Airbnb vs. Renting: Which is More Profitable?

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Contributor, Benzinga
July 23, 2023

If you've purchased an investment property, you'll be faced with the decision of Airbnb vs. renting for maximum income. While it's true that some people are making tens of thousands monthly on Airbnb, there are also Airbnb properties sitting vacant from poor reviews or a location with low demand. How do you know which strategy will best suit your property? Read on to understand the pros and cons of Airbnb vs. renting to create a customized rental strategy for maximum returns. 

How Does Airbnb Renting Work?

Airbnb is an online platform that facilitates short-term rental bookings, connecting hosts with accommodations available for rent with guests looking for a place to stay. With Airbnb, hosts pay a fee to the platform for the services provided in connecting potential clients with hosts. Hosts charge a flat fee and cover all property-related expenses, including maintenance, utilities and cleaning. 

Hosts have control over the nightly price, cleaning fees, and cancellation policies. Based on this, Airbnb charges variable fees that usually are 3% of the total booking cost for hosts, plus a service fee charged to guests of 5-20% of the booking total.

Customers have the opportunity to rate hosts, and those with the highest reviews receive super host ratings that feature their properties more highly on the platform. 

How Does Renting Work?

Renting refers to the process of occupying a property owned by someone else in exchange for payment, typically on a monthly basis. Most long-term rental contracts range from 12 to 24 months, although some hosts choose month-by-month rentals. With rentals, you may list the property online on listing sites, on Facebook or locally in newspapers or message boards. 

With renting, usually, the tenants pay utilities, while the owner is responsible for maintenance expenses, taxes and insurance. Long-term rentals offer greater stability and less daily management than Airbnb but usually command a significantly lower nightly rate.  

Is Airbnb or Renting More Profitable?

Whether Airbnb or renting is more profitable depends on the property type, location, overall market trends, market saturation and associated costs. If you have a beautiful rental property in an over-saturated vacation rental market, you might have difficulty breaking into the Airbnb market or might face additional vacancies. Likewise, a home near a rural community with low tourist traffic may not make sense as an Airbnb. 

Assuming the property is well maintained and located near an area with significant tourism, Airbnb can be more profitable. However, there are additional maintenance and cleaning expenses, and you'll have to invest significantly more time managing the property. Even with that, Airbnbs carry more risk as there's no guarantee of booking. 

On the other hand, renting a property for a year at a time can create stability and will require less time managing the property or arranging cleaning. Long-term rentals command significantly lower nightly rates than Airbnbs or other short-term rentals. Both Airbnb rentals and long-term rentals can offer opportunities for tax deductions with proper recordkeeping

Airbnb vs. Renting Example

Suppose you own an apartment in Chicago. The average monthly rate for comparable properties is $2,000 per month or $24,000 a year before expenses like taxes, maintenance and insurance. 

If you rent it nightly, you can charge $300 a night. Assuming a conservative 40% occupancy rate, you could make $43,800 yearly, or nearly double. However, you'll have to deduct cleaning fees, Airbnb fees and the time it takes to manage the short-term rental from the profit. And location matters. If the property is outside the city or in an undesirable area, the nightly fees and occupancy may be lower, reducing returns. 

Another advantage of Airbnb rentals is occupancy flexibility. With 40% occupancy, you can choose to use the apartment or allow family or friends to stay there during low periods, potentially improving value for your needs. 

Comparing Airbnb vs Renting

Here's a detailed comparison of Airbnb vs. renting to help you decide which makes sense for your property:

Rental Income Potential

Airbnb: Investing in an Airbnb property can provide the opportunity for higher rental income, especially in areas with high tourist demand or popular travel destinations. Short-term rental rates can often exceed those of long-term rentals on a per-night basis.

Traditional renting: Traditional long-term rentals may offer more stable and consistent rental income over time. While the rental rates may be lower compared to short-term rentals, long-term tenants provide reliable occupancy and reduce the need for frequent turnovers.

Rental Demand and Occupancy

Airbnb: The demand for short-term rentals can be influenced by factors such as tourism, events or seasonal fluctuations. However, occupancy rates may vary depending on the location, property type and competition in the area.

Traditional renting: Long-term rentals tend to experience more stable and consistent occupancy rates. The demand for long-term housing is generally driven by factors such as population growth, job opportunities and housing needs. Strong population centers and those with growing markets generally offer stable long-term rental opportunities. 

Property Management and Maintenance

Airbnb: Managing an Airbnb property involves more frequent turnover, cleaning, guest communication and ensuring a positive guest experience. This method may require additional time, effort and potentially hiring professional property management services, which can cut into profits.

Traditional renting: Long-term rentals typically involve less frequent turnover and may require less day-to-day management. Landlords still need to address maintenance issues, handle tenant requests and ensure the property complies with local regulations.

Flexibility and Use of Property

Airbnb: Investing in an Airbnb property provides the flexibility to use the property for personal use during periods when it's not rented out. Property owners can block off specific dates for their own use or adjust availability based on personal preferences.

Traditional renting: With long-term rentals, the property is committed to tenant occupancy for the duration of the lease. Landlords have less flexibility to use the property for personal purposes until the lease term expires unless previously agreed with the tenants.

Regulatory Considerations

Airbnb: Operating an Airbnb property may be subject to specific regulations, permits or restrictions imposed by local authorities, homeowner associations or short-term rental regulations. Understanding and complying with the applicable laws and regulations in the specific area is crucial. An increasing number of urban areas are limiting Airbnb use to avoid pricing out locals. Double-check that using the property as an Airbnb is allowed where your property is located. 

Traditional renting: Traditional rental properties are typically subject to landlord-tenant laws and regulations, which vary by jurisdiction. Landlords must comply with legal requirements related to lease agreements, tenant rights and eviction procedures.

Should You Choose Airbnb vs. Renting?

Real estate investing has long been the bedrock of many wealth-building strategies. Whether you opt for Airbnb or renting, rental properties offer opportunities for long-term appreciation and positive cash flow from rental income. Which works best for you will depend on the time you have for management (or cash to hire a management service) and the local market for short-term rentals. 

If you're ready to get started, find a guide to purchasing your first rental property here or get Benzinga's complete guide to real estate investing

Frequently Asked Questions

Q

What are the major expenses associated with investing in Airbnb?

A

Major expenses beyond the property price of an Airbnb include furnishing and decor, maintenance, utilities, amenities such as television subscription services and home insurance that covers short-term rentals.

Q

What are the risks involved in investing in Airbnb?

A

Risks involved in investing in Airbnb include long periods of vacancy, property damage, guest injuries due to something at the property, theft of personal belongings or squatters occupying the property.

Q

Should I invest in Airbnb or stick to traditional renting?

A

Whether you invest in Airbnb or stick to traditional renting depends on the property type, market and willingness to manage the regular turnover of short-term rentals. Both Airbnb and traditional renting can offer long-term returns, although Airbnb offers the possibility of higher returns and greater risks of vacancies.

About Alison Plaut

Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.