If you want to buy a home, or you’re paying down mortgage on a home already, you’re probably on the lookout for ways to save money. Maybe you have an extra bedroom or two. Listing the empty space seems like a win/win situation. Enter Airbnb, the online hospitality site that’s taken over the vacation rental market.

For the uninitiated, Airbnb is a booking service matching travelers with open rooms all over the world, usually for short-term stays. If you’re comfortable meeting and hosting new faces, Airbnb can be a great way for homeowners to bring in passive income. Even better, the extra funds may help pay the mortgage.

But hosts don’t just sit back and let the money roll in. There’s lots of work involved, from setting a fair price to filling out tax forms to learning local housing regulations. Essentially, you’re taking on the role of a part-time landlord. Airbnb hosting might also make it more difficult to refinance your home.

Should you open up your home as an Airbnb host? If you can succeed at the seven steps below, hosting may be a good fit.

Click here to become a host on Airbnb

1. Make sure Airbnb hosting is legal where you live

First and foremost, check the law. Some high-traffic tourist cities like New York, San Francisco, and New Orleans have cracked down on Airbnb regulations. New York City has some of the toughest short-term rental rules in the country—and hosts who don’t obey these rules face steep fines. Airbnb’s responsible hosting checklist includes shortcuts to rental guidelines for several cities (look under “Your City’s Regulations”).

Your first stop will be your local (city or town) government’s website. Local governments tend to have more specific rules, but check your state government’s website too. Look into these areas:

Business licensing

As an Airbnb host, you’re considered the owner and operator of a business. You might need to apply for a license.

Permits

You may need a special permit to list part or all of your home.

Zoning regulations

Zoning regulations are laws determining how property in a specific geographic area, like a city or neighborhood, can be used. To avoid being fined on a zoning technicality, check your local rules. You can often find these in a city ordinance or planning code, which may be available online.

Housing standards

Are there minimum construction, health, or safety standards your home has to meet before you can host? Is an inspection required where you live?

City, county, and state taxes

Some areas require hosts to collect a certain tax from guests, and pay this tax to the city, county, or state. If these taxes are compulsory where you live, you can add them to the fee you charge guests.

Keep an eye on these regulations to see if and when they’re updated.

You can earn hosting on Airbnb, under the right circumstances.

How much you can charge depends on where you live. Large cities with relatively affordable housing tend to earn hosts the most profit over time. Living near a tourist magnet, whether it’s a seasonal event or a regular attraction, can also help. You can charge higher rates for weekends or for certain seasons. Extra amenities, like a private guest bathroom or parking space, can justify a higher price.

Whatever price you set should be competitive and reasonable. Airbnb helps out with their smart pricing feature, which recommends a price based on surrounding properties. They’ll keep track of the market for you, raising or lowering the price based on changes in demand (such as high-traffic weekends). Look at nearby listings and see which ones have amenities similar to what you’re able to offer.

Airbnb suggests a low and a high estimate, but you aren’t required to stay within those parameters. You might find it helpful to compare a few estimates first. The Eliot and Me estimator has a detailed way to determine a fair price. It measures the overall worth of your property and tracks fluctuations in the market over time.

To really stay on top of the short-term housing market, you might consider a data-tracking subscription service like Beyond Pricing or Everbooked. Both services will automate pricing for you.

Your cancellation policy can affect how much you earn. More rigid policies mean you don’t have to give guests refunds for a cancellation, but these policies might slow down bookings. Airbnb gives you several options for a cancellation policy, from flexible to strict.

Some hosts suggest setting your price a little lower than market value at the beginning (a 25 percent discount or so). Guests frequently book rooms based on positive reviews. An early discount can be a great way to get some good reviews under your belt. Once you’ve established yourself as a great host, you can raise your price.

Besides listing a room or two as a live-in host, you have the option to list the whole home while you’re away. A whole-home listing for a weekend, if it’s something you’re comfortable with, can bring in thousands of dollars—especially during a peak visiting season to your location. This may be the easiest way to use Airbnb funds to pay off a mortgage quickly.

Before you earn money as a host, you have to put down a little cash. Airbnb charges a service fee of three percent for processing payments. And you’ll want to complete any necessary renovations to the room you’re planning on listing.

Check in with your home insurance company before you start hosting. Airbnb does include insurance—its host guarantee protects up to $1,000,000 in damages—but its policy may not cover everything you need. See if your home insurance covers short-term rentals. Depending on the company and the volume of guests you host, you may need to purchase a business policy or rental dwelling policy.

4. Report your Airbnb income correctly on your taxes

Keep records of who stayed with you, for how long, and how much they paid. The more money you’re making with Airbnb, the more important these records become.

If you list a room for 14 days or fewer (total) during the tax year, you don’t need to report your listing earnings as income. Make sure to maintain records anyway. Airbnb sends tax forms to the IRS, and the IRS may need proof your earnings aren’t taxable.

