Vacation rentals are hotter than ever with the burgeoning growth of AirBnB and the insatiable demand of travelers who want to get back on the road in a post-pandemic world
If you've ever stayed in an AirBnB or were curious what it was like to own and operate a vacation rental, you are definitely not alone. Since the founding of AirBnB and other vacation rental sites such as VRBO (which also acquired HomeAway in 2015), there has been an explosion of interest for those owners looking to rent out their homes for short term stays.
In fact, in many markets where AirBnB operates, hosts who rent out their homes for short term rentals can generate significantly more income than if they used their homes for more traditional long term rentals (i.e. annual leases with one tenant paying monthly rent)
While it might sound like easy money to start listing your own home on AirBnB, there are several things you will want to consider to determine if it is right for you.
Short-Term Rentals Can Be More Profitable Than Traditional Long-Term Rentals
Most people who are considering investing in an AirBnB property are likely already familiar with the dynamics of investing in a traditional long-term rental (i.e. a property that is typically leased out for 12 months at a time to a tenant that pays a monthly rent). Unlike long-term rentals, AirBnBs are considered short-term rentals, where the average stay of a guest is not 12 months, but more likely 7 days or fewer. Because of these shorter average durations of stay, the average nightly rate charged by owners tend to resemble those of a hotel, leading to higher profit margins for potential owners.
Let's look at an example in a city such as San Francisco. The average monthly rent for a 1 bedroom apartment in the city of San Francisco is $3,000. For a similar 1 bedroom apartment used as an AirBnB (instead of as a long-term rental), the average monthly income generated can be closer to $5,000 (average nightly rate of $250 and an average occupancy of 80%). This represents $2,000 more dollars that can be generated in a single month, or $24,000 more per year for that same single one bedroom property! This dynamic is not a phenomenon unique to San Francisco and big cities, but can be seen everywhere from small towns outside of national parks (e.g. Gatlinburg, Tennessee), to desert homes catering to those looking to get away from the city (e.g. Joshua Tree, California).
Short-Term Rentals Can Allow You To Use Your Property Throughout The Year
One of the biggest advantages an AirBnB rental has over a traditional long-term rental is that you will still be able to use it throughout the year, unlike a long-term rental where you have a tenant staying in your home for 12 months at a time.
For example, I have a condo in Maui that I list on AirBnB and VRBO and still use a couple times a year with my family for personal enjoyment. For destinations that you visit or enjoy going back to year in and year out, owning an AirBnB rental can be a great way to still get occasional usage of the property while generating significant income for the majority of the year in which you are not there.
Hosting Can Be Fun!
Have you ever wondered why renting out your house to a tenant on a 12-month lease makes you a "landlord", but renting out your house on AirBnB or VRBO makes you a "host"? It's because it can actually be fun to host guests and share with them all the things that you like about your property and the area in which it is located.
Being a host is more like being a tour guide who gets to introduce other people to all the wonderful things about your house and fun activities located nearby. As a landlord of a long-term rental, it can feel like you are only dealing with complaints about broken toilets, dirty carpet, and other boring maintenance issues. Don’t get me wrong, you will occasional deal with this if you are doing AirBnB as well. However, being a host can also be a fun way to share your home with travelers from all over looking to discover your home and city, and there is a certain level of joy and fulfillment that comes with that which is distinct from just being a landlord.
Income Can Be Less Predictable Than Traditional Long-Term Rentals
While the income generated from an AirBnB rental can be much higher than through a traditional long-term lease, the income can also be more uneven throughout the year. This happens because of seasonality in the demand of your AirBnB rental.
For example, let's say you have a property in Lake Tahoe, California, a popular destination for skiing in the winter and boating activities in the summer. For the winter months and the summer months, you will see very high daily rates and occupancy that is near 100%. However, during the off-season months (e.g. Autumn), you might see occupancy take a significant drop in addition to generally lower nightly rates.
While your home might still be very profitable when looking at the entire course of the year, you may need to plan to have a safety reserve of cash to make sure you can cover monthly expenses for any off-season months if your home has highly seasonal income.
Managing An STR Is Not Completely Passive
One of the biggest differences between an AirBnB rental versus a long-term rental is around time commitment. With a long-term rental, you are spending the majority of your time with the property when a new tenant moves in or when an existing tenant moves out (usually only once a year). This time spent is usually around advertising your property for rent, interviewing potential tenants, repairing any damage made by the previous tenant, and cleaning the property before the new tenant moves in. All of this time commitment typically occurs within a concentrated 2-4 week period, and only once a year (sometimes only once every few years if you were lucky to have a good long-term tenant who has stayed for several years).
With an AirBnB, you are likely to spend more regular time throughout the year dealing with guest bookings and communications. Even though this might only be 10 minutes of work per booking, this work will be ongoing throughout the course of the year, not just at one point of the year like a long-term rental. For those owners with a very demanding day job, it can be a little more stressful to have to respond to guest inquiries in a timely manner. Luckily there are automation messaging services and property management services that can also help lighten the load with this increased time commitment, although those may come at an additional expense.
Initial Startup Costs And Ongoing Costs Can Be Higher
When using your home for an AirBnB rental, it has to be furnished and those furnishing costs can add up. All the beds, couches, dining table, chairs, and housing furniture is expected to be provided and ready to go for potential guests. This is different than a long-term rental, where tenants are usually expected to bring all their own furniture.
Making sure your AirBnB rental has furniture (and stylish/comfortable furniture at that!) is an additional cost to budget for when planning to list a property on AirBnB property. For a 2BR condo, costs may range between $3,000-$5,000, and for a 4BR home costs may range between $10,000-$15,000. Of course these costs can vary significantly depending on the quality of furnishings you want and the amount of appliances and furniture you will have to provide.
Legal Restrictions and Tax Implications Should be Considered
Before purchasing a property (or converting an existing property) into an AirBnB rental, you must understand if short term rentals are allowed in your city. Local regulations might limit the amount of permits given to new AirBnB rentals and some cities are no longer issuing permits for new owners. Additionally, some cities limit the location of short term rentals to specific neighborhoods within a city (e.g. beach areas or downtown areas). Please check with your local city and county to determine what the rules are for your specific market.
There are also potentially some beneficial tax considerations that are unique to operating a short-term rental like AirBnB. The US tax code has some nuances that may give a short-term rental some favorable tax advantages over a long-term rental. Please consult with your CPA to understand some of these possible considerations.
The Bottom Line
Owning an AirBnB rental can be a very lucrative and rewarding experience in real estate investing in 2023. Unlike long-term rentals, the day to day operations and overall profitability of a short-term rental can be very different, which any new host should take into account before launching their AirBnB. There is no single best answer on whether you should invest in an AirBnB rental as opposed to a long-term rental, as AirBnB rentals serve a different target market and involve differing time commitments. However, with AirBnB, VRBO, Booking.com, and many other platforms making it very easy to list your home, short term vacation rentals is an option that every potential real estate investor should look into to diversify their portfolio.
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