result in hefty fines, and Airbnb includes this warning on its website:
"Some cities have laws that restrict your ability to host paying guests for short periods. These laws are often part of a city's zoning or administrative codes. In many cities, you must register, get a permit, or obtain a license before you list your property or accept guests. Certain types of short-term bookings may be prohibited altogether. Local governments vary greatly in how they enforce these laws. Penalties may include fines or other enforcement.
These rules can be confusing. Often, even city administrators find it tough to explain their local laws. We are working with governments around the world to clarify these rules so that everyone has a clear understanding of what the laws are. In the meantime, please review your local laws before listing your space on Airbnb. By accepting our Terms of Service and activating a listing, you certify that you will follow your local laws and regulations."
In addition to complying with state and local laws, hosts should be aware that they might be subject to rental income taxes. To assist with U.S. tax compliance, Airbnb collects taxpayer information from hosts so they can provide an account of their earnings each year via 1099 and 1042 forms.
The Bottom Line
Airbnb provides an online marketplace that connects people with rooms to share with people who need a place to stay. In the past, these types of services have been used largely by thrifty tourists looking for the cheapest place they can find in a particular city. Now, however, more and more business travelers and professionals are looking to Airbnb for a unique and memorable experience. Although there are certain risks associated with using a share economy system such as Airbnb, users can take steps to help mitigate any potential problems.
Disclosure: At the time of this writing, the author did not own shares in any of the companies mentioned in this article.