If you have extra room in your home, you may be able to turn it into extra money. Whether you're retired, the kids have recently moved out, or you just want to meet new people, the sharing economy provides flexible options to pad your nest egg. But is the trouble worth it?

With networks like Airbnb and VRBO, finding guests is relatively easy, which could make renting out space an appealing way to earn income. Half of all Airbnb hosts reportedly make more than $500 per month, and some make significantly more. But your earnings ultimately depend on your property. Locations near popular destinations can generate the highest revenues, and renting an entire residence will fetch higher rates than a room within your home. Sites, like AirDNA, can help you understand how much you could potentially charge.

Another benefit of renting your space is control over your schedule. Using online platforms, it’s easy to select how often you want to “work." If you only want to rent out your space on certain days, you can indicate those dates on a calendar and block out other times. Depending on how much you want to earn, you might not need constant rentals

Should you put money into your property?

If you're committed to the idea of earning income through short-term rentals, you may be tempted to invest in your property to boost profits. But it's probably best to start small — renting a single room or renting your home while you're away — and growing your business only after you've tested the waters.

Improvements to start with

Starting with relatively small projects such as adding privacy for your guests, can improve your offering. For example, you might consider:

  • A separate entrance that makes the rental a “whole house" instead of just a room
  • A private bathroom that is only accessible to your guests

These enhancements could allow you to charge more for your space, but it's critical to balance the costs and benefits of investing in your property.

Larger improvements to consider

Bigger projects can help you offer even more to your guests. For example, you might add a tiny house on your property or convert a garage to a separate apartment. With major projects, you face the same challenges above, and you also magnify the risks. That said, any additions could add to your property value, so you might be able to recover your investment when you sell your home — as long as the project increases your equity by more than you spend

Will it pay off?

Even if you can earn more after making improvements, it's wise to complete a detailed evaluation of your project. A breakeven analysis can help you understand if and when you'll recoup any money you spend on your property. To understand the tradeoffs:

  1. Determine how much the project will cost.
  2. If you plan to borrow for the project, include financing costs like origination fees and interest charges.
  3. Estimate how much extra you can earn as a result of the project.
  4. Calculate how long it will take for that extra income to pay off the project. For example, divide the additional income per rental into the total cost of the project. With an understanding of how often you rent your property, you can arrive at a breakeven timeframe.

Customizing your property for short-term rentals comes with pros and cons beyond just the financial aspects.

For one, depending on how large a project you commit to, you may be living in a construction zone. Projects take time and energy. You may need to coordinate with contractors and stay home so that workers have access to your property. You might need to tolerate noise, dust, extra traffic, and scheduling snafus, all of which can be frustrating.

The trade-off is improved privacy for both you and guests. Larger projects may improve your quality of life after the project's completion. Guests will have their own space — and you won't need to share your living space.

Before You Dive In

Consider all your costs

As you evaluate how much you can earn, be sure to include expenses related to offering short-term rentals. You might have a rough idea how much you can charge per night, but you won't keep 100 percent of the rental fee. For example, you might face the following costs, among others:

  • Local taxes: Depending on where you live, you may have to pay local taxes on your rental income. For example, your city may impose a sales tax on short-term rentals.
  • Insurance: Airbnb provides basic Host Protection insurance, but it's wise to discuss your insurance needs with local experts and your insurance company. Host Protection insurance has limitations, so you may want to purchase additional coverage to protect yourself.
  • Cleaning and maintenance: The more you rent your place, the more you'll spend on keeping it up. Prepare to pay for everything from cleaning supplies to regular maintenance due to wear and tear. If you don't want to clean the property yourself after guests leave, you'll need reliable help available on short notice. Those expenses will eat into your profits, although you can build the costs into your rental fees.
  • Income taxes: Depending on how you operate, you may need to pay federal income tax on the revenue you receive. Ask a CPA for specifics, and keep taxes in mind as you decide how much to charge.
  • Service fees: Online platforms charge fees to list your property and handle booking logistics. For example, Airbnb charges service fees, so you need to price accordingly.

Understand that ratings matter

Running a business in the sharing economy may be different from work you've done in the past. The ratings and reviews your guests leave can make or break your business. Offering a clean and comfortable space is critical, but for the best ratings, be prepared to:

  • Accommodate guests coming and going on their own schedules, including check-ins at odd hours.
  • Provide tips on local attractions, events, and restaurants.
  • Add a special touch that visitors appreciate, whether it's free breakfast, loaner bicycles, or a bottle of local wine.

Formulate a Strategy

Short-term rentals can provide an excellent source of income and put your extra space to good use. But it's essential to understand the pros and cons — and the financial impacts — of using services like Airbnb for extra income. By starting small, you can learn valuable lessons and design a strategy that fits your lifestyle without getting in over your head.