If you’re a landlord or real estate business, you might be looking at Airbnb as a way to diversify your earnings. Short-term rentals can certainly bring in more money, but the decision to list a property on Airbnb isn’t that straightforward. You need to account for Airbnb rental taxes, rules on short-term rentals in your city and the demand for vacation rentals.
With 74 percent of rental properties owned by individual investors, it’s important to consider all of your options. We’ll cover some of the pros and cons of Airbnb real estate versus traditional, longer-term rentals, along with some tips from Airbnb rental experts, to help you make the right decision.
Airbnb Real Estate vs. Long-Term Rental Earnings
Airbnb short-term rentals are lucrative, with average rates of $160–$170 per night in many U.S. cities. That compares well to average rental prices, with a two-bedroom apartment renting for an average of $1,900 a month. But, your earnings from an Airbnb property are highly dependent on your “Occupancy Rate” — the percentage of time that your Airbnb property actually has tenants compared to the amount of time it could have tenants.
With long-term tenants, you have a guaranteed monthly income based on their tenancy agreement. With Airbnb, you need good occupancy rates to make the most of your real estate.
Justin Hauge is the Chief Growth Officer of Rabbu, a rental asset management company. When it comes to tracking your earnings with an Airbnb rental, he suggests looking to net operating income: "Net operating income (NOI) is the best metric to look out for. NOI tells the owner how their revenue is exceeding their expenses, and it gives them a way to track the reach of the strategies and technologies they’ve invested in. First-time owners should keep a closer watch on their NOI, and any owner that implements new tools should use NOI to keep track of their effectiveness."
Demand for Airbnb Rentals vs. Long-Term Rentals
Occupancy rates can vary widely depending on where your Airbnb property is located. The average occupancy rate across the U.S. is 48 percent — Airbnb properties are occupied almost half the time. We can calculate potential earnings based on this rate and compare it to long-term rentals:
- Airbnb: Average rate of $165 per night, multiplied by 30 days a month, multiplied by 48 percent occupancy rate is around $2,400 a month.
- Long-term rental: Average rate of $1,900 a month for a two-bedroom apartment.
- Extra earnings from Airbnb vs. long-term rental: $500 a month.
Julie Aragon, the CEO/Founder of the Aragon Lending Team, agrees that short-term Airbnb rentals can be more lucrative: "Broadly speaking, the net income from an Airbnb is significantly more than a long-term rental...but as with any other major decision it depends on your unique scenario aka your mileage may vary."
It’s very important to look at the Airbnb demand in your city or area and compare it to your long-term renter options to find which is best for you. You’ll also need to consider the impact of COVID-19 on Airbnb occupancy rates, and the current high demand for long-term rental properties.
Rules for Airbnb and Short-Term Rentals Vary Widely
Your state, regional and local laws may impact your ability to offer short-term rentals. Some ordinances do not allow Airbnb and other short-term property rentals at all, while others may put limitations on what you can do. Airbnb’s help page says:
“Some cities have laws that restrict your ability to host paying guests for short periods. These laws are often part of a city's zoning or administrative codes. In many cities, you must register, get a permit, or obtain a license before you list your property or accept guests. Certain types of short-term bookings may be prohibited altogether. Local governments vary greatly in how they enforce these laws. Penalties may include fines or other enforcement.”
Here’s another good overview of the Airbnb rules and regulations in many areas across the U.S.
Tyler Forte, the Co-Founder and CEO of Felix Homes, agrees that following local regulations is of utmost importance. "Before starting a business, you also need to check with the city regulations. For example, in Nashville, it’s required that the property owner obtain a business license and collect state and local taxes. The City of Nashville also imposes a 'Hotel/Motel Tax,' which must be collected under the terms of the Short-Term Rental Properties Ordinance. These regulations vary by city."
Julie from the Aragon Lending Team also sees local rules and business permits as a challenge to Airbnb hosts: "Short-term rental permitting is becoming more difficult in certain areas and the inability of predicting whether an area will take a stricter stance is a real risk to investors planning to operate short-term rentals. Also, some areas have a limited number of short-term rental permits, so newer hosts may be disadvantaged."
You must read and understand any ordinances that could impact whether you’re allowed to rent through Airbnb in your location. If you don’t follow these rules, you risk fines and other penalties.
Airbnb Rentals and Long-Term Rentals Tax Rules
If you rent out a property for more than 14 days during the year, you will need to pay taxes on any rental income. This applies to both short-term rentals through Airbnb and long-term rentals from your tenants. As a minimum, you’ll be paying self-employment and federal income taxes to the IRS, and state income taxes to your state’s department of revenue.
Airbnb rentals may also attract occupancy or other taxes from your state or local government. This depends on the rules for Airbnb in your area, and you can speak to an accountant to understand how that impacts you.
Get Good Insurance for Your Airbnb Real Estate Properties
Standard home insurance, landlord insurance or renter’s insurance may not cover short-term rentals. We recommend taking out a separate, specialist policy to insure your Airbnb properties. CoverWallet provides comprehensive coverage for Airbnb hosts, so you can be confident your properties are protected.
Making the Jump to Airbnb
Ultimately, the decision on whether to list your property on Airbnb depends on:
- The demand for short-term rentals in your city.
- The rules for Airbnb rentals in your area.
- Taxes that may apply to Airbnb rentals.
- Comparing the money you could make from Airbnb to long-term tenants.
Daniel Rusteen of OptