The Airbnb vs. renting debate is one of the main discussion points among real estate investors and with very good reason. The vacation rental market is very lucrative. In 2019 alone, revenue in the industry added up to $17,5 million. According to VRM Intel, 45% of investment property buyers bought a property to generate an income through renting it out as opposed to flipping it. Though, considering that short-term rentals do not offer the same regular income, is the risk worth it?
Now, amid the pandemic, this question about which investment approach can yield the best income has become even more vital. With international travel taking a backseat, will domestic travel be enough to sustain vacation rentals? In this article, we’ll help you identify the best investment strategy for your business.
Airbnb is a third-party website that helps property owners connect to travelers. Hosts can list their properties on its platform and then rent them out on a short-term basis to guests. Airbnb does charge a service fee, but in exchange, it will market your listing and take care of the payments.
If you opt for traditional renting, you will be making your property available to be rented out for a period of six months or longer. It will be your responsibility to market your rental and collect the monthly payments unless you choose to work with a property management firm.
When comparing Airbnb vs. traditional renting, there are different aspects that may have a direct impact on your income. Also, both approaches have their own advantages and disadvantages.
Traditional renters have to follow the lease agreement and may not change the pricing on the spot. This means that you will receive the same amount of rental income, ensuring a steady cash flow.
Airbnb allows you to be more flexible with your pricing. Hosts can use different pricing strategies and adjust their pricing practically every day in response to different factors like day of the week, demand, season, etc.
An Airbnb rental may require higher upfront costs as the rental should be fully furnished and stocked. Ongoing expenses are also higher as you need to ensure that the property is always in perfect condition.
This means that some of the items you will need to replace and restock regularly. Also, if you will be working with a property management company, their fees will be higher if they need to manage short-term rentals.
If you go the route of traditional renting, you will not be that involved financially. Find the right tenant and he/she will take care of your property and garden. If there is an emergency, you will have to deal with it (but this will be an irregular occurrence). You will also have to take care of general property maintenance, but that is the responsibility that comes with owning any property.
The following are some examples of the expenses of traditional renting:
The following are some examples of expenses that an Airbnb host must pay on top of the expenses of traditional renting:
Airbnb rentals are susceptible to seasonality leading to lower occupancy rate and income during the low season. On the other hand, short-term rental hosts can earn way more during the high season due to higher guest turnover and increased prices.
Though, demand for your property will not happen overnight. You first need to have received a few five-star review before you will receive more bookings. This means that when you are starting out, you might have to discount your prices to ensure that your property will be in demand.
Regulations against short-term rentals are on the increase. What makes it more challenging is that short-term rental laws may vary from state to state. This means that you have to do your research diligently.
If your city does allow short-term rentals, you might have to apply for a permit. This means that you would have to pay extra fees. If you think to skip this step, think again as you could get fined. In some cases, you might even have to pay for legal action.
Airbnb has different tax implications. In the US, you will have to pay federal and state income tax depending on your type of rental. If you rent out your property on Airbnb, you might have to pay occupancy tax as well.
Traditional rental income will also be taxed, but you will have more concessions. You will also be able to deduct more property-related expenses from your tax.
Irrespective of if you use Airbnb or traditional renting, it is best to reach out to a professional tax consultant.
The Airbnb Host Guarantee partially protects Airbnb hosts. However, it is not enough and each Airbnb host should have additional vacation rental insurance. Also, as you will be renting out to different guests throughout the year, there is a greater risk that your property could suffer damages. As a result, your insurance costs will be more.
That being said, property owners who opt for traditional renting will also most likely have a commercial insurance policy.
As you will be renting out your property at a higher nightly rate, you can make more money on the condition that you have a good occupancy rate. With Airbnb, you can also sell extra services to your guests which can help you to generate extra money on top of the rental income.
Hosts have the opportunity to adjust their pricing every day in response to a wide variety of factors. You can, for example, offer discounts for longer bookings or midweek stays.
The opposite is also true. For weekend bookings, you can charge more. This means that you can have two (or more) sets of rates to respond to the current demand.
