Posted over 2 years ago

5 Reasons Annual Rentals Trump Airbnb Investments

5 Reasons Annual Rentals Trump Airbnb Investments

Which is better, annual multifamily rentals or Airbnb style short term vacation investments?

Short term vacation rentals like those you see on Airbnb have become very trendy among new real estate investors. They tease with the hope of higher rents per night, and the chance to flex your interior design and hospitality skills. How do they really stack up against multifamily apartments as annual rentals? Which is better for your portfolio?

Consistency in Income & Returns

The ‘promise’ or higher rental rates by renting out units to short term guests can be seductive. However, vacation rentals face stiff competition and generally have much higher vacancy rates. They are also far more volatile. Even if you can rent for double the rate of an annual rental for five months of the year, during local vacation season, once you add up the empty months, additional booking fees, and the cost of cleaning between tenants, it’s still often a net loser. Then consider the impact of a storm or shifting travel trends and all it can take is one event to wipe out your entire income for a year or two or more.

Passive Income

Short term rentals are incredibly management intensive. You may have to keep up with cleaning, maintenance, check-ins, and move-outs, as well as bookings and reviews daily — all for each unit. Great Airbnb hosts who want repeat business, referrals and to stand out and be trusted online can have to go to great lengths to provide a fantastic experience throughout the stay too. It’s not passive at all. It may be more work than your old job — all in stark contrast to annual tenants.

Taxes

The true profitability of any investment is how much you get to keep at the end of the day. In addition to booking commissions and other expenses, short term rental hosts with guests staying less than six months are often subject to higher or additional taxes as well. Watch out for any potential impact on your income taxes, as well as triggering additional local taxes and permit fees.

Value & Growth

You’ll typically find properties to use as short term rentals in the most competitive and highest-priced areas. That’s true whether they are in dense urban areas or resort towns. These types of rentals have become so prevalent in these areas that properties being listed are already priced for Airbnb investors, with the most optimistic rents. That means you may be paying two or three times as much for the same property versus a couple of years ago. You may not be able to make the numbers work on an annual lease basis. Experienced investors might call those prices unsustainable. If tourism falters for any reason, those properties may come down in value pretty quickly. Whereas multifamily apartments are often acquired with room for value add improvements and offer more room to grow in value and appreciate over time.

Positive Impact

Many people and cities are up in arms over what short term rentals have done to their neighborhoods, buildings, and affordability in their communities. It is still illegal or restricted in many areas. There are many ways to make money and even great investment returns. If you also want to be sure your investments have a positive impact, are a force for good, or at least aren’t doing harm, annual rental apartments can be a great way to help provide access to affordable housing instead.



Comments (2)

  1. I don't think many investors understand how management intensive these short term rentals are.  I had a beach rental for 17 years and managed it myself after finding the local property management companies did not really screen the tenants that well.  These rentals are a hospitality industry and you had better have a great cleaner and stay on  top of all maintenance items if you want great review.  It also requires you to upgrade things frequently as technology changes and all the items in the unit (kitchen utensils, TVS, linens, furniture) wear out.


  2. Great article.  Thank you for the information Bill.