The real estate market has been a dependable option for people who hope to generate passive income through rental properties. Since the creation of Airbnb in 2008 and Vrbo in 1995, however, the market for short-term rental properties has changed dramatically.
In 2019 alone, the market for home rental properties skyrocketed up to $17.5 million in the United States. After the COVID-19 global pandemic hit, the housing market was flipped on its head once again.
People lost their jobs and found themselves unable to pay their mortgage. Others were compelled to downsize and move into something more affordable.
On the brighter side, some homeowners sought to upgrade their home to have more space in which to place offices because parents worked from home, and areas for instruction because their children had to adopt virtual learning.
Unfortunately, the pandemic created high demand and a low supply in home construction due to a lack of labor. This made the price of homes climb significantly beyond their customary value, which in turn forced more people to have to wait to buy a home. Many turned to renting.
In terms of short-term rental properties, the pandemic also had a substantial impact on the hospitality industry because few Americans were able to travel. Though that has changed a bit, we see far more domestic travel than international travel at the present time (and the foreseeable future).
If you are thinking about investing in rental properties as a means of generating passive income, you might be asking yourself whether you should start an Airbnb or a full-time rental. You aren’t alone; that debate has been going on for a while.
To give you a better understanding of which type of investment might be appropriate for you, let’s take a look at some of the advantages and disadvantages of each.
Benefits of Airbnb
For both the renter and the host of the property, Airbnb is fairly simple to use. When you’re the property owner, you list your available unit or home on the site.
From there, Airbnb does the rest … sort of. They handle the marketing of your listing because the more you make, the more revenue the company enjoys, so it would be to their benefit to try to get as many properties filled as possible.
Pricing for Airbnb allows you to be incredibly flexible, although they require you to maintain their guidelines for relative pricing in your region. You may adjust the price per day it’s listed to account for such distinctions as weekends, holidays, or special events (such as local festivals, pro sports contents, and headliner concerts).
Another plus side for property owners is that Airbnb charges only 3% for payment processing. The company may raise that 3% to 5%, however, based on the cancellation policy you select, which leaves the remaining 95% to 97% to be put into your pocket.
The majority of the firm’s income derives from the 6% to 12% booking fees that guests will have to pay during their stay.
Cons of Airbnb
According to NerdWallet, hosts on Airbnb make an average of $924 per month in the U.S. Although that figure might seem substantial, you should take into account your mortgage, utility bills, and other expenses such as repairs or renovations. This doesn’t cover the property you are living in, either.
Yes, this number will fluctuate based on a number of factors, it often becomes one of the largest downsides of Airbnb versus a full-time rental property. You may have to be incredibly strategic about your pricing and perform a significant amount of research about the competition in your area.
You also will have to improve your property with certain additional features or experiences, as Airbnb refers to them. This could include adding stand-up paddleboards at your place if it stands by a body of water or adding a personal chef experience for a romantic getaway.
It also means you may want to do some extra marketing on the side to promote your “boutique vacation home” in order to get as high a monthly occupancy as possible.
You also risk incurring more property damage due to the fact that far more people will be in and out of your place compared to having one tenant over the course of six months or a year. In the latter case, you would have performed a background check on the renter, which is limited on Airbnb to reviews left by hosts — if any have been done on your prospective guests.
Positives of Rental Property
As investments, rental properties offer a few more guarantees than an Airbnb. You will still need to hunt for a tenant, but you will possess a leasing agreement that ties the renter to the house or apartment for an extended period of time.
That could be six months, a full year, or possibly even longer depending on what the lease agreement states.
Rental properties also typically require less maintenance. This is because either the tenant will be in charge of handling the lawn or pool care or you will have hired a maintenance company to handle any and all of those issues.
This does mean you will need to include these types of services in the monthly price of the unit or house to compensate for their cost to you, however.
Unlike an Airbnb, you won’t have to restock supplies like toilet paper constantly, or ensure a cleaning after every stay. That will be solely the responsibility of the tenant, which means fewer ongoing expenses once you’ve made the initial investment.
You will of course be responsible for any major problems that arise, but that would also be the responsibility of an Airbnb property owner.
Cons of Rental Property
Because of the contract, you may think you are guaranteed to receive the amount owed every single month. However, you should take the word “guaranteed” somewhat lightly.
Just because someone signs a contract, that doesn’t always mean he or she will pay — or pay on time. You will need to familiarize yourself with certain legal concerns, such as tenant laws and landlord laws.
Overall, there may be no clear winner with regard to which type of rental property will be best for you. You could potentially make more money with an Airbnb, but there’s no guarantee that will happen.
On the other hand, you have significantly less flexibility with a rental property tied to a lease agreement. As we said earlier, it all depends on the property, your skills, and what you are willing to commit to your investment beyond the initial financing.