Long-term and Airbnb rentals: differences for homeowners. Check out this article to resolve hesitations about each model. Weigh the pros and cons after learning income potential, taxes, licensing, and insurance.
Are you weighing the benefits of Airbnb versus renting out your property long-term? Straightaway, you may be thinking about how much you can potentially make as a long-term landlord compared to an Airbnb host. While this is an important consideration, don’t merely focus on the income potential when making your decision. For instance, it’s true that short-term rentals on Airbnb and other hosting platforms (Homestay, Booking, Agoda Homes, or Vrbo) can generate higher earnings. But, you may find that your local council has occupancy restrictions, limiting the number of nights you can host guests. In turn, this translates to reduced earnings. You should be looking at the full picture by assessing other important factors before settling on Airbnb vs renting. The factors include legal requirements, tax obligations, licensing, personal preferences, and more.
In some areas, you’ll need to be proactive and look into the future. For instance, your local area may not have any laws governing the operation of short-term rentals. However, there may be plans to introduce new legal guidelines that could impact how you run your business long into the future.
Now, let’s look at the major considerations you should make before choosing between Airbnb vs a long-term rental model.
It’s hard to downplay the allure of becoming a short-term rental host! The short-term rental market is booming, after posting a strong recovery following the devastating effects of the COVID-19 pandemic on the travel industry.
Grandview Research reported that the US vacation rental market grew from $12.3 billion in 2020 to $15.1 billion in 2022 and further predicted a growth rate of 5.3% CAGR until 2030.
As an emerging trend, travelers — mostly millennials, digital nomads, and families — are preferring vacation rental properties over hotels, because they are cheaper, offer more privacy, and a chance to wander off the beaten track.
That said, short-term rentals may not fit every homeowner. Let’s consider the main distinguishing factors of long-term rental vs Airbnb.
Airbnb vs short-term rentals differ across various points when assessing the income:
Pricing strategy and price determinants
Landlords don’t have a lot of flexibility when selecting a pricing strategy. They will charge prices that are comparable to surrounding properties with similar features such as the number of rooms or proximity to the city center.
Short-term rental owners can charge a higher nightly rate than the daily average rate of a normal rental. For instance, the average rent for a 1-bedroom in San Francisco is about $3,000 per month. On Airbnb, hosts are charging anywhere from $120 to $240 per night/guest for similar properties. That said, the property has to achieve a certain level of occupancy on short-term stays to exceed the revenue of a traditional rental.
Airbnb hosts can similarly take advantage of more pricing strategies. For instance, they can boost income with add-on services, including home-cooked meals, guided tours, unique experiences, or rental equipment like bikes.
Some price determinants may not play a role when comparing Airbnb vs monthly rental income. For instance, proximity to urban centers may be secondary and a home in a rural setting can fetch high rates. In fact, one of the hottest trends in the Airbnb market is the rising popularity of rural locations. Rural travel has increased from less than 10% globally in 2015 to 28% in the US, 43% in Canada, and 48% in the UK.
Dynamic vs fixed-pricing
Airbnb pricing is more versatile and not subject to restrictions. Hosts can charge a higher rate on weekends or during peak travel seasons. The nightly rate can vary as per the number of guests. You can charge for extra things such as cleaning, pets, or late check-ins.
With long-term rentals, landlords can’t increase the rent during the fixed term of the tenancy unless it’s allowed by the lease agreement (*containing a rent review clause). The rent increase has to conform to city limits if applicable. For instance, LA adopted a law in late 2021 that limits rent hikes to 80% of the local consumer price index or by 3%, whichever is lower.
Upfront and ongoing expenses
Landlords have a few upfront and ongoing expenses as tenants bear some responsibility in taking care of the property.
Airbnb has more starter costs, including furnishing expenses, remodeling, redecorating, professional photography (if requested), and costs for providing extra amenities. They may incur extra insurance and business registration costs.
Hosts similarly have more ongoing costs compared to landlords, and this can impact profitability. They may need to spend on utilities, cleaning, subscriptions, repairs, and maintenance.
Demand & income stability
In terms of income stability, rentals have an upper hand as leases tend to be longer, with 12 months as the standard. As long as the rental has a dependable tenant, the landlord can forecast and plan ahead.
The profitability of short-term rentals is dependent on how many bookings it will receive and the nightly rate. There are some techniques that hosts can use to determine the demand, for instance, using average occupancy rates for similar properties in the region.
Still, coming up with accurate forecasts is a challenge, and occupancy data may not be widely available. Take into account low demand as it is a big determinant of whether to go with an Airbnb vs traditional renting.
Airbnb owners may have to deal with extra tax requirements in certain jurisdictions. They can entail occupancy taxes, value-added taxes (VAT), and goods and service taxes (GST). In addition, hosts still need to report rental income in their return.
Now there’s not much difference in terms of Airbnb vs short-term rental concessions & deductibles. In both models, owners can deduct the following expenses if they contributed to generating the income:
In some areas, Airbnb has made agreements with governments or is mandated by law to collect and remit local taxes.
*This is general advice and is not legal. We highly recommend consulting with a tax professional or local government to determine all the applicable taxes & permitted deductions.
In some jurisdictions, Airbnb property owners may be subject to a different set of legal and licensing requirements compared to traditional rental property owners.
