The Great Debate: AirBnB vs Traditional Leases

Airbnb vs. long-term rentals: Is Airbnb worth it?

Are you someone that is considering becoming a host on Airbnb to make side-hustle money?

If you are, great! I will do my best to convince you that short-rentals are much more lucrative compared to traditional real estate investments. It has certainly been the case for me. I have been able to bring in over 10K per month managing my listings from across the country!

Haven’t signed up for an account yet? Use my referral link to get $50 more for your first reservation.

Introduction: Airbnb Super Host with 2000+ trips on 10 listings

Hello everyone, my name is Jerry and I am a sharing economy entrepreneur. Whenever I tell anyone I operate AirBnbs for a living, they always seem to ask me how much money one can make by converting a traditional rental property to a short-term rental.

Of course, there’s a lot of factors that go into determining if an Airbnb can be profitable, but for the most part, I can confidently say Airbnb is by far the best way to utilize a property in 2018.

Risk: When things go wrong

Traditionally speaking, many people have a negative connotation attached to renting their home to others. Flashy news stories that depict the condition of houses after the tenants move out is commonplace and that image has been ingrained in many potential landlord’s minds. If you are a property manager or investor, you probably have a personal story of such a situation and want to do everything in your power to never experience it again.

Some of you may have heard of the story that described one San Francisco Airbnb host’s nightmare situation: a guest turned squatter that refused to leave after their reservation ended. On top of issues like that some hosts even fear that their beloved property will be turned into a scene from Project X!

If those scenarios sound like a nightmare to you, you’re not alone.

I’d like firmly state that these fears are completely understandable but are by no means a realistic expectation of what will happen if you list a property on Airbnb. I will be addressing each fear in this article so stay tuned!

We’re going to go over the fears that many hosts have before they list their house on Airbnb and how you can address them. We will follow up with a financial analysis of the two options to decide of which one will yield a better return on investment.

Let’s begin!

Things that can go wrong on Airbnb

The Squatting Airbnb Guest

As most landlords probably know, one of the most troublesome parts of renting out a property is the potential of guests that refuse to pay the rent. In most states, the eviction process is a long and arduous process that not only drains the pockets of the landlord but results can take several months before a tenant is removed from the property.

For some reason, the same fear has caused many investors to not consider Airbnb as an option. I want to tell you that Airbnb effectively eliminates the risk of squatting tenants. One of the best ways to prevent this risk is by installing a Smartlock on the door and only giving your guests temporary access. This way you are sure that the guest cannot make a spare key to come back after their reservation ends. Having keypad entry also ensures that you can monitor who goes in and out at any time. Heavy use can tip you off for potential house parties.

If your guest stays pass their reservation you can simply call the police to report a trespasser. They do not have keys nor any residency established so there are no tenant rights in place. If your state automatically establishes tenancy to anyone that stays in a property for over 30 days, make sure you limit the maximum amount of days in a row a guest can book.

Project X: Airbnb Edition

Another concern that I briefly addressed in the last topic was the fact that a guest may use your Airbnb listing to throw a party. There are two solutions to this problem. You can go the technical route by installing wifi connection monitors or adding a front door camera. The way I prevent parties from happening is by renting out individual rooms in my listing. Because each guest does not know each other, they will quickly report any signs of disallowed activity. I have been hosting I haven’t had a single situation where a party has occurred in the listings that I rent out as a shared house.

Guests who damage your listings

Compared to traditional rentals, Airbnb and other short-term rentals have a reputation of creating a lot of unnecessary wear and tear on a property. While this may be true in some regards, it definitely is not fair to make such a blanket statement. Foot traffic and home use may be higher due to the increased turnover that arises from vacation rentals, but the overall amount of use remains doesn’t shift drastically.

While more people may inhabit the home on a daily basis, they may only spend a couple of hours per day at your listing. Remember, most Airbnb guests are simply looking for an affordable alternative to hotels. They are in town for business or leisure and will only use your property as a place to sleep. If you accept long-term reservations of 1 or more weeks, you may get a guest who is going to spend more time at the property. The guests who book these reservations at my properties are mainly either visiting scholars and professors or locals that need a place to stay before their lease starts.

Any damage is identified at check out

One thing to note: because your property will receive a cleaning after each checkout, any damage will be immediately noticed and addressed. The damage can be quickly documented by your cleaning team (make sure you submit a resolution request before the next guest checks in or your claim will be denied) and you can request reimbursement from the guest. Traditional leases will be more susceptible to prolonged damage due to tenant habits.

In vacation rentals, you don’t have to worry about any specific bad behavior due to the revolving door of different guests. An individual guest may have a bad habit that can cause damage over time, but they will only be staying for a couple of days. In a traditional lease, most landlords will only perform a walk-through at the end of the lease term. Many a time has a landlord been shocked at what they find due! Examples of prolonged damage include animal excrement and mold buildup in bathrooms due to lack of ventilation.

Things that go wrong in long-term leases

Now that we’ve addressed a few of the most common concerns from potential hosts, let’s just discuss the cons of placing a traditional lease on one of your properties.

Opportunity Cost

Property owners that choose to place long-term leases on their properties will not be able to take advantage of any income opportunities that arise until after the lease terminates. With the sharing economy blossoming, the flexibility to take action at any given time is very important. While you can always find long-term tenants for your property, you may lose that option by deciding to sign a lease.

Property owners that choose the short-term rental route have to option to switch at any point in time. Should Airbnb or VBRO stop working in your location, you can place long-term tenants. In some areas where seasonality changes occupancy rates significantly you can even adopt a hybrid approach where you list the property as a long-term rental during slow months and as an Airbnb during the high demand months.

Higher Variance in Long-term Rentals

Yep, you read that right. I hypothesize that long-term leases are a higher variance option than short-term rentals. My reasoning is that while short-term rentals will fluctuate throughout the year due to demand shifts, the fact that the low lead time to realize income makes short-term rentals like Airbnb a lower variance choice.

This might sound ridiculous, but hear me out. Long-term leases are considered a solid way to secure a reliable income stream for a given period of time. What investors don’t realize is that a non-paying tenant can wipe out multiple months of income! On top of that, it usually takes a few months to turn over a property and find a tenant after a lease terminates! Assume the property generates $1,000 per month in rents. If you miss 1 month due to any reason your yearly income will drop by almost 10%!

Making money on Day 1

On the other hand, Airbnb listings will receive bookings and exposure almost immediately. Airbnb provides new listings with an algorithm boost to ensure they can compete with established listings. When I added new listings to my portfolio I received bookings the same day I listed them! The lower income lead time reduces your overall risk exposure, especially when you have a mortgage or rent to pay.

If you want to list your property as a shared house, you will further mitigate risk. Even if one guest causes a room to be damaged to the point where it has to be delisted, the other rooms will still be generating income. In some locations, seasonality may be a smaller factor than you would expect. College towns will always have a high demand throughout the year but skiing towns may see drastic drops in demand after their tourist season passes.

Nightmare Situations: Eviction and Severe Damage

Tenants that are unable to pay the rent and refuse to leave are usually a landlord’s biggest fear. The eviction process in the United States has become very tenant-friendly and requires a landlord to follow all processes correctly in order to successfully remove a tenant. Many a landlord have been so distraught from the experience that they liquidate their properties and depart from the real estate business.

We have all heard of scenarios like that and frankly, it’s not all exaggeration. There is nothing more frustrating than watching as everything you have built comes crashing to the ground. Landlords that have leveraged themselves can even risk going into foreclosure if the eviction process gets drawn out.

On the other end of the spectrum of disasters, long-term tenants will sometimes leave the house unrecognizable when they leave. The mentality that they don’t have to take care of a property just because they are renters is very common amongst bad tenants. In the worst cases, some landlords have to spend more than the entire amount of rent they receive from a tenant just to get the property ready for a new lease.

Airbnb returns vs. Long Term Rentals

Drum roll….. The moment you have been waiting has arrived!

Now that we have discussed the various risks of each utilization option, we can discuss the financial aspect of the operation.

Long Term Rental Returns

A traditional lease duration is generally around 12 months. This means that once a tenant has signed the contract, a landlord can expect to receive a steady stream of payments for a predetermined amount of time. For many investors, this is a conservative way to plan out an investment and is the only set up that they are familiar with. Each step of the process is extremely straightforward – from the moment a property is listed to the moment the tenant leaves the property, there is a set procedure that does not drastically change based on property attributes and geographic location.

Given this lower perceived risk, traditional leases will only gross a landlord around 1% of the value of the home each month. This number is a rough estimate of what is perceived to be a good return, but the return can be vastly different in different parts of the country.

