Pros and Cons of Airbnb as an Investment Strategy
Here’s what to know before putting your money into short-term rentals
Whether you’ve stayed in an Airbnb rental for vacation, or have just heard about the lucrative possibilities of owning a sought-after short-term property, owning a portfolio of Airbnb rentals may seem like a smart way to boost your passive income.
Using the Airbnb platform—or a competitor such as VRBO or HomeAway—to rent properties can be a lucrative real estate investment strategy, but it also has challenges. In some cases, it may be easier and more profitable to simply rent a property to a single tenant, or forgo real estate investing altogether.
Here are some of the key pros and cons of using Airbnb and short-term rentals as an investment strategy.
It May Be More Lucrative Than Traditional Renting
A solidly-booked Airbnb rental may be more profitable than renting the same property to a long-term single tenant. That’s because you’re usually able to charge more on a nightly basis.
In Seattle, for example, the average apartment rents for about $2,000 per month. That represents $24,000 gross income if the tenant signed a 12-month lease.
But what if you went the Airbnb route? According to AirDNA, the average daily rate for an Airbnb rental in Seattle is about $150, and units are occupied an average of 270 days out of the year. If you rented out your Airbnb for $150 per night for a total of 270 nights per year, it’s possible to rake in $40,500 in gross revenue from the rental. That’s $16,000 more than you’d make through traditional renting.
These numbers only reflect gross revenue: Your actual revenues could be higher if the property appreciates in value. Your net revenue also could be much lower due to different costs of owning and managing properties.
You'll Get a Diversified Portfolio of Tenants
With traditional renting, you are putting your eggs in a single basket with one tenant. This can work out fine if the tenant is financially reliable and stays for a long time. But if they ever miss rent payments or simply vanish in the night, your income takes an immediate hit that’s hard to immediately replace.
With an Airbnb rental, you are collecting income from different tenants on a regular basis. Each renter represents a very small percentage of your total income, so if any of them cancel at the last minute or otherwise flake on paying, it may not have much impact.
Depending on where you live, your dream of owning and renting an Airbnb property may never get off the ground. Many jurisdictions have placed restrictions on Airbnb investment rentals, making it nearly impossible to rent out a property other than your own residence.
In San Francisco, for example, you can’t rent out any part of a property unless it is your primary residence, defined as your staying on the property at least 275 nights a year. And it is illegal to have more than 90 nights of “un-hosted” rentals, meaning you aren’t present while guests are there.
In many cases, these restrictions were put in place to ensure adequate housing supply for residents, but they likely cut down the potential earnings for someone looking to make money through Airbnb.
Many cities are still deciding whether to regulate short-term rentals. That uncertainty makes it very risky to purchase a property with Airbnb rentals in mind.
Expenses May Be Higher
If you own a property and rent it to a single tenant, your involvement in managing the property could be minimal. A conscientious tenant will pay bills regularly, keep the place clean, mow the lawn, and stock the cupboards. You’ll only need to step in to perform property maintenance or handle the occasional emergency.
An Airbnb property is likely to be more work-intensive because it will fall on you, the owner, to ensure the property is in tip-top shape all the time. There are also things you will likely need to provide that you wouldn’t normally provide to a single tenant, such as:
- High-quality furniture, decor, appliances, and amenities. If you want to impress potential Airbnb tenants, you may need to invest some cash to make sure the place looks and feels classy. Airbnb guests want to feel like they are staying in a high-end unit.
- Food. You don’t need to cook for your Airbnb guests, but keeping some basic food items in the fridge can go a long way toward keeping guests happy. This may involve stocking fresh eggs, coffee, or alcoholic beverages. Some Airbnb hosts even make a point to bring out snacks at various times of the day.
- Cable TV, WiFi, and more. If you rent to a single tenant, it will usually be their responsibility to hook up the cable TV, WiFi, subscribe to Netflix, and so forth. Airbnb tenants, on the other hand, usually expect these things to be in place during their stay, so the cost of this technology—and maintenance—falls to you.
You may be able to save yourself time and work by hiring a cleaning service and property management firm to handle all of these tasks but would also add to your operating costs.
In many locations, Airbnb collects tourism and/or occupancy taxes from renters, and remits them to the appropriate taxing authorities.
However, some jurisdictions require you to pay some or all the taxes manually.
Success May Be Gradual
It’s unlikely you’ll be able to keep an Airbnb unit booked nearly every night right from the start. Bookings through Airbnb come largely from your reputation as an owner. The higher your ratings from past renters, the more likely you are to attract new ones. In the beginning, you may have very few reviews, so you may need to keep rent prices low or offer incentives to get people to stay. Even if you have a great unit in a prime location, don’t assume you’ll be rolling in rental income immediately.
Income May Be Irregular
If you own a property and rent to a single tenant, you may be able to keep that tenant on a long-term lease and collect rent each month. This can provide you with a steady income stream. Airbnb rentals may be far more inconsistent. While in theory, you can rent out a property 365 days a year, you are likely to have many vacant dates on your calendar. You may even prefer to have a vacant day or two between bookings in order to prepare the property for the next guest.
In a post on Airbnb’s community message board, an owner named Michelle says her properties are booked about 60% of the time, depending on the season . During the humid season in New Orleans, she said, bookings drop to 40%, but her Massachusetts rentals are full 75% during the busiest tourist seasons.
“I have a three-night minimum and I block a day between bookings,” Michele wrote in the post on Airbnb. “So even in a ‘full’ month, there are gaps of 1-3 days that just happen to fall between bookings.
As an owner, you may be able to offset these empty dates by charging more than a typical rental unit, but there’s no guarantee you’ll come out ahead.
The problem of vacant dates can be worsened if you live in a locality that restricts the number of days an Airbnb unit can be rented out.
The Bottom Line
Airbnb and other short-term rental platforms can be very lucrative, especially if you are patient and willing to do the work to attract renters and keep them happy. However, your operating costs will likely be higher than for a traditional rental property, and regulations have made investing in Airbnb hard or even illegal in many places. Be sure to do your homework before taking the plunge into Airbnb investing.