Airbnb Versus Traditional Renting: Which Is Better for Business?
Worldwide, over 150 million guests have made reservations for Airbnb in over 65,000 cities. And rental properties that have successfully converted to Airbnbs have frequently proven to be profitable investment strategies. Some Airbnb apartments, houses and condos are collecting many times their yearly mortgage cost. Success stories like these abound. But other short-term rentals haven’t fared as well — and the lessons of their loss should be understood before you dive in and commit.
If you’re thinking of converting your rental property to an Airbnb, the ability to confidently predict profits can be tricky. Because so many factors go into an Airbnb success, we’ve put together a review of the business benefits and pitfalls of managing long and short-term rental properties. Compare and contrast these tips and see what works best for you.
The Pros of Airbnbs
The argument for Airbnb versus traditional renting is one that’s best explored by looking carefully at the benefits and drawbacks for each option. Here are a few reasons why this rental strategy may be right for you:
Adventure awaits. For real estate investors that choose to go the Airbnb route — and remain nearby to manage the rental — meeting new people traveling from the far reaches of the world can be exciting. Since most guests are short-term stays, you’ll get a chance to meet a new guest every few days.
Flexible rate options. With each new vacancy, you’ve got the opportunity to adjust your rental rate to better reflect demand in the market. Lower your prices in the low season and attract the off-season traveler, or push rates high during peak periods.
Good reviews draw traffic — and bookings. With each new arrival, you’ve got another opportunity to make a great impression and get great reviews. Over time, these reviews become increasingly important for some Airbnb owners seeking to stay booked.
The increased profits cover Airbnb’s 3% service fee. When your rental’s calendar is filled up, you’re probably going to be able to overcome that service charge for processing and marketing your property.
The Cons of Airbnbs
If you’re looking for a turnkey solution to generating passive income, an Airbnb listing can work — but you’ll have to pay a premium to get things done. Other drawbacks to managing an Airbnb, like the upfront investment to fully furnish the space, should be carefully considered before you make a purchase. Here are a few cons of Airbnbs:
You’re better off if you’re a people person. Because reviewers will be writing about your interactions with them, personality counts. If you’re not very personable, working day in and day out with new travelers may feel very demanding.
You’ll still be a landlord — maybe more than before. Airbnb hosts experience an increase in property management tasks after converting from a traditional rental. This is because the frequent tenant turnover requires them to work in the unit swapping out linens and cleaning the space regularly.
There are different tax implications for vacation rentals. When compared to long-term investment property renting, the tax benefits are quite different. In traditional rental property real estate, you’re able to write off business expenses, and other costs which may not be available to you as Airbnb host. Airbnb delivers rental income to the host in the form of the processed payment, and as such, it’s taxed that way.
Income can vary week to week, month to month. Airbnb bookings are typically dependent on a positive outlook with tourist-based financial indicators playing a main role. When the economy turns downward, travelers may be less frequent, and securing tenants may not be possible. You may lose money with Airbnb.
Your employer may prevent you from managing. If your full-time job won’t let you leave at a moment’s notice, your Airbnb clients may review you poorly. This can result in fewer bookings, a decreased occupancy rate and increased out-of-pocket mortgage payments.
You’ll need to fully furnish the unit. This added expense can sometimes be missed by newcomers. It’s important to keep in mind that you’ll need a fully-stocked kitchen, from a coffee maker to a bowls, plates and glasses. Remember that items like couches and furniture will degrade over time, too. Not only will your unit see the effects of wear and tear, but everything inside will too.
The Pros of Traditional Long-term Rentals
Long-term rentals apply to tenants with lease agreements that extend six months and beyond. When comparing the profitability of long-term rentals against the allure of quick profits from Airbnb, well-vetted tenants who can pay the rent consistently may be worth more in the long run. Here are some benefits of long-term rental agreements:
Your tenant is legally obligated. With a long-term lease agreement you may find more financial stability and predictability. The lease agreement requires your tenant to make timely rental payments.
Increased income predictability. Because your mortgage note will be due every month, knowing that you’ve got a parcel of months covered with a reliable tenant can be comforting. By sacrificing profit potential, you gain the likelihood of repeated and on-time rental payments.
Greater independence from tenants. Airbnb requires a consistently fast turnaround on tenant inquiries. If your response time exceeds a certain length of minutes, you may lose your preferred host status.
You’ll have more free time. You’re likely to be more available without the constant need to manage your Airbnb account. Long-term contracts free you up to pursue other goals.
The Cons of Traditional Long-term Rentals
Worrying about whether your tenant’s going to pay the rent on time is an obvious concern for many landlords. But there are other important drawbacks to long-tern lease agreements when compared to Airbnbs:
The chance to sell quickly may be less. With a long-term lease in force, your ability to sell that real estate investment may be more difficult. You’ll need to work with a lawyer and the tenant to make arrangements, and could be required to pay the tenant to leave.
Opportunities to make improvements are limited. With frequent Airbnb tenant turnover, you’re more able to make improvements on a space during vacancies. If you’re long-term tenant is not ok with you working on the rental, you may be forced to wait and make improvements after the tenant exits.
Long-term tenant problems can get costly. If you resort to evicting a long-term tenant, the process is not only expensive, but time consuming as well. With short-term agreements, problem tenants are out the door in a number of days without much financial impact because their payment-in-full was applied upon arrival.
Temporary Rental Insurance May Be Right for Your Airbnb
Short-term rental to others insurance coverage may be a good answer for a part-time Airbnb rental space. An addition to your homeowners policy, this coverage allows you to rent your property up to 62 days a year. You’ll have coverage against theft or damage to your building — and its contents — in the areas of the dwelling that you rent out. If you plan on renting out your home for more than 62 days, you’ll need to get landlord insurance to cover your property.
The Importance of Landlord Insurance
Regardless of the direction you take your rental property, if you rent your space full-time, you’ll need to protect your investment with landlord insurance. At American Family, you’ll get a custom-designed policy that’s tailored to meet your business needs. Get in touch with an agent today and review your landlord policy options. With our great coverage you’ll find more capacity to focus on pursuing your financial goals.
Related Topics: Landlord