Using the Airbnb platform—or a competitor such as VRBO or HomeAway—to rent properties can be a lucrative real estate investment strategy, but it also has challenges. In some cases, it may be easier and more profitable to simply rent a property to a single tenant or to forgo real estate investing altogether. Here are some of the key pros and cons of using Airbnb and short-term rentals as an investment strategy.
It May Be More Lucrative Than Traditional Renting
A solidly booked Airbnb rental may be more profitable than renting the same property to a long-term single tenant. That’s because you’re usually able to charge more on a nightly basis. In Seattle, for example, the average apartment rents for $2,197 a month, according to October 2021 data. That represents $24,000 gross income if the tenant signed a 12-month lease. But what if you were to go the Airbnb route? According to vacation home rental agency AirDNA, the average daily rate for an Airbnb rental in Seattle is about $157, with an occupancy rate of 77%. If you were to rent out your Airbnb for $150 per night for a total of 270 nights per year, for example, it’s possible to rake in $40,500 in gross revenue from the rental. That’s $16,000 more than you’d make through traditional renting.
You’ll Get a Diversified Portfolio of Tenants
With traditional renting, you are putting your eggs in a single basket with one tenant. That can work out fine if the tenant is financially reliable and stays for a long time. But if they ever miss rent payments or simply vanish in the night, your income takes an immediate hit that’s hard to replace immediately. With an Airbnb rental, you are collecting income from different tenants on a regular basis. Each renter represents a very small percentage of your total income, so if any of them cancels at the last minute or otherwise balks on paying, it might not have much impact. In San Francisco, for example, you can’t rent out any part of a property unless it is your primary residence, defined as your staying there at least 275 nights a year. And it is illegal to have more than 90 nights of “unhosted” rentals, meaning that you aren’t present while guests are there. In many cases, these restrictions were put in place to ensure an adequate housing supply for residents, but they likely cut down the potential earnings for someone who is looking to make money through Airbnb.
Expenses May Be Higher
If you own a property and rent it to a single tenant, your involvement in managing the property could be minimal. A conscientious tenant will pay bills regularly, keep the place clean, and mow the lawn. You’ll only need to step in to perform property maintenance or handle the occasional emergency. An Airbnb property is likely to be more work-intensive, because it will fall on you, the owner, to ensure that it is in tip-top shape all the time. There are also things you will likely need to provide that you wouldn’t normally provide to a single tenant, such as:
High-quality furniture, decor, appliances, and amenities: If you want to impress potential Airbnb tenants, you may need to invest some cash to make sure the place looks and feels classy. Airbnb guests want to feel that they are staying in a high-end unit.Food: You don’t need to cook for your Airbnb guests, but keeping some basic food items in the fridge can go a long way toward keeping guests happy. This may involve stocking fresh eggs, coffee, or alcoholic beverages. Some Airbnb hosts even make a point to bring out snacks at various times of the day.Cable TV, Wi-Fi, and more: If you rent to a single tenant, it will usually be their responsibility to hook up the cable TV and Wi-Fi. Airbnb tenants, on the other hand, usually expect these things to be in place during their stay, so the cost of this technology—and maintenance—falls to you.
You may be able to save yourself time and work by hiring a cleaning service and property management firm to handle all of these tasks, but that would also add to your operating costs.
Success May Be Gradual
It’s unlikely you’ll be able to keep an Airbnb unit booked nearly every night right from the start. Bookings through Airbnb come largely from your reputation as an owner. The higher your ratings from past renters, the more likely you are to attract new ones. In the beginning, you may have very few reviews, so you may need to keep rent prices low or offer incentives to get people to stay. Even if you have a great unit in a prime location, don’t assume that you’ll be rolling in rental income immediately.
Income May Be Irregular
If you own a property and rent to a single tenant, you may be able to keep that tenant on a long-term lease and collect rent each month, which can provide you with a steady income stream. Airbnb rentals may be far more inconsistent. While in theory, you can rent out a property 365 days a year, you are likely to have many vacant dates on your calendar. You may even prefer to have a vacant day or two between bookings in order to prepare the property for the next guest. In a 2016 post on Airbnb’s community message board, an owner named Michelle wrote that her properties are booked about 60% of the time, depending on the season. During the humid season in New Orleans, she said, bookings drop to 40%, but her Massachusetts rentals are full 75% of the time during the busiest tourist seasons. As an owner, you may be able to offset these empty dates by charging more than you would for a typical rental unit, but there’s no guarantee that you’ll come out ahead. Generally, your occupancy rate as an Airbnb host will depend on several factors, including the weather, time of year, and location.
The Bottom Line
Airbnb and other short-term rental platforms can be very lucrative, especially if you are patient and willing to do the work to attract renters and keep them happy. However, your operating costs will likely be higher than for a traditional rental property, and regulations have made investing in Airbnb hard or even illegal in many places. Be sure to do your homework before taking the plunge into Airbnb investing.
