Real estate investors are always on the lookout for their next big venture. With occupancy rates soaring, now may seem like a good time to invest in an Airbnb. What’s the difference between investing in an Airbnb versus a traditional rental? It all boils down to four main factors, each with their pros and cons.
What’s an Airbnb?
You may have stayed in an Airbnb or one of its competitors, such as VRBO and HomeAway, without really considering how they work as an investment.
Airbnb offers an alternative to a hotel stay. The rental might be anything from a simple room for a quick overnight stay to a luxury beach rental for an annual family gathering.
Airbnb hosts offer a place to sleep as well as the amenities of home. Entire house rentals usually include full kitchens, laundry facilities, and all the linens you’ll need.
The price of most Airbnbs is comparable to or often better than local hotels, especially with the presence of a kitchen.
Airbnb rentals were hit by COVID-19 restrictions during the height of the pandemic, but the data shows that profits have rebounded as lockdowns eased. The average host makes $13,800 a year — a number that’s increased almost 44% since 2021. Globally, hosts have collected more than $150 billion.
Some hosts don’t even start with a separate property. They rent their own homes when they are away on vacation.
How Do Traditional Rentals Compare to Airbnb?
Traditional rentals are generally offered with a lease that ranges from six months to one year. Although there are certainly some month-to-month options and short-term stay exceptions, most first-time property investors have done the math and found that a traditional rental is the safest bet.
Before comparing an Airbnb to a traditional rental, you’ll want to consider these four factors:
- Rental income potential
- Expenses
- Regulations
- Risk level
1. Rental Income Potential
Start by considering how much money you want to make and how fast you want to make it.
Pro: Potential Income Is Higher With an Airbnb
If you have a fully booked Airbnb that is rated highly and well stocked, you may be able to make almost double the gross income of a traditional rental.
Consider an average one-bedroom apartment in Seattle that rents for about a month. Over a 12-month lease, the gross income is $26,400. If you have an Airbnb that costs $160 a night and is booked 280 nights a year — lower than the average 81% occupancy rate — your gross income would be $44,800.
Con: It Takes Time to Earn Good Money on an Airbnb
The income potential is high, but it doesn’t happen overnight. Airbnb ranks its listings based on the number of five-star reviews, plus host response time and other SEO factors. It’s unlikely that you’ll earn top dollars right away. If you can get your rental optimized and on the front page of search results, you’ll have a better chance.
2. Expenses
Traditional rentals and Airbnbs do not have the same expenses.
Pro: Traditional Rentals may Have Fewer Expenses
With a traditional rental, tenants bring their own furniture and are responsible for utilities, including internet and television.
Con: Airbnbs are Expensive at First
The best Airbnbs are fully furnished, so you’ll need to consider high-quality, durable furniture, kitchen tools — including plates and glasses — and linens for the house. If you offer amenities, such as bicycles or paddle boards at a beachfront property, you’ll need to spend money on those items, too. You’ll also need to offer Wi-Fi, cable TV, and at least one television.
If you want to insure those belongings, Airbnb offers its own coverage. However, if you opt out, you’ll need to find other insurance or be prepared to cover repairs and replacements out of pocket.
On the plus side, the income generated by Airbnb guests will eventually cover these expenses, but the initial outlay can be substantial. If you qualify for a home buyer rebate when you purchase the property, you can use that money to lower the upfront costs.
3. Regulations
Many real estate investors struggle against regulations, but in many cases, they exist to protect landlords and tenants.
Pro: Traditional Rentals Have Predictable Regulations
Traditional rent regulations can vary across the country, but for the most part, policies are fairly similar from state to state. Rent regulations against eviction and price hikes protect renters, but landlords can also benefit from the stability.
Con: Airbnb Has Different Regulations in Different Regions
Airbnb does have a few blanket policies for hosts, such as a strict no-cancellation policy on the part of the host, but other regulations can vary from city to city.
Before you make an offer to buy an Airbnb investment property, make sure you understand the local regulations and how they could impact your potential revenue.
4. Risk Level
Pro: A Variety of Airbnb Renters Might Equal Less Risk
With an Airbnb rental, stays range from just a few nights to a month or more. This diversity of renters means you may take less of a hit financially if a scheduled tenant cancels at the last minute.
Airbnb also offers different cancellation policies. If your property is in a hot location, a strict cancellation policy may offer more protection against flaky guests.
Plus, managing an Airbnb instead of an apartment building means you’re less likely to have to evict guests.
Con: Traditional Apartments Provide More Stable Income
A bad tenant in a long-term contract can be disastrous, but if you’ve used proper screening tools, it’s unlikely to happen. The national eviction rate is less than 3%, so the remaining 97% will provide you with more stable monthly income.
Stability will be especially important if this is the first apartment building in your portfolio and you are planning on leveraging it to keep buying properties.
If you prefer predictable income, investing in a traditional apartment building might be best. Most Airbnb hosts note that occupancy rates fluctuate depending on the time of year and what’s happening in their area.
The Bottom Line
Although you’ll likely make more money with an Airbnb than a traditional rental, it’s less stable and requires a significant outlay of capital beyond the cost of buying a home and paying a real estate agent and closing costs. Whether you choose an Airbnb or a traditional rental will depend on the cash you have upfront and your overall investment risk tolerance.
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