Analysis of the Columbus, Ohio housing market

Let’s analyze a scenario where we are an investor in the Midwest. Since I have experience as a real estate agent I will be using Ohio as the baseline for our analysis.

We are looking for a home that is centrally located in a median-income neighborhood. A quick search for properties in Columbus, OH yields this list:

As you can see the prices of housing in the Midwest hasn’t inflated like certain cities in the U.S! If you are a reader that lives in a city like Los Angeles or New York, it may seem impossible to become a homeowner but there are plenty of up and coming cities around the country that are ripe for investment.

For the sake of brevity, we can see that most 3 BR 2 BA houses in this area will run around $250,000 to $300,000. The major adjustments in price that we can expect will come from location, amenities, and build quality.

Columbus’s Rental Market 

Let’s take a look at the rents that similar properties can command in the area. Being a college town (Go Buckeyes), the demand for real estate near the university has been rising alongside the rate at which the university grows. As more events bring tourists to the city, housing prices will continue to increase to adjust for demand.

Luckily for you, this market hasn’t been bombarded with international investment yet. Go ahead and adjust the Zillow search we performed earlier to list the properties available for rent. Note: if you are searching during the school year, you may have difficulty finding enough comps. Most properties near OSU are booked before students go on winter break. For our purposes, a rough approximation will be satisfactory.

Here’s a small list of available properties for rent:

Average rent to property prices

If you quickly scan over the rent prices of the list you will see that the rental revenue for each property is around $500 per bedroom. While this falls short of our 1% CAP rate goal, it still eclipses the returns that many mature markets like Los Angeles can offer.

I will go ahead and select this property as our guinea pig: https://www.zillow.com/homes/for_rent/Columbus-OH-43202/house,apartment_duplex,mobile,land_type/33825551_zpid/76571_rid/3-_beds/40.020598,-82.994392,40.00469,-83.021858_rect/14_zm/

The Zestimate (do not rely solely on this number for analysis) is approximately 250K. The listed rental price of $2,800 would be very attractive to many investors.

We are going to go ahead and assume that this property is ready to list upon closing.  This will never be the case for as most landlords will want to perform preventative maintenance as needed.

Using some rough numbers that don’t include many expenses a basic financial analysis yields a cash ROI of 53.86%. Sounds great!

Many investors will see such a high return and quickly jump on the opportunity. I implore you to continue reading.

Airbnb profit and ROI

Now that we have had a look at the returns when a property is listed as a traditional rental, let’s check out an Airbnb financial analysis.

We can go ahead and set up a few benchmarks based on my own listings. For our initial analysis let’s use a conservative approach when estimating revenues.

Listing Details:

• Private rooms in shared house

Baseline figures:

• 75% occupancy
• $43 average nightly rate
• 20$ turnover cost
• 7.5% supply cost

Now that we have set up our hypothetical scenario we can construct our financial analysis.

By choosing to list our property as an Airbnb, we achieve a Cash ROI of 62.83%. That’s a 9% increase in your cash ROI just by optimizing the way you utilize your property.

To make the difference more apparent, you can remove the unrealized equity/property appreciation components to compare the two options side by side. When we do that the difference is HUGE!

Financial Analysis Results – a clear winner

Long-term rental cash ROI: 16.66%

Airbnb rental cash ROI: 31.31%

This equates to a nearly 2x return on investment. When we take out non-relevant returns, we can see that Airbnb and other short-term rental options are by far the best option to make the most money!

Please note that these numbers are an approximation of what returns you can expect. There might be expenses that I have missed. There are also fluctuations in the various inputs that I used. Use these numbers as a baseline for your decisionmaking.

Good luck on your journey to financial independence

You’re at the finish line. I hope you enjoyed my article on Airbnb vs Traditional leases. If you have any questions please don’t hesitate to reach out by commenting below or sending me an email. If you need consultation or start-up help, I also offer help at affordable rates.

Check out our Turo articles if you want to supplement your Airbnb income with sharing economy apps. As a full-time host, you aren’t tied down to the rigid schedule of a 9 to 5 job. You make the most of your time and find new ways to make money. The sharing economy has produced so many opportunities that no one expected would be possible. These days you can make money by charging electronic scooters. The possibilities are endless.

Click here to register on Airbnb and receive an additional $50 for your first reservation!