Airbnb vs. Renting: Pros & Cons of Each Strategy
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Summary:
An income stream from an Airbnb vs. a rental property can be a nice boost to your bank account, but there are downsides as well. An Airbnb rental, for example, has excellent income potential, but there are also higher upfront costs plus ongoing expenses. There’s also the added risk of multiple people passing through your vacation rental. Long-term rental properties won’t command as much in rent, but they will provide a steady cash flow and are generally low in maintenance costs and much less time-consuming overall.
Investing in real estate is generally thought to be one of the most solid investments. If the property is well maintained, investors can almost always expect to make a profit when they turn around and sell it. There is also the potential for passive income when it’s used as either a vacation rental or traditional rental property.
Today we’re going to take a look at the advantages and disadvantages of using a rental property for short-term rentals, like Airbnb, versus a long-term lease agreement. Read on to learn about factors investors need to consider if they’re looking to make extra income from a rental property.
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Airbnb vs. renting
As with most types of investing, there are two sides to consider: the risks versus the rewards. Rental properties are no exception. Here are a few things that potential investors should first consider when deciding between Airbnb vs. renting.
- Is the house located in an area that allows for Airbnb rentals?
- Are you interested in potentially higher profits or a more steady, consistent income?
- Do you have the extra time and money to spend on constantly maintaining a short-term rental property?
- Do you prefer minimal maintenance and a more hands-off approach to managing a traditional rental?
- Are you prepared for the upfront expense of furnishing a short-term rental and having it cleaned, stocked, and maintained between guests?
These questions and more will help you begin to decide if running an Airbnb vs. renting in a more traditional manner is the right investment choice for you. In general, expect that you can earn more money with short-term rentals but will have more upfront costs and ongoing maintenance expenses. Traditional renting won’t allow you to make as much cash on the deal, but it will be less of a headache, points out Odest Riley, CEO of WLM Realty.
“When deciding whether you want to be a landlord or become a part of sharing economy platforms such as Airbnb or VRBO, you have to ask yourself what kind of business owner [you are]. As a long-term rental landlord, you are in the business of managing a property while hoping to very rarely have any turnover and minimal owner/tenant interactions.”
Income potential and flexibility
There’s little doubt that at least on the surface an Airbnb rental property has the potential to earn a lot more than a traditional rental. You can’t just charge whatever you want, because you’ll need to remain competitive with comparable Airbnbs in your particular market. However, the daily rate is typically going to be much higher than what you could get for a long-term agreement. Plus, you have the flexibility to raise rates during peak times.
“Because Airbnb allows you to adjust pricing in response to factors such as demand and season, short-term rentals can command a higher nightly rate than long-term leases,” explains Johana Williams, Senior Property Manager at Utopia Management.
By contrast, traditional renting is bound by a rental agreement, meaning you can’t just increase the rent whenever you feel like it. You’ll have to wait until the current lease agreement is up before charging a rent hike. Even then, there may be rental restrictions on how high you can raise the monthly rent.
For years, Airbnb hosts saw high ROI from listing their properties as short-term rentals. Now, as cities and states begin to crack down on regulations that directly affect these vacation properties, it’s detrimentally impacting owners who depend on this for income. -- Ryan Barone, CEO of RentRediClick to Tweet
Example of income potential for Airbnb vs. renting
Say you own a two-bedroom townhome that you use as a long-term rental property, and you charge $1,500 a month in rent (the equivalent of about $50 a day). Assuming you have a one-year lease agreement, you would take in $18,000 a year. That’s a nice chunk of change to take home that’s essentially passive income.
However, to compare, suppose you’re an Airbnb host using that same townhome as a short-term rental property charging $200 a night. In that scenario, you could bring in $18,000 with just three months of renting.
Though not many Airbnb properties are rented for the entire year due to seasonal impacts or other factors, even if you only rented the property out for six months of the year, you could be making $36,000 a year in income. That’s double what you would have made in an entire year as a traditional rental unit.