There is no need for a lease agreement. You have your house rules and Airbnb also has its set of rules to help protect hosts. This means that if a guest breaks your house rules, you can reach out to Airbnb immediately instead of having to enter a long-drawn-out legal matter.
The Airbnb Host Guarantee is a great benefit as it offers protection of up to $1 million. Airbnb’s review system also offers hosts some form of protection. By taking the time to read the reviews that guests have received, you can get a better idea of what you can expect.
The potential for damages is higher than traditional renting. While the majority of bookings do not result in damages, some guests specifically book via Airbnb with the plan of using your property as their party venue.
As a result, many hosts stress more about if their property will get damaged when renting it out via Airbnb vs. renting. Though, as you will be renting your property for shorter periods at a time, you will have more opportunities to check on the state of your property.
After each booking, you will have to clean your property, restock certain items, and possibly replace items that were damaged or are no longer in working condition.
Don’t bargain that you will be able to rent out your property every single day of the year. In fact, you will prefer it that way (hosting so many different guests can take its emotional toll). One month you might be completely booked, while the next month received only one booking.
Usually, your income will be seasonal. Your location, attractions, and events will play a major role in your occupancy.
Also, some cities restrict the number of days that you may rent out your Airbnb. So, it could be that you will be forced to block off some days.
To be a successful Airbnb host, you will need to market your property. This will require that you take high-quality photos and change them often to fit the season, write captivating property descriptions, and write reviews for guests. You also have the increased pressure of ensuring your property is completely ready for every guest. Considering the much higher turnover rate, this adds up to a lot more work. In short, it is much more than simply being a landlord!
The major pro of traditional renting is that you are assured your property will be occupied for a longer period of time. This means that you are certain of how much rental income you will be paid at the end of the month.
Lower guest turnover translates to less work. The time you need to spend cleaning or maintaining your property will be significantly less.
Not only do you have less flexibility with regards to your pricing, but you also do not have the option to make your property unavailable all of a sudden. This means that with traditional renting, you can’t rent out your property on a “part-time” basis. For example, with Airbnb, you can rent out your property only over weekends, but with traditional renting this is not the case.
You also have to check up on your tenants to ensure that they pay the monthly rent on time. Even if only one month’s payment is missed, it can have a huge impact on your income. Worse yet, if they disappear, it could take a while to find a new tenant. On the other hand, Airbnb requires that guests pay the amount in advance.
You and your guest should sign a lease agreement before the rental period starts. This means that you may not change the price to adapt to demand or introduce new rules before the rental period has ended.
When deciding between traditional renting vs. Airbnb, be sure to take into account the following factors:
If you opt for short-term rentals, you will only be able to enjoy high occupancy rates if your property boasts a great location. What makes it popular? It’s simple, there must be a reason for people wanting to visit your location. Alternatively, if it is not in a major city or a popular vacation destination, your property must offer something very unique.
In some cities with very strict short-term rental laws, traditional renting will be the wiser option. You also need to research if there are any other extra requirements such as permits or restrictions on the number of nights. These might sound insignificant, but it can reduce your rental income potential.
As a matter of fact, in some areas, short-term leases are entirely prohibited. So, you might not even have the Airbnb vs. renting option.
Overall, Airbnb yields a higher nightly rate than traditional renting. Some hosts have even reported that they are able to triple the amount they would have made with traditional renting. Though, that only applies to an Airbnb that has a high occupancy rate.
When it comes to Airbnb vs. renting, there is no clear-cut winner. Airbnb can generate higher rental income. Though, this does come at a cost. Hosts need to ensure that their investment property boasts a great location, which might mean more upfront costs.
Even with a beachfront property, you’ll only be able to generate more revenue if you go the extra mile. This means that you need to market your property, ensure that you receive enough five-star reviews, and implement an effective pricing strategy. Without the willingness to put in the extra work and remain patient while you grow your reputation (which can take a long time), traditional renting will be the better rental strategy for you.
iGMS can remove the hassle from short-term rental management and help hosts to streamline their vacation rental business. It can help you to automate many of your day-to-day operations that you will need to complete. These include: