Before finalizing an investment strategy, real estate investors looking to join the sharing economy need to evaluate the ins and outs of Airbnb vs. renting. While regular renting remains a safe bet for investors, there’s no denying that short-term rentals have skyrocketed in popularity in recent years.
If you are looking to rent out your property, your primary concern is likely to be which option generates the most revenue. They both have their pros and cons, and it’s a good idea to carefully consider each option before making your decision. Read on to learn the key factors related to vacation rentals and traditional renting, as well as which option brings greater revenue.
Airbnb vs. Traditional Renting: Defining the Terms
What is an Airbnb rental?
An Airbnb rental is a property that is leased to someone on a short-term basis, usually over a few days to several weeks. However, long-term rentals, rented for a month or longer, are also available. Airbnb rentals can be houses, apartments, rooms, and even more unusual properties like boats, castles, and forest cabins. The pricing structure of these rentals is flexible as hosts can change their daily rates regularly to maximize revenue.
What is traditional renting?
A traditional rental property is a property leased out by a landlord to a tenant for a longer, fixed period, usually 6 months or 12 months. The rate charged is a monthly rate, and it is usually a set figure based on a signed rental contract between the landlord and tenant. Traditional rental properties are usually houses, apartments or rooms.
Airbnb vs. Renting: Legal Rules and Regulations
Rules and regulations relating to short-term and traditional renting differ. In regular renting, property owners who own a freestanding property should be able to rent it out to long-term tenants. If your property is in a complex or building, you may need permission from the Homeowner’s Association first.
The regulations for short-term rentals are a little more complicated. Short-term rental laws are different in every state and may vary from city to city. In some cities, short-term rentals may be completely prohibited, while in others, they may be allowed to operate under very strict regulations. You may also need to get permission from your neighbors to operate a vacation rental and permission from your HOA if your property is in a housing complex. Make sure you know the local zoning regulations of an area before making a real estate investment decision.
Also, if you are thinking of subletting, you will first need written permission from the existing landlord to do so.
Short-term Renting vs. Traditional Renting: Property Tax
When it comes to taxes, your Airbnb business will be treated as such, and the income you earn on your rental property will be subject to tax. In the USA, you will need to pay federal and state income tax and, in certain states, you might need to pay occupancy tax as well for listing your property on Airbnb.
The income you earn on traditional property renting is also taxed, however, there are more exceptions available. Any money you put into getting the property ready (such as buying furniture, doing upkeep, etc.) can be listed as business expenses, which will be exempt from tax.
Airbnb vs. Renting: Property Insurance
Being an Airbnb host means that your property and its assets are protected to a certain degree by Airbnb Host Guarantee. However, there are certain instances where Airbnb will not cover any damaged or missing items. For this reason, it’s still recommended that you take out vacation rental insurance for absolute certainty.
Being the landlord of a traditional rental also means you might have to deal with unexpected breakages or damages by renters. Property insurance might also be the safer option to go for to ensure you aren’t left paying for any hefty damages.
There is also a difference between vacation rental insurance and regular homeowner’s insurance. On average, homeowners pay around $120 per month for property insurance and around $1500 per year. Vacation rental insurance generally costs more, averaging between $2000 and $3000 per year, but this figure can increase if your rental property is in a popular tourist destination.
Airbnb vs. Renting: Property Management
Managing an Airbnb rental is often a full-time commitment, taking up more time than managing a traditional rental does. Daily tasks include:
- Guest messaging
- Writing reviews
- Cleaning and task coordination
- Arranging maintenance work
- Confirming reservations and taking payments
- Arranging check-in and checkout times
Using vacation rental software like iGMS to oversee your vacation rental simplifies your management strategy by automating these tasks and completing them for you.
Pros and Cons of Airbnb vs. Renting
1. Greater revenue potential
As mentioned above, your potential revenue is higher when renting out an Airbnb rental. Most guests who book Airbnb rental properties are doing so for vacation or work purposes, not living purposes. Because of this, they are generally accepting of the higher daily rates for short-term rental properties.
2. Greater control over your rental property
Listing your rental unit on Airbnb allows you to have greater control over your rental. As you will likely have cleaning and support staff in your property in between each guest’s stay, you can easily identify if something has been broken or damaged to your property.
This is in contrast to traditional renting, where tenants pay for privacy in your rental. If a tenant damages or breaks something within the property, you may only discover it after their long-term lease has expired.
3. More flexibility with pricing
Airbnb hosts can increase or decrease their pricing when necessary. For instance, as a host, you can increase your booking rate over the weekend if you receive more weekend bookings. You can then lower your rates during the week to encourage more reservations. In essence, the ball is firmly in your court when it comes to pricing your Airbnb.
4. Host protection by Airbnb
Another benefit of being an Airbnb host is Airbnb’s Host Guarantee, which offers protection of up to $1 million to hosts against property damages. If a guest breaks or damages something in your property during their stay and doesn’t reimburse you for the damage, Airbnb may step in and credit the damage costs to your account.
5. You are not bound by a lease agreement
When renting out an Airbnb property to guests, you don’t need to use a lease agreement. Some hosts choose to have guests sign a vacation rental agreement to give them peace of mind, however, it’s not mandatory. As a host, you have your House Rules that you can ask guests to read and agree to, and Airbnb also has its own rules for them to follow.
1. Damages are more likely
Unfortunately, due to the higher guest turnover, there is a greater chance of your property being damaged by a guest in Airbnb renting. Most of the time, this damage is accidental. However, there is a possibility of guests booking your rental to throw parties despite a worldwide ban recently released by Airbnb.
Some ways that you can reduce potential damage include installing software to help prevent parties like NoiseAware and PartySquasher, charging guests a security deposit, and reading the reviews of potential guests before accepting them.
2. Income may be irregular
While you should always strive to maximize your bookings, you will likely find that your booking rate will vary from month to month. This translates into a more irregular monthly income. Seasonality can impact your monthly earnings (you will earn more during your high season than your low season), as well as limitations on short-term rentals that cities and states might impose.
3. Expenses are higher
Ultimately, your income potential is higher in an Airbnb than in a traditional rental property. However, your monthly recurring costs will also be higher compared to traditional renting, such as:
- Cleaning and maintenance costs
- Restocking of household supplies
- Monthly utilities
- Vacation rental insurance and any applicable rental tax
- Marketing and advertising of your rental
- Paying a property manager or management company (if applicable)
To ensure you are earning a profit on your short-term rental property, you need to maintain either a consistent booking rate or employ a smart pricing strategy that covers your costs.
4. More maintenance and marketing required
As you will need to attract a steady stream of bookings, you will need to market your property online to potential guests. You will also need to spend time doing inspections of your property and on maintenance tasks if anything needs to be fixed. You can outsource these tasks to a property manager, but that will increase your overall expenses.
Traditional renting pros
1. More consistent income
In Airbnb renting, you may experience dips in your monthly income and have busy and slow months. This is not the case with traditional renting where your tenant will be occupying your property for a more long-term period. You also receive a fixed monthly rate from your tenant. Through traditional renting, you can enjoy a more stable, consistent income.
2. Lower monthly expenses
Your monthly expenses will also be lower if you opt for traditional renting. Your rental will be occupied for much longer periods, so you won’t need to spend as much time marketing and looking for tenants. Your tenant will be covering the cost of their own monthly utilities, which can be a great reduction in your expenses if you live in an expensive city or state.
3. Lower guest turnover
Let’s face it: sometimes dealing with guests can be tiring! Having a constant stream of different guests can be overwhelming, especially if you are hosting guests who make special requests or last-minute changes. You won’t have this issue with traditional renting, as you will only be dealing with one or two renters over a year. A lower guest turnover usually means less work for you, as you have fewer guest complaints or requests to handle.
4. Less hassle to maintain your rental
Leasing your property takes a lot of hassle out of managing your property, as renters are responsible for paying their own utility fees and restocking their supplies. Aside from sharing your rental contract and occasionally checking in, you can leave your tenant to their own devices, and it’s not necessary to remain in constant contact with them.
1. Less flexibility with pricing
One of the major drawbacks of traditional renting is having little to no flexibility in your pricing strategy. Once you have an agreed monthly rate that your tenant will pay you, there is no wiggle room for any adjustments. Pricing limitations aside, you also have no flexibility to change your property’s availability at short notice. If you want to spend time there, you won’t be able to if you already have a tenant. You also cannot offer your property on a part-time basis, such as during the week or only on weekends.
2. Lower earning potential
Your earning potential is also lower than in Airbnb renting. On the whole, short-term rental properties have the potential to earn a lot more due to their higher daily rate. Airbnb also requires guests to pay upfront for renting the property, while tenants only need to pay their rental rate in monthly installments. If they cannot pay their rent for one month, your overall earnings will be hit, and it could potentially turn into an ongoing problem.
3. You are locked into a rental agreement
If you decide to lease your property, you will likely work from a rental contract to lay out the terms of the lease agreement. However, once you sign the agreement, it’s a legally binding contract you are locking yourself into. You won’t be able to change your mind and amend any points even if parts of the contract no longer suit your requirements.
4. Potentially troublesome tenants
A common pain point for landlords is ending up with tenants who break their rules or show no respect for their properties. It might also end up being extremely difficult to find legal grounds to evict a tenant, depending on your location’s rental laws.
Both Airbnb and renting offer benefits and drawbacks. However, which one is better will depend on the property you have, as well as your location and needs.