Are you a prospective investor looking for advice on the best real estate strategy? This post will provide you with a comparison of Airbnb vs renting out traditionally based on the following criteria:
- Profitability
- Maintenance
- Occupancy rates
- Taxes
- Home appreciation
- Flexibility
- Financing
You should read to the end of this article to find out our recommended real estate strategy for new investors. And if you’d like to estimate your potential cash flow and return on investment for either short term or long term rentals, it’s time you try out Mashvisor’s real estate investment software.
While Airbnb rentals have been the most profitable and thus best real estate investments in recent years according to our nationwide market research, the Coronavirus had a major impact on this investment strategy. The Airbnb occupancy rate started dropping in all US major cities as soon as the global pandemic was announced.
However, the Airbnb rental industry started rebounding soon, and we expect short term rental occupancy rate to be back to normal growth by September 2021, partially as a result of the Coronavirus vaccinations.
During the height of the Covid-19 pandemic, as short term travel and vacation trips came to a temporary halt, Airbnb superhosts with 5 to 20 properties pivoted to long term renting as a real estate strategy and a coping mechanism, hosting people who moved to suburbs from the high populated big cities.
Right now, Airbnb owners in many cities still benefit from the pent up demand, although it appears there could be more regulations on short term renting in many states going forward.
1. Profitability
Profitability is the most important factor for the majority of new investors. Logically, you should make more profit when you have a tenant or tenants who pay rent monthly. But the reality is that Airbnb properties are more profitable than long term rentals.
For example, while the average rent for a traditional rental in California as of February 2021 is $2,789, based on Mashvisor’s real estate data, you could make $4,177 a month when you list the same house or apartment on Airbnb (the average Airbnb daily rate in the California real estate market is $224). The reason for this is that Airbnb prices depend on more factors other than location.
In a year, the difference becomes much more substantial. Although you have to factor in the cost of maintenance, taxes, and furnishings, Airbnb still seems like a more profitable real estate investing approach. Moreover, investing in Airbnb properties is proverbially a way to not put “all your eggs in one basket”, since all your potential revenue from the property wouldn’t depend on a single tenant.
2. Maintenance
Consider property maintenance when deciding on the best real estate strategy for you
Property management companies charge more money when working with Airbnb properties and that’s understandable as Airbnb rentals require more hands-on management than long term rentals. You need to ensure the property is in tip-top shape every time as you’ll potentially get more foot traffic.
In this case, it would be easier to maintain a property with one or two regular tenants on a long term basis. However, you could save time on property maintenance by creating a checklist for turnover operations, e.g., working with a standby cleaning company, changing sheets, and restocking supplies.
3. Occupancy Rates
When you rent to a single tenant, you don’t have to worry about finding new renters unless you’re dealing with problem tenants or unpaid rent. In these cases, you might have to proceed with eviction filings.
On the other hand, one of the major cons of Airbnb real estate investing for beginners is that your marketing must be spot-on and you should be willing to lower prices to accommodate slow periods, else your property sits empty. In our California example, the average Airbnb occupancy rate is 63%. However, you can charge more with Airbnb during peak periods, allowing you to offset the shortfall from vacancy periods.
Check out Airbnb Occupancy Rate by City in California.
4. Taxes
Across the board, you have to pay taxes on rental income. This tax is based on your ordinary income tax rate. When you sell a property you’ve held for more than a year, you’ll also pay the long term capital gains tax.
In places like the Florida real estate market, where Airbnb is allowed and generally unrestricted, hosts still have to pay an occupancy tax. Airbnb itself pays this occupancy taxes on behalf of hosts. It’s deducted from whatever guests pay. However, in some cities, hosts must manually pay the occupancy tax.
Note that you must complete a W-9 form when you become an Airbnb host. If you fail to do so, the company would have to withhold 28% of your income in taxes. But if you only rent out the property for 14 days or less in a year, you don’t have to pay income tax on the property. With both long term and short term rentals, you can deduct maintenance, furnishing, and management costs on your investment as business expenses.
Note that short term rental rules and regulations vary from city to city. Especially with the recent conversations around Aiebnb causing shortage in rental inventory, it is wise to know what applies in your desired city before deciding whether to go for Airbnb vs renting out.
5. Home Appreciation
Both long term and Airbnb rental properties benefit from real estate appreciation. But with Airbnb real estate strategy, you’re not bound by a lease agreement and you could list your property for sale at any time and simply remove it from Airbnb if you wanted to sell.
On the other hand, selling an Airbnb may not be a wise move, especially when an area looks poised for major development. This is one of the reasons for the backlash on Airbnb with some people attributing low inventory and high prices to Airbnb hosts opting not to sell.
Check out the 10 cities with the highest real estate appreciation in 2021.
6. Flexibility
Want to vacation in one of your properties for a week? You can’t do that with long term rental investing strategies. Apart from the fact that hosts can periodically choose to stay in their properties, which is great if you have a short term rental in one of your favorite places, Airbnb also allows for flexible pricing.
You can raise or lower your prices based on the market forces of demand and supply, thus maximizing your return with this real estate strategy.
7. Financing
Although you’ll usually need more financing for Airbnb vs renting out, you might get away with a lesser down payment instead of the expected 20% for an investment property. Additionally, you can lock in a more favorable rate on conventional loans (cash out refinance, second mortgages, and HELOCs), especially when you have a good credit score (680+). So, Airbnb might be the better solution to how to invest in real estate estate with little money.
Whether with Airbnb or long term rental investment strategies, there are always fixed and recurring costs. You should budget for a 20% down payment and have a substantial cash reserve for maintenance. Recurring costs for long term rentals are usually mortgage and routine maintenance.
With Airbnbs, you have to factor in the cost of furniture, digital locks, property decoration, internet or WiFi, restocking food and toiletries, and turnover operations. The more amenities you have in your space, the more edge your property has over competitors.
To reduce expenses and get much needed experience managing Airbnb properties, it’s recommended that newbie investors try the rental arbitrage real estate strategy, where you rent a property long term, making a deal with your landlord that allows you to list your space on Airbnb.
But if you have the means and the credit score to purchase a property in a good location, you could break even and turn profitable with an Airbnb investment strategy in no time.
So what is the best real estate investment strategy? Overall, your real estate strategy should depend on your goals. Are you looking to make more profit from your real estate investment? Or want to be able to use your rental anytime you want when investing in real estate properties?
Then an AirBnB in the right location would be a great option. But if you want hands-off management and less stress, you should consider a long term rental strategy.
For a newbie real estate investor, we recommend starting out with the Airbnb real estate strategy as it is much more profitable and flexible than the long term rental strategy. Whether you’re looking to invest in AirBnB or long term rentals, you need to be able to find lucrative properties in the right location.
Mashvisor’s Property Finder tool will help you find the most profitable properties in the best places to invest in real estate. Meanwhile, the investment property calculator will help you analyze the investment potential of both Airbnb and traditional rental properties with a few clicks of a button.
To start searching for and analyzing short term and long term rentals now, sign up for a 7-day free trial of Mashvisor followed by a 15% discount for life.