A definitive head to head battle between Airbnb and renting out.
This blog post will compare Airbnb and Renting out strictly under the evaluation of business potential. Yes, you meet more people with Airbnb and yes you have a chance of building rapport with a rental tenant but does it affect your bottom line? If I can’t prove it below; I won’t mention it below.
Now that the rules are set, let us have a look at our combatants:
Part 1: Overview of Airbnb and Renting Out.
What is Airbnb?
Airbnb is a shortened term or “air bed and breakfast.” It is primarily an online short-term lodging market place whereby mostly travelers connect with property owners to pay for accommodation. Airbnb accommodation terms are usually very short-term; from daily to weekly charges.
Airbnb properties will normally range between full residential properties, detached home properties such as cottages or individual rooms within the same living space of the owner.
What is Renting out?
Renting out is a form of accommodation transfer whereby a landlord (property owner) provides a tenant (property renter) the property to live in for a specified period which is typically no shorter than a month and can lead to years.
While renting out can come in all the forms available for Airbnb as stated above, it is not strictly tied to the provision of residential accommodation. Landlords can rent out all 6 types of real estate: residential, commercial and industrial, land, special use, and hybrid.
While renting out an Airbnb can share commonalities through the provision of accommodation. The similarity ends abruptly on the surface level.
The accommodation experience of renting out provides a tenant a closer experience to actual homeownership whereas, in Airbnb, the experience shares more likeness to that of the hotel industry.
With these differences in mind, renting out and Airbnb have specific advantages and disadvantages that are unique to them only from a financial point of view. This is covered in the next part.
Part 2 – Is Airbnb Better Than Renting Out? Taking Score.
To rate which is better, I’ll be scoring Airbnb and Renting out on the same following parameters with consideration to average expectations:
- Pricing Leverage: The ability to consistently charge more, relative to property investment and service offered.
- Payment Stability: How likely is it, that the property will continually be able to generate income throughout the year.
- Setup and Setup Cost: How easy and costly is it to start up the business.
- Maintenance Cost: How easy and costly is it to maintain the minimum viable state of the property to remain competitive for its purpose.
- Competition Analysis: How competitive is the industry (how easy is it to be competitive in the market).
To keep the ratings as comparable as possible, I will mostly be comparing Airbnb and Renting out on the experience of renting a single-family home property (unless special considerations need to made).
1. Pricing Leverage: 👍
The average charge an Airbnb stay was reported to be $160.47 per night; this is an abnormally large pricing leverage for the property owner. If you were able to manage a 0 void period for a month of 30 days, your property would generate a revenue value of $4, 814.
Considering that average Airbnb services consist of a provision of accommodation, utilities, cleaning, food, and environment; the potential average return on investment when considering price alone is immense.
Airbnb properties can charge a disproportionate premium for the addition of extra amenities such as being close to the beach, shopping centers, swimming pools, etc.
Another considerate benefit specifically for Airbnb pricing is that property owners for entire homes can price for the property or per person staying in the property.
2. Payment Stability: 👎
As a hard counter to the incredible pricing leverage of Airbnb is how erratic the payment stability of the industry is. It’s true that IF an Airbnb owner COULD manage to keep their property full for 30 days straight they would stand to gain a huge net return investment on their property.
Are they likely to keep a property full for a complete 30-day cycle? Probably not though not impossible in special scenarios.
Are they likely to keep the property full during an entire year? Nope, absolutely not.
As we stated above, Airbnb is closer to the hotel industry when it comes to how it how its accommodation style works, as such it succumbs to the same limitations that hotels do.
Airbnb is a seasonal luxury. It lives and dies by the law of attraction; when it’s the festive season, the economy is booming, people have money, the weather is great and people feel safe then they travel and get an Airbnb.
If a single element of the above goes awry, then the entire operation is at risk.
3. Setup and Setup Cost:👍 and 👎
Both Airbnb hosts and rental landlords need a form of property to accommodate guests. A caveat is that Airbnb hosts can get crafty in what they offer – from houses to rooms, to tents and yurts.
When it comes to setting up, Airbnb has 2 faces. On the one hand, the process of getting your property listed for accommodation on the website is almost comically simple; describe your property, upload photos of your property, sort out guest settings (calendar, booking setting, and price) and finally publish the property for the public. This is the happy fun side.
The not so happy other side is that the legality of Airbnb is not on globally equal and this has and continues to be a point of concern for Airbnb hosts. For every city is could potentially be different but ultimately, the concerns have to do with city zoning laws.
Some cities require you to have a permit, others not at all and some will completely restrict your ability to charge for tenants who stay on your property for specific short periods.
Always check the law if you decide to go down the Airbnb road.
4. Maintenance Cost: 👎
Maintenance has the chance to be a real nightmare for an Airbnb host. They already have to deal with the universal law of tenants that is “If it can break, they will break.” but they also have to deal with the horror stories of wild tenants on a more regular basis.
Remember, as Airbnb tenants are primarily festivity tenants; they are there to enjoy themselves first and foremost and live on the property second. For some and likely most; that’s relaxing by the pool but for more than one of them; it’s a party.
Airbnb isn’t held to the strict maintenance laws that rental owners have to abide by but unlike for rental owners; when a tenant breaks something it can cost you business quickly because the next tenant is coming in a day and can easily trade for another property.
For Airbnb properties, a defect isn’t a problem – it’s a financial disaster.
5. Competition Analysis: 👎
When it comes to the Airbnb market; it’s a never-ending race to continually secure the next tenant.
For one thing, as we mentioned above under “payment stability” – Airbnb properties are on average highly seasonal and dependant on the availability of specific favorable environment or else the entire market collapses.
Now add on top of that the fact that all Airbnb properties are waiting for those favorable conditions to be present to all attract a limited number of potential short-term tenants who are also be targeted by the hotel industry.