What if you have guests for 15 days or more per year? You’ll need to report your earnings as part of your gross income. The process itself gets pretty detailed. Airbnb offers an extensive guide for claiming your earnings as a host.

One important note: The IRS distinguishes between rental use and personal use of a property. You can take certain deductions for rental use. But the IRS considers every day you live in the house a “personal use” day, even if you’re listing your home at the same time.

It’s not unheard of to get professional tax help during your first year as an Airbnb host. The regulations can be complicated, since you have a personal home and listing property at once!

Here’s the rule of thumb for taking deductions: They should be for “ordinary and necessary” expenses. In other words, any expense that’s essential for your job as an Airbnb host is a possible deduction.

But the expenses should be related to the job, which is the tricky part. Heating, electricity, and Internet might be deductible costs if they’re used in the listing space, but not if they’re used in your personal home.

How can you decide what’s a listing expense if you only have, say, one electric bill for the entire house? You can calculate the percentage of utilities used for the listing space, and provide proof—such as the square footage of the listed room.

Some deductions you might be able to claim include:

  • Earnings from guests
  • Service fees charged by Airbnb
  • Cleaning fees for the listing space
  • Advertising expenses
  • Maintenance and utilities for the listing space
  • Items (bedding, towels) purchased for Airbnb guests
  • Refunds paid to guests
  • Repairs needed for the listing space

The boom in the short-term rental or “sharing” economy has made banks wary. When it comes to mortgage loans, residential homes and investment properties (like rental properties) are classified differently. A home hosting Airbnb guests is a little of both.

If you plan to refinance your mortgage, be aware Airbnb hosting will make this process harder. Homeowners are less likely to follow through with mortgage payments on investment properties. So banks are more cautious about loans for any type of investment property, including a home with one listed room. Airbnb hosts who list space in their primary residences have been rejected for certain home loans and lines of credit.

That’s not to say you won’t get to refinance. But your application may be looked at more closely. You may be charged a higher interest rate or a larger down payment. You might not be able to count on the Airbnb funds in your refinance home loan application.

How do you ensure the best possible results if you plan to refinance? You’ll need to prove the income is taxable (if you have guests for at least 15 days a year, it is).

You also need steady, ongoing income. Mortgages can last up to 30 years. Lenders want to know you can guarantee this additional income stream to help you make the payments.

If you’ve been successfully hosting for a while, have plans to continue, and can prove a decent income stream, you’re more likely to have luck refinancing.

6. Put in the time, work, and energy of a good host

Money comes from bookings, and bookings often come from good reviews. The best way to get good reviews is consistent hospitality.

Even before guests arrive, you spend time communicating with them. Airbnb wants hosts to respond to booking requests and inquiries within 24 hours. Guests may contact you with specific questions.

You’ll provide clean sheets, towels, and a clean bathroom at a minimum. Guests appreciate certain non-required extras like snacks, drinks, laundry facilities, or a personal note greeting them and introducing the area.

Cleaning’s another regular expense. The more turnover, the more cleaning there will be. You can clean rooms yourself or hire a cleaning service, depending on what works for you. If you do hire a service, you can charge guests a cleaning fee with their booking.

As you can see, it all adds up to a time investment. You’re more likely to get plenty of well-paying guests if you put in the work to make your space a local favorite.

7. Consider going the extra mile

Listing a room for a short time can give you some supplemental funds. But if you want enough profit to make a dent in your mortgage – or to pay it off altogether – you might have to think bigger.

Are you willing and able to list out the entire house for periods of time? What extra amenities can you offer guests to make your pricing more competitive? Can you offer housing during holidays or high-profile seasonal events? Can you make a long-term commitment to Airbnb hosting?

One Seattle-based startup has an interesting proposal for potential Airbnb hosts in the market for a home. The company, Loftium, makes a down payment on your mortgage. In exchange you repay them with the money you make from Airbnb hosting.

You commit to one to three years of hosting, and Loftium shares about 30 percent of the Airbnb profits with you. Since the down payment isn’t structured as a loan, there’s no interest rate.

This approach may not be right for you. Buyers are on the hook to host Airbnb guests for the length of the contract, even if they don’t have a good hosting experience. But it’s an intriguing idea. Will more companies follow the Loftium model in the future? We’ll have to wait and see.

Summary

Airbnb hosting in your home is a big step. It’s not quite the same defining experience as taking out a mortgage.

But it’s an act of trust and commitment. If you work to be a good host, keep good records, and are savvy about fair prices, Airbnb could pay off well down the line.

Click here to become a host on Airbnb

Read more

  • Look Before You List: Is Being An Airbnb Host Worth It?
  • Airbnb Alternatives: How Other Short-Term Rental Sites Compare