Airbnb vs. traditional long-term renting has garnered increased scrutiny in recent times. While long-term rentals offer greater stability in uncertain circumstances, they come with diminished flexibility. Delve into the advantages and drawbacks of conventional rental properties versus opting for the renowned holiday rental platform.
The ongoing debate between Airbnb and traditional renting holds significant importance among real estate investors, and rightfully so. The vacation home rental market boasts substantial profitability. In 2021 alone, the global industry amassed a revenue of $57.94 billion, projected to surge to $96.85 billion in 2023.
As per VRM Intel, 45% of property investors acquired real estate for income generation through rentals rather than quick resale. However, considering that short-term vacation rentals might not offer the consistent income of long-term rentals, the question arises: is the risk justifiable?
Now, the crucial query is: which investment approach can optimally deliver income? This article will guide you in determining the most suitable investment strategy for your enterprise.
Airbnb vs. Renting: Pros and Cons
Airbnb Pros
1. Enhanced Income Potential
By renting your property at a higher nightly rate through Airbnb, you have the potential to increase your earnings, provided your occupancy rate remains favourable. Additionally, with Airbnb, you can offer supplementary services to your guests, thereby generating extra income alongside the rental revenue.
2. Increased Pricing Flexibility
Hosts enjoy the flexibility to fine-tune their pricing on a daily basis, adapting to a diverse range of factors. For instance, you can provide discounts for extended bookings or stays during weekdays. Conversely, for weekend reservations, you can implement higher charges. This means you can maintain multiple rate structures to align with current demand dynamics.
3. Absence of Formal Lease Agreement
A lease agreement is unnecessary, as you can establish your own house rules, which complement Airbnb’s set of regulations designed to safeguard hosts. This means that should a guest violate your house rules, you have the option to promptly contact Airbnb, bypassing the need for protracted legal proceedings. Alternatively, you can consider employing a vacation rental agreement for added security.
4. Host Safeguarding (Airbnb Host Guarantee)
The Airbnb Host Guarantee is a valuable advantage, affording protection of up to $1 million. Additionally, Airbnb’s review system furnishes hosts with a degree of security. By taking the time to peruse the reviews left by previous guests, you can gain insights into what to anticipate.
Airbnb Cons
1. Risk of Damage
The likelihood of damages is elevated compared to traditional rentals. While the majority of bookings result in no harm, certain guests intentionally choose Airbnb to use the property as a venue for gatherings.
Consequently, hosts often harbour greater concerns about potential property damage when letting it through Airbnb compared to conventional renting. However, due to the property being rented for shorter durations, you will have more frequent opportunities to inspect its condition.
2. Increased Expenditure
Following each booking, you’ll need to undertake cleaning, replenish specific items, and potentially replace any damaged or non-functional belongings.
3. Irregular Income
It’s unrealistic to expect your property to be occupied every single day of the year. In fact, it’s often preferred not to have a constant influx of guests (as catering to a diverse range of visitors can be emotionally taxing). Your bookings can vary greatly, with one month being fully booked while the next might have just one reservation.
Income patterns tend to follow seasons. Your area, local attractions, and events will heavily influence your occupancy rates.
Furthermore, certain cities impose limitations on the number of days you can rent out your Airbnb. This might necessitate blocking off certain dates.
4. Heightened Effort and Time Commitment
Succeeding as an Airbnb host demands effective marketing of your property. This entails capturing high-quality images that reflect the current season, crafting engaging property descriptions, and writing reviews for guests. You’ll also face the added responsibility of ensuring your property is impeccably prepared for each guest and maintaining open lines of communication to create a memorable guest experience. Given the accelerated rate of turnover, this translates to significantly increased workload. In essence, it extends far beyond the role of a typical landlord!
Renting Pros
1. Regular Income
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.
2. Lower Guest Turnover
Lower guest turnover translates to less work. The time you need to spend cleaning or maintaining your property will be significantly less.
Renting Cons
1. Reduced Flexibility
Traditional renting comes with limited pricing flexibility, and you lack the sudden option to make your property unavailable. This means that operating your property on a “part-time” basis isn’t feasible as it is with Airbnb. For instance, while Airbnb allows weekend-only rentals, this isn’t the case in traditional renting.
2. Limited Potential for Income Maximization
Managing long-term tenants requires consistent checks to ensure timely monthly rent payments. Missing even a single month’s payment can significantly impact your income. Depending on your location and local rental regulations, evicting a tenant might prove challenging. Moreover, finding a replacement tenant could take time if they suddenly vacate. In contrast, Airbnb mandates upfront payment from guests.
3. Lease Agreement Obligations
Before the rental period commences, both you and your guest must sign a long-term lease agreement. This entails that adjustments to pricing based on demand or the introduction of new rules cannot be implemented until the rental period concludes.
Things to consider before turning your property into an Airbnb:
1. Laws and Regulations
Before embarking on the short-term rental journey, ensure legality. If using your property for this purpose is prohibited, it’s best to avoid. To determine if your property qualifies, consult your local regulations. Check your city or county website, search keywords like “short-term rentals,” and contact planning departments. Some areas demand primary residence status or impose rental day limits. Remember that regulations might evolve with Airbnb growth. If your property aligns and complies, you’re ready to proceed.
2. Risk Tolerance
Have you ever conversed with a financial consultant? They often ask, “On a scale of 1-10, what’s your risk tolerance?” How should you respond? “I adore risk! The more, the merrier!” But you don’t want to seem overly cautious either. You grasp that riskier investments offer higher returns potential. “I’d say I’m a 4-6 in risk tolerance,” you reply.
“I believe you’d suit our moderately aggressive index fund,” the advisor suggests, highlighting “aggressive” to boost your confidence.
This quirky tangent underscores how tricky it is to measure risk tolerance. Investments, particularly real estate, entail risk. Those with bigger rewards typically carry greater risks. When contemplating your first short-term rental, uncertainty is natural due to inexperience. Investors eye two key risks in short-term rentals:
- Property damage potential
- Financial uncertainty
Damage Risks
This initial point sparks vigorous debate. Many investors (myself included) contest the notion that short-term rentals pose higher property damage risks compared to long-term investment properties. A long-term tenant can inadvertently cause damage as easily as a short-term guest. In fact, you exert more control over guests’ stays in short-term rentals. If issues arise, you possess greater authority to deny access and face fewer bureaucratic hurdles compared to lengthy eviction processes.
Certainly, horror stories exist. Guests might smoke despite “no smoking” signs, host damaging parties, overuse amenities like hot tubs, or break appliances. Yet, similar incidents can transpire in long-term rentals. Early in your real estate investment journey, you likely heard warnings that tenants often neglect properties.
Amid risks, short-term rentals boast compensatory benefits. You can enforce rigorous guest screening criteria, such as age limits, valid IDs, and group sizes. You can even bar poorly reviewed guests from viewing your property. Furthermore, your property receives regular cleaning and post-check-out inspections to address potential issues.
Financial Risks
Naturally, financial risks merit consideration too. Your short-term rental may fall short on bookings, leading to an off-target occupancy rate. Projected daily rates might prove inaccurate.
Yet, the prospect of doubling, tripling, or quadrupling returns by transitioning a long-term rental into short-term is viable. Similar to any long-term investment, confidence in numbers and projections is vital. Leverage market knowledge or seek guidance from Airbnb-experienced experts for calculated risks aligned with long-term objectives.
Remember, if your short-term rental venture falters, you can revert to a successful long-term model to mitigate risks. Most real estate investors embrace transient challenges for eventual gains. As showcased, Airbnb’s don’t inherently carry greater risk than other real estate investments. Check the risk tolerance box and consider embracing a short-term rental venture!
3. Net Operating Income
In most scenarios, converting a rental to short-term can yield higher monthly income. However, income isn’t the sole performance gauge, as short-term rentals bear added expenses not found in traditional leases. Owners now cover costs usually borne by long-term tenants.
Operating expenses should encompass:
- Taxes
- Insurance
- Maintenance
- Supplies/inventory
- Utilities (power/electricity/gas)
- Water
- Internet
- Landscaping
- Property-specific features (e.g., pool/hot tub maintenance, pest control, security)
- Management fees (if self-management isn’t intended)
Considering this, net operating income (NOI) is a superior performance indicator, factoring in income post operating expenses.
4. Cash Flow
Are you seeking to enhance cash flow from your rental investments? With rising interest rates and recent appreciation trends, generating cash flow has become more challenging.
Your current property might be achieving a break-even point. While a prudent long-term strategy with projected rent and value growth, it may lack immediate impact. Your property could yield minimal monthly cash flow, covering annual maintenance. Alternatively, your property might be cash-flowing well, but you aspire for lifestyle changes or accelerated capital growth. If prioritizing cash flow, consider short-term rentals (STRs).
5. Time
The following aspects, time and management, are closely intertwined. To consider an Airbnb, one or both of these elements must be addressed.
Can you dedicate the time to establish and oversee an Airbnb? It entails a learning curve, furnishing the property, and navigating platforms like Airbnb or VRBO. Since short-term renting is hospitality-oriented, timely and considerate guest communication is essential. Managing guest schedules and cleaning is a constant task.
Various automation tools exist, such as Guesty, HostAway, and Lodgify for channel management, as well as TurnoverBNB for calendar automation. Setting up automated messages within platforms is also possible.
Managing an Airbnb alongside a full-time job is feasible, though not without challenges. Assess your readiness for the added workload involved in effective short-term rental management.
If you possess the time and determination, check the decision grid box!
6. Management
If time is a constraint, don’t dismiss STRs! Property management is an option, distinct from traditional services. Short-term rental managers handle every aspect:
- Property setup, furnishing, and onboarding
- Online presence and pricing
- Guest interactions and inquiries
- Scheduling cleaning, maintenance, landscaping
- Inventory and supplies management
- Financial tasks: payments, invoices, reports
Given their comprehensive role, STR managers charge more, usually 15%-30% of gross income. Evaluate if this aligns with your financial objectives.
Reliable managers and vendors are crucial. If unfamiliar with a market, finding trustworthy cleaners, technicians, and managers may require trial and error. Building a reliable team beforehand is essential for STR success.
If good management, vendors, and finances align, tick the box on your decision grid!
MORE Lease Options blogs HERE:
Serviced Accommodation Mortgages
Does Section 24 Apply To Serviced Accommodation
The Ultimate Guide To Serviced Accommodation
Download NOW
4 Simple Steps To Becoming Wealthy Through Property