It’s a short peak season for the market and it has a high turnover as most tenants are unlikely to stay at the property for more than a week; as a host, you may have to be able to attract and please a continuous stream of tenants. It is a market founded on “strike while the iron is hot.”
Having desired amenities, ensuring that you are on top of all repairs, keeping your tenants happy; this isn’t going above and beyond in the Airbnb market. It’s the cost of business.
Rating Renting Out:
1. Pricing Leverage: 👎
For rental properties, pricing leverage is kept proportionate or in most cases disproportionately discounted to the market investment. Regardless of the property; a good (above average) return on investment for a rental property is 10% annually and great (top percentile) return is around 12%.
That would mean, to earn an Airbnb equivalent return on your property of $4, 814 monthly; you would need a property valued around $577, 000.
That my dear friends; is not an average property.
2. Payment Stability: 👍
“A bad rental property gets 30 days, a decent rental property gets 30 months and a great rental property gets 30 years.” – Isheanesu Jindu; you can quote me here.
The above statement just helps show how phenomenally stable rental income is. In the absolute worst-case scenario; a well-qualified tenant has already paid a months’ worth of rent before they move out.
A decent property will rarely have a tenant leave for years before they have to upgrade up or down due to circumstances.
And a great property will either never be empty or your tenant just might give you an offer to buy the home.
Rental properties are effectively full-time accommodation properties and this form of housing is a necessity, not a luxury; come storm come thunder – people will need a place to live throughout the entire year.
3. Setup and Setup Cost: 👍 and 👎
While Airbnb typically maxes at large residential properties and can shapeshift down to ingenious minimalist shelters, renting out starts at residential properties and from there the sky is the limit. From rooms to houses, to mansions, shopping malls, warehouses, office parks, the list goes on.
As we’ve agreed that to keep things simple and easy to compare, we’d be stating that both the Airbnb host and rental landlord have a single-family home of the same quality. As such on the property level; they are priced and valued the same.
The major differentiating factor between the 2 when it comes to set up and the cost of set up are the legal costs of running the 2. While Airbnb is simple to set but legally obscure in most cases – Renting out is simple to begin but held to mostly uniform; strict codes of conduct that have very real legal risks if not upheld.
There is an advantage in that renting out is an established industry and there are real estate agents and property management agents who can easily navigate new landlords through the laws.
4. Maintenance Cost: 👍
A rental property always has to be within very specific and strict legal boundaries with regards to being liveable. These have to be maintained before, during and after a tenancy.
While an Airbnb property almost always has to be near perfection to attract tenants from competitors, a rental property usually only needs to be liveable and priced right. The presentation of a rental property will usually always attract an equal quality tenant.
A low-quality property will attract low-quality tenants and a high-quality property will attract high-quality tenants. At the end of the day, when above the legal minimum; maintenance costs can be as high or as low as the tenant wishes.
5. Competition Analysis: 👍
Rental properties are, on the spectrum, closer to necessity than luxury goods. This makes the market more stable and less competitive by nature.
That’s not to say that the market is impervious, to high levels of competition; it’s just that more drastic occurrences need to happen to make the market significantly more competitive for landlords.
To explain, for the market to become significantly more competitive against landlords; 1 of 2 things needs to happen. The number of rentals desired by tenants needs to drop drastically; where demand drops and there is an excess of the number of properties available in the market needs to rise experientially; where supply rises enough to create another excess.
For scenario 1, long-term property such as rental property is unlikely to have significant drops in demand as people will always need a place to live as much as they need food to eat.
Scenario 2 is more likely but not by much as it would require a force that is capable of investing in enough properties to flood the market which would need the development of hundreds to thousands of properties for each income bracket.
Conclusion – What is the better investment? Rentals or Airbnb?
A summary of our above factors is as follows
|Pricing Leverage||Airbnb||Greater opportunity to charge disproportionate premiums.|
|Payment Stability||Rentals||Prone to significantly longer consistent periods of nearly guaranteed payments.|
|Setup and Setup Cost||Tie||Airbnb, when legal has a very simplistic online setup routine – Renting out, has stricter setup laws but these are easily handled through a property agent.|
|Maintenance Cost||Rentals||Rentals can attract tenants with just the bare minimum while Airbnb requires are more damage-prone and dependant on a presentation of excellence.|
|Competition Analysis||Rentals||Airbnb, as a luxury offering, is competitive by nature while rentals, as a necessity, are less competitive and require huge changes to become so.|
While the debate is more subjective than anyone would want to admit and if done correctly; both mediums offer the opportunity for financial success; it is undeniable from a strictly financial perspective to state that rentals offer a less risky path towards financial success.
Airbnb offers fewer margins of leniency when it comes to staying profitable and viable. The market crashes, there is an outbreak of a disease, someone adds a pool in their backyard and so on – your entire business comes to risk.
The winner is Renting Out👑.
Bonus – Can I have both a rental property and an Airbnb at the same time?
Wouldn’t it be great to have your property be a rental property on the Airbnb offseason and continually enjoy rental payments, then switch back to Airbnb over the festive season for a big injection in premium income?
Yes, it would be great and yes, it would also be highly illegal.
When Airbnb was still rather new, multiple apartment properties attempted to do just that; rent out during most of the year and convert empty or soon to be empty units as Airbnb properties at a premium. Governments caught on to this and were not happy at all.
This is primarily a hard rule regarding large/official rental properties like an apartment block.
Due to the aforementioned obscurity and shifting variety of laws for Airbnb properties; rental landlords could potentially but unlikely do both on the same property.
However, balancing the very strict laws of renting out a property with the loosely defined laws for Airbnb tenants could turn out to be akin to mixing water with wine – better left separate.