Insurance
Whether you use your investment property as a vacation rental or a long-term rental, you’ll need to have landlord insurance. This is pretty straightforward when we’re talking about traditional renting. However, most insurance companies will see an Airbnb rental property as a higher risk because of the large number of short-term tenants coming and going. The more people, the more opportunity that something will go wrong.
Some insurance carriers may not offer an insurance policy on short-term rental properties at all because of the added risks. If they do, you’ll probably (depending on your area) pay more than you would with long-term rentals where there’s only one tenant or family using the place.
Another important consideration is that many cities are now considering Airbnb renting as a business. This means you might need business insurance or have to add a rider to your existing policy.
As Proper Insurance points out: “More and more cities like Austin, Santa Barbara, New Orleans, Nashville, and Chicago are now requiring short-term rental owners to carry a business license and carry $1,000,000 in commercial liability. Communities are also putting in requirements for occupancy tax collection, like a hotel. None of these requirements exist for a long-term lease rental.”
IMPORTANT! Before you buy, talk to an insurance agent in your area to find out exactly what coverage you need. Airbnb itself offers limited insurance to its hosts, but you’ll want to make sure you’re covered in any eventuality. You’ll also want to ensure you’re legally carrying the proper type of insurance for your Airbnb property.
Additional expenses
Another big expense to consider with Airbnb vs. renting is the initial cost to furnish the place. At a minimum, you’ll need beds, couches, chairs, and tables for your guests’ comfort. You’ll also have to supply sheets, towels, and toilet paper, plus kitchen items like silverware, dishes, glassware, and miscellaneous utensils. In addition, you need to factor in ongoing cleaning and maintenance costs, which you could also do yourself.
If you have a long-term rental property, by contrast, your initial costs are small and short-term. Of course, you’ll want to have the place cleaned and maybe add a fresh coat of paint before a tenant moves in, but after that it’s pretty much their responsibility.
Pro Tip
If you decide to become an Airbnb host, you may want to add extra amenities to help you stand out from the crowd. Nice touches might include free coffee and tea, a fridge stocked with cold soft drinks, guest bathrobes, or a welcome basket. These extra comforts may entice guests, but keep in mind they will also add to your overall costs.
Managing the property
Short-term rental hosts need to be a lot more involved with their vacation rentals than traditional landlords — cleaning, stocking, and maintenance can be very time-consuming. You could hire property managers to do that, and many real estate investors do, but keep in mind that will eat into your profits.
“[By renting] your space on a shared economy platform you are essentially running a hotel, which consists of not only managing the property but also managing everything from the sheets to the batteries in the TV remote,” says Riley.
If property owners use the rental property for long-term rentals, on the other hand, management of the property is pretty minimal. You may have emergency repair calls on occasion or engage in general property maintenance, but most long-term tenants are required to take care of the property as part of their lease agreement.
Tax considerations
With any investment property, you’ll of course have to pay state and local taxes on the income you pull in. But you may also have to pay an occupancy tax on vacation rentals in certain jurisdictions, whereas that wouldn’t apply to traditional renting.
You also likely won’t be able to take advantage of as many tax deductions in the short-term rental market as you can with long-term rentals. For example, if your vacation rental isn’t occupied 100% of the year (which is common), you may not be able to take the full amount of tax deductions as you can with traditional renting.
IMPORTANT! To make sure you know what you’re getting into, consult a professional tax consultant or real estate attorney to determine the real-world tax consequences of an Airbnb vs. traditional long-term renting.
Location and local laws
Being a successful Airbnb host depends on a lot of factors, such as the type of property, the amenities offered, and how well it’s managed. But occupancy rates and, thus, the amount of rental income you can generate also rely heavily on where the property is located.
Being located in a high-demand area will have a huge impact on how much rental revenue you can bring in. Obviously, investors can make a lot more rental income if the short-term rental is located in a popular vacation destination rather than in a residential neighborhood.
And, of course, there’s also the possibility that local laws prohibit or put restrictions on short-term vacation rentals. This means you might be confined to long-term rentals or have to apply for a permit or pay extra fees to run a vacation rental business in certain markets. Ryan Barone, CEO of RentRedi a property management software for landlords, says he has seen this trend in recent years.
