After a road trip took him through Nashville, Tenn., Harrison Paul bought a $400,000 home there as a place to stay on occasional visits. He contemplated renting it out short-term on the Airbnb website but initially nixed the idea.
"I was worried about getting the permits, insurance, interfacing with the guests, and providing toiletries and towels, because I live so far away," said Mr. Paul, a freelance art director in Santa Monica, Calif.
Today, Mr. Paul’s property is managed by Lease Killers, a nine-month-old Nashville firm owned by three 20-something entrepreneurs. The company maintains the home’s Airbnb listing, sets rates, which range from $299 to $900 a night, communicates with guests, coordinates cleanings and ensures that Mr. Paul complies with city regulations. In return, Lease Killers gets a 10% cut.
A decade ago, websites such as HomeAway and Airbnb upended the vacation rental market by creating a cheap, do-it-yourself way to turn properties into short-term rentals. Airbnb’s model even allows homeowners to rent out a spare bedroom or just a couch.
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The next frontier in short-term rentals: luxury homes with resort-style services and amenities. Right now on Airbnb and other top rental websites, only about 3% of the listings charge over $500 a night, according to estimates from Airdna, an industry analyst in Denver. But the rapid growth of third-party management services and tools is enticing more high-end homeowners to try short-term renting—for the right price.
These rental-management companies maintain the online listings, with some masquerading as the homeowner to answer questions from potential guests. They then book guests, coordinate key handoffs, schedule cleanings and—of increasing importance—help the homeowner navigate local regulations.
Taking it one step further, some management companies turn to other companies, such as Guesty, a Tel Aviv outfit, and Kigo, a Richardson, Texas-based company, for back-end, guest-management software and services. Guesty also provides round-the-clock communication with guests for the 7,000 listings it services.
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Sarah Law of Edinburgh, Scotland, pays a company called BnBbuddy to manage short-term rentals of two apartments in Edinburgh. BnBbuddy, also based in Edinburgh, created a profile for Ms. Law and—for roughly 20% of gross rents—arranges key handoffs, coordinates cleanings and answers guests questions. BnBbuddy pays 1.5% of gross rents collected from Ms. Law to Guesty for use of its software.
Ms. Law’s most upscale property is downstairs in a two-unit building she developed and where she lives. This three-bedroom apartment rents for between $335 and $800 per night and has been 85% occupied since it went on the market in the spring, said Ms. Law. Few of her guests have any idea that their host lives upstairs; she only gets involved when required, she said.
"I don’t actually want people knocking on my door, because that’s what I pay the other guys for," said Ms. Law.
Other short-term rental support companies include year-old Mashvisor in San Francisco, which provides an online tool to calculate the return on investment from short-term rentals compared with long-term leases. San Francisco’s Beyond Pricing created an algorithm that determines the most competitive nightly rental price based on fluctuations in the supply of and demand for properties. Vancouver-based Keycafe arranges for local stores and restaurants to store keys for renter pickup. Another company, HostTonight, is currently testing key-delivery-by-drone in Latin America.
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Airbnb and other major websites say that wealthy investors buying property specifically to rent out short term account for just a fraction of their hosts. "The overwhelming majority of our hosts occasionally share the home in which they live," said Airbnb spokesman Nick Papas, adding that "a typical Airbnb host earns an additional $7,350 a year." Bill Furlong, HomeAway’s vice president for North America, said that users of the site fit the same profile that vacation-home owners always have: They use short-term rental income to offset their costs in owning a second home.
Hotels are among the biggest critics of these short-term rentals, arguing that homeowners face far less regulation and often don’t pay occupancy taxes. That is starting to change in some cities. Last year, San Francisco legalized some short-term rentals, but only for people renting out their primary residence; around the same time Santa Monica, Calif., began requiring anyone even sharing their home to get a business license; short-term rentals, where the homeowner isn't present, are banned. In New York, a bill currently awaiting Gov. Andrew Cuomo’s signature would issue fines up to $7,500 to anyone advertising a unit in a "class-A multiple dwelling," which accounts for most kinds of apartments, for any use other than a permanent residence.
Still, the industry is continuing to evolve and expand. Expedia, a travel-booking website, bought HomeAway for $3.9 billion in November. In April, AccorHotels, a French multinational with roughly 4,000 hotels in over 90 countries, purchased short-term rental website Onefinestay. Recently, Onefinestay launched a program that pays real-estate agents referral fees for introducing the company to luxury property owners who list on the site.
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Earnings from short-term rentals vary widely, depending on variables such as property values, carrying costs, management fees and demand. Mr. Paul and his business partner, who co-owns the Nashville house with him, grossed $12,000 in June, when the Country Music Awards Music Festival brought a wave of high-paying guests. July’s gross was only $2,300.
Federico Casas Alatriste, 34-year-old technology entrepreneur in Mexico City, bought two studio apartments in the hip neighborhood of Roma two years ago specifically to rent out on Airbnb. He nets $800 a month from each of them, after covering mortgage, maintenance and management costs. His manager, HostTonight, has operations in New York City, Colombia, Chile and Mexico.
Mr. Casas Alatriste said the monthly cash flow is only one of the benefits. "My guests are buying my apartments for me," he said. "It has worked really well."