As a real estate investor, it's up to you to choose your investment strategy. So once you have an investment property in hand, you will need to decide between Airbnb versus renting. In light of that, we've created a comparison of the two rental strategies to help make your decision easier. Read on to get a better idea of which strategy is right for you.
How is Airbnb different from a traditional rental?
Before we get into the important things to consider when choosing your rental strategy, it's important to look at how Airbnb properties and traditional investment properties differ. Here are five important things to ponder.
1. Rental agreement length
First and foremost, the main difference between an Airbnb listing and a traditional rental is the length of the rental agreement. Put simply, Airbnb is most often used as a short-term vacation rental. It works more like a hotel room than a traditional lease. While guests might stay for a long weekend or even a week or more, they rarely become long-term tenants.
In contrast, if you're thinking of renting out a traditional investment property, the lease will likely last for at least six months, if not longer. Sometimes, landlords have an extremely low turnover rate, and the same tenant will rent the unit for multiple years.
2. Rental pricing and income
The pricing structure also varies between an Airbnb rental and a standard rental property. For one, each Airbnb listing has a nightly rate, while a traditional rental property generally collects rent monthly.
If the monthly rent for a standard rental property is broken down, the daily rental amount is much lower than what you might find in an Airbnb property. Thus, Airbnb rentals have the potential to generate more income over time. Unfortunately, though, that is not always the case since these units also tend to have lower occupancy rates.
It's also worth noting that pricing is easier to change on the vacation rental site. Airbnb allows users to change their nightly rates at any time, which means you can adjust pricing according to the popularity of your local market.
However, with a long-term rental, you are locked into the rent specified in your lease. Therefore, the rent may incrementally increase if specified in the lease, but you are unlikely to see any major changes during the lease term.
3. Potential expenses
Expenses are typically higher for short-term lets like Airbnb. For instance, your property will be expected to function as a hotel room, providing a fully furnished unit stocked with all the necessities. You will most likely also have to pay a cleaning fee in between guests and a small booking fee to the rental platform on each transaction.
On the other hand, as a landlord, your financial responsibility for the property is limited. You will probably have to cover property maintenance costs. However, those occur only rarely. Depending on how the lease is structured, you may also need to cover some utilities. But beyond that, furnishing the unit is the responsibility of the tenant, not the homeowner.
4. Rules and regulations
Generally, the rules for a traditional rental property are few and far between. In some cases, you may need a permit to become a landlord. In others, you may need to do some testing to ensure your rental property is habitable. However, there normally aren't many restrictions.
Short-term rentals, on the other hand, are increasingly becoming subject to more regulations. Many municipalities have laws outlawing them entirely, as do certain associations and planned unit developments.
5. Tax considerations
In the U.S., you have to pay federal and state income tax on any Airbnb income. In addition, in certain areas, your short-term rental may also be subject to an occupancy tax. While it's important for real estate investors to realize they will also be taxed on traditional rental income, they will have more concessions. For example, you'll have access to more tax write-offs that aren't necessarily available to short-term lets.
If you have specific questions about the tax implications of renting out an investment property versus listing your rental on a vacation rental site, your best bet is to reach out to a tax professional.
Renting through Airbnb: Pros and cons
- Higher income potential: Since the nightly rate for an Airbnb rental is higher than that of a traditional investment property, you have the potential to earn more income overall.
- Flexible pricing: Airbnb's flexible pricing gives hosts more control over how much they charge, which can be especially impactful for those who live in a resort area with a defined busy season.
- Airbnb Host Guarantee: Airbnb protects its hosts from incurring expenses related to damages through its Host Guarantee, which offers up to $1,000,000 worth of protection.
- Higher turnover: A higher turnover rate generally means more work for the homeowner. If you're the one taking care of the unit, you can expect to do more cleaning and restocking. However, if you hire a property management company, you can expect to pay more for this type of rental.
- Irregular income: The income you earn from a vacation rental may be irregular. Depending on your occupancy rate, you may have days when you make no income at all.
Renting with a traditional, long-term lease: Pros and cons
Long-term lease pros
- Regular income: For real estate investors, the biggest advantage of a long-term rental is receiving steady, predictable cash flow. The tenant will be expected to pay rent each month like clockwork.
- Less hassle: Once you get a tenant in and a lease signed, owning a traditional rental is much less work. Other than answering the occasional maintenance call, there's not much you need to do for the property.
Long-term lease cons
- Less flexibility: Unfortunately, with a traditional rental, you are bound by the lease terms until it ends, giving you less flexibility to make changes to your rental strategy.
- Less income potential: Long-term rentals typically have a lower price point than Airbnb rental properties. There's a chance you could be leaving some income on the table in exchange for stability.
How to decide which rental strategy is right for you
Now that you know how having an Airbnb rental property differs from a traditional investment property and the advantages and disadvantages of each real estate investment strategy, the next step is to decide which avenue is right for you. To that end, we've laid out four tips to help guide your decision-making process.
1. Compare local market rates
Start by comparing the rates for short-term and long-term rentals in the area where your investment property is located. A big difference between the two might help make your decision easier. If not, you may need to look into other factors before picking one investment strategy over the other.
2. Consider your rental property's location and condition
Airbnb properties tend to do best when they are centrally located, have plenty of amenities, and are in great condition. If your property needs a little TLC or is located farther from the action, you may want to consider making it a long-term rental instead.
3. Take local laws into account
Before deciding to use the rental platform, it's important to make sure no laws prohibit short-term rentals in your area. If there are, you're going to want to stay away from this investment strategy. Otherwise, you could face steep fines or other penalties.
4. Think about the workload
Lastly, think about how much work you're willing to put into the property yourself or how much you want to pay a property manager to take care of everything. If you're willing to invest a little more sweat equity, a vacation rental might be the way to go. However, if you simply want to have passive income without doing a ton of work, think about sticking with a traditional rental instead.
The bottom line
At the end of the day, there is no wrong way to tackle real estate investing. The decision between renting an Airbnb property or a traditional investment property is a personal one. Use the information above as a guide to help you get started on making the choice that's best for you.
It's also important to remember that this choice is not set in stone. You can always start your property out as an Airbnb and then change it to a traditional investment property later down the road, or vice versa.