AirBnB vs Traditional rentals

11 Replies

@John B.

You might want to ask this in the short-term rental forum, but just really quickly (as an Airbnb owner).  They are night and day.  

Short-term rentals are much more work and much higher Op Ex as you are paying for everything (cable, lawn, pool, electricity, furnishing, post and pans, linens, etc.) but they also bring in (usually) a much higher gross income. They are much more of a micro-business then a long-term rental which are arguably more of a 'set it and forget it' model until the lease expires.

The short-term rental has different cash flow calculations to model against vs long-term and you have to think about making sure you are providing a 5-star experience which drives great reviews which drives higher search results on Airbnb/VRBO which equates to more bookings and thus more revenue....so once again...night and day difference.  : )

Cheers!

I love everything Jon said, and I would just add two major risks to AirBnB, which both drive me to a major suggestion if you decide to go that route...

The first risk is if AirBnB gets outlawed where you buy. I live in West Los Angeles and it's now illegal here. And then the cities that aren't banning it, some have ended up putting restrictions on how much you can do it, etc. So literally the city/county could stop it cold under your feet (risk of that happening depends on where it is).

The second risk is, hello 2020... all vacation travel stops for an extended amount of time. No AirBnB-ers to rent your place.

People will always need long-term rentals and cities will never ban that. The mitigation to these risks is to run the numbers on the property you plan to AirBnB as a long-term rental and see how those shake out. So that way, worst case, you can covert it to a long-term rental if something were to happen to AirBnB-ing.

Originally posted by @John B. :

@Jon Crosby Who manages your Airbnb? Since I'm trying this out of state, do property managers offer to manage these as well?

Yes, property managers will be happy to manage your remote properties for you but usually at a very high rate, sometimes as high as 50% of your gross revenue, so I prefer to remotely manage but making sure I have a great housekeeping service as my eyes and ears when possible. But to be transparent, my properties have never been more then a 2-3 hour drive from me either...but I know several out of state STR owners who are happy to just fly in if there are any issues so long as it's only a 2-3 hour flight.

@Jon Crosby Yeah I hear you. As it is my properties are only about 2 hours from me now and have my property manager deal with everything. Yeah I guess housekeeping and making sure your properties are clean and ready to go for the next client is important. And to remotely manage the rest doesn't sound too bad.

@John B.

Hi John. I agree with everything Jon said, plus Ali makes a great point about knowing your local regulations and knowing that it's a possibility that Airbnb's could be banned in the future in your area even if legal now.

That being said, I love my three Airbnb's! To mitigate the risk of a future ban I evaluated these purchases through the lens of a long term rental. Numbers have to work there in case I need to pivot. These homes would also sell easily, and for a profit, if I needed.

Airbnb in my area has been strong through Covid. But that hasn't been true for all areas. So do your research.

I have higher expenses than a LTR, but higher cash flow, too.

Pro - Our cleaner is inside the property very regularly so small issues get fixed before they turn big.

Pro - We self manage easily because we live in the neighborhood.

Pro - Bad guests are out quickly! Lol! Truth be told, most of our guests are great!

Good luck with whatever you do!

Most short term guests (Air bnb, VRBO) treat the property with respect and leave it in good condition. Plus, it gets cleaned between guests. My air bnb property gets cleaned anywhere from 6-12 times per month. Which means my property is always in top condition. Compare this to long term renters. I worry more about long term renters causing damage to a home. And if you are renting long term and want to kick your tenant out, most of the time it's a hassle. You have to evict and take the necessary steps to evict correctly. This can take months and cost thousands of dollars.

Having owned long term rentals for 26 years now I can tell you short term is WAAAAAY better in my opinion. It's a completely different animal for sure and has its own set of problems (some mentioned previously) but the cashflow aspect is night and day from long term if it's run well. I was happy to make $150 positive cash flow on a long term rental (units with a mortgage) but when the tenants leave all that gets eaten up in rehab/turnover expense. So long term is get rich REALLY slow. Short term the properties stay in mint condition virtually all the time, the maintenance is half of that in long term (biggest surprise to me), all of the legal headaches of long term are gone ( no evictions, bad checks, collections, security deposit disputes, etc.).

Nobody making meth in the bathtub, no tenant not cutting the grass, no cars on blocks in the front yard, etc.
Short term rentals force you to be a good owner meaning you cannot defer maintenance else you risk bad reviews and then you are out of business. BUT it is a TOTALLY different business model and STR are hospitality 100% so if you aren't into the details then it may not be for you.

Non-vacation areas mgmt fees are 20%-30% of revenue vs. 7-10% for long term. Vacation areas can go higher for short term obviously to offset for seasonality.

I think geographic area, attractions, etc play a huge role in which way I would recommend you go. Could you make a vacation rental a call memorable place? Do you want to deal with short stays and quick turn around or do you want to deal with long term tenants?

I think both can be good investments just depending on what you want to deal with.

You can make a ton of money on short term rents but obviously there is a lot of hands on management that is needed. Long term rentals can be a little more passive once you do the work up front. Passive is a loose term. lol