For one, they may have to register as a business and adopt a business structure (sole proprietorship, partnership, or corporation). The local government may have to issue a special permit or license.
As a worrying trend, some cities have been introducing unfavorable regulations that are essentially clamping down on the number of homes being transformed into “Defacto hotels.” So, it may increasingly become difficult to operate as an Airbnb considering your location and local policies.
For instance, short-term rentals have been seen to escalate the Los Angeles housing crisis. In effect, the government passed an ordinance limiting apartment conversions to short-term rentals. It only permits homeowners to rent out their primary residence (where they stay for 6 months or more) with a cap of 120 days.
In Honolulu, the local government has discouraged short-term rentals by passing a law that bans bookings of less than 90 days.
* This is not comprehensive and legal advice. Find out any applicable legal statutes in your area. Though rare, some places don’t permit short-term rentals altogether.
Airbnb hosts and landlords tend to have similar insurance needs. Both require property and liability protection from risks that stem from accommodating renters or guests.
The market has not been quick to respond with niche products for short-term rental hosts. Homeowners’ policies don’t cover short-term rental claims. To address this, some platforms have tailored products for their hosts. For instance, Airbnb offers host liability insurance as part of the free AirCover for hosts. It offers protection of $1 million in liability protection for guests who get hurt or lose their belongings. Hosts similarly obtain $1 million in damage protection.
Now, this may not be enough. Short-term rental owners are advised to consider other extra protections.
Choosing to become an Airbnb host or a long-term landlord comes with additional implications on your overall lifestyle. For instance, you have to decide if you want to keep using the property. With a long-term rental, this may be difficult and impossible. However, you can stay at your own Airbnb property.
Depending on the primary purpose of your residence, the choice between long-term renting it out or partly retaining it as an Airbnb can also differ. For instance, it’s much more flexible to list your vacation home than to rent it out, as you need to use it during certain times of the year.
Your availability can play a role in the decision. Hosting is akin to running a small hotel of sorts and requires more involvement if you choose to manage it yourself instead of hiring a short-term rental management company such as Estaga.
Let’s assess some of the benefits and drawbacks of each option to find out if it is better to rent out or host an Airbnb:
Here are the top benefits of Airbnb vs renting out an apartment or home for a long term:
Short-term rentals can bring in more money compared to traditional rentals. But this is only possible if the owner picks the right market where the property can achieve good occupancy and nightly rates. They similarly need a sound pricing strategy that factors the vacancy rates and expenses.
An Airbnb can be a second home in another city. Similarly, you can rent out your primary residence as you travel. Many hosts have even found it possible to travel on the extra income generated by their property.
The average Airbnb guest stays for several days. There is a reduced chance of not getting paid. With rentals, there is a risk of evictions that can take a lot of time to finalize.
The short-term rental model similarly has a number of drawbacks:
Hosting an Airbnb demands your personal time and dedication. There is a lot to do, from managing the cleaning, facilitating the check-ins & check-outs, providing ongoing support, and dealing with unexpected repairs. Platforms encourage hosts that go above and beyond their hosting duties, so-called super hosts on Airbnb.
Guests generally want to stay in a nicer place than what they are accustomed to back home. So, there is a lot of emphasis on the aesthetics and standards of a place. Airbnb owners may need to spruce up their homes or buy trendy furniture.
Short-term rentals are being subjected to more restrictions and scrutiny. Owners have to file the right taxes or register their properties as businesses.
Being able to use your property
Potential for higher income
Reduced risks of non-payment and evictions
More involvement and management
More upfront and furnishing costs
Complex legal environment
Here are the benefits of long-term rentals vs Airbnb:
Landlords typically have fewer day-to-day responsibilities compared to Airbnb hosts. They are mainly involved in ensuring that the property is safe and suitable for habitation, carrying out repairs, and managing tenants.
Landlords are not legally required to furnish the property. In some states, they don’t have to provide appliances. If they provide appliances, they have to ensure their safety and continuous operation.
The income is generally predictable as the tenancy agreement specifies the amount of rent for every given month. There are certain protections for owners if the tenant decides to break their lease. Rentals similarly have low vacancy rates in many jurisdictions.
Choosing to rent out your property similarly has some disadvantages.
Rental properties make less money. There is no opportunity to jack up prices with the number of occupants or generate additional income by offering extra services and amenities.
The average tenancy for a single-family home in the US is about 3 years. If you rent out your property, it becomes unavailable for long stretches of time.
Long-term rentals may be risky if you’re having to deal with problematic tenants. They may miss their payments, and the laws may dictate when the eviction process can start or how long it may last.
Lower upfront expenses and no furnishings
Not available for use
If you choose Airbnb over traditional rentals, you still have to deal with certain pain points, including
You can enjoy the benefits of becoming an Airbnb host without the drawbacks. Simply, delegate the responsibility of managing your property to a professional vacation rental company.
And lastly, we don’t make money unless you do.
So, is long-term renting or Airbnb better? Well, both options have their advantages and drawbacks. With Airbnb, it can offer more revenue and flexibility to use your property. However, it doesn’t fit owners looking for a more hands-off approach. Still, this drawback can be mitigated by hiring a professional Airbnb property management company. Long-term renting offers more predictable income, and it’s legal in most places. However, potential earnings may be lower. Weigh your overall investment strategy and personal preferences before making a choice.