“Investing in real estate property is one of the most valuable things someone can do if they’re in a position to. That said, the difficult part is deciding what to do with your investment. For years, Airbnb hosts saw high ROI from listing their properties as short-term rentals. Now, as cities and states begin to crack down on regulations that directly affect these vacation properties, it’s detrimentally impacting owners who depend on this for income.”
Pro Tip
“It is important to consider any potential regulatory issues where the property is located, [like] is there any limitation on short-term rentals, and if so what are they and what financial risks can be associated with any potential penalties,” advises Nicole Beauchamp, Senior Global Real Estate Advisor/Licensed Associate Real Estate Broker at Engel and Volkers.
Pros and cons of Airbnb vs. renting
It’s always a smart move to look at a snapshot of the advantages and disadvantages of any investment opportunity before making a costly decision.
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Regardless of what rental property you want, first decide on how you’ll pay for the property. Luckily, if you have enough equity built up in your primary residence, you may have more options than you realize. For instance, you can opt for a home equity loan or line of credit (HELOC).
But before making a decision, compare what interest rates and loan terms you might qualify for using the tool below.
Airbnb vs. renting: Which is the better strategy?
There is no right answer about which rental strategy is best for any investor. Much of the choice depends on your financial goals, the time commitment you’re willing to put in, and the type of property. Real estate expert Nick J. Kyte nicely summarizes the decision-making process.
“When looking at [an] Airbnb, the ability to receive higher income normally tops the list, followed closely by the ability to change rates for seasonal peaks and events, and greater flexibility on when you choose to rent it out. When looking at the long-term, most outline stable income, tax write-offs, and [the] ability to choose the tenants as positives for choosing [the traditional] renting option.
“[The] majority of investors will make more money with Airbnb, but if the investor values stable income, less turnover and more tax write offs, going the long-term rental option may just be a better choice overall.”
FAQs
Is Airbnb good for the long term?
While you may get discounted rates for visiting an Airbnb property for longer stays, you’ll almost never beat the prices you could get for a traditional rental property. One of the main points of having vacation rentals is because of the better income prospects.
On the other hand, if you wanted to stay for a month or more at an Airbnb property during the off-season when there is little to no competition for Airbnb guests, you could get a great deal. For example, a lake house in the dead of winter probably isn’t a huge draw for many people. In that case, short-term rental hosts might be willing to accept less money rather than have the house remain vacant all winter.
Why are people against Airbnb?
There’s an ongoing Airbnb vs. renting debate about investors in Airbnb properties taking up housing units that could be used be used for long-term renters, resulting in a shortage of affordable housing. Others, like Riley, disagree, pointing out there is more to the affordable housing shortage than too many short-term rentals.
“The statistics more realistically point to local governments not allowing enough housing to be built in their communities, causing a supply shortage and increased prices in the rental market,” Riley says. “So before we blame the shared economy for displacing people and creating homelessness, we need to pay more attention to city councils who vote NO on affordable housing in the municipalities.”
Why are cities banning Airbnb?
There are a number of cities and other areas that prohibit short-term rentals, or severely restrict them, for a variety of reasons. Some say it’s because Airbnb properties are taking business away from local hotels, inns, and bed and breakfasts. Others suggest that a constant turnover of guests is disruptive to the community, especially in apartment buildings or other shared dwellings.
A further argument contends that because Airbnb rentals aren’t regulated, they may not be up-to-date on health and safety codes.
Key Takeaways
- Real estate investors can earn significant rental income whether using the property as a short-term rental or employing a more traditional rental strategy.
- Airbnb properties can make more in monthly rental revenue than long-term rentals. However, they require higher upfront costs and constant maintenance and cleaning.
- For investors who prefer a steady monthly rent, tenants who stay for an extended period of time, and less overall work on the property, traditional rentals are probably the better choice.
- Those who understand the extra money and effort needed to succeed in the Airbnb business might be happiest with short-term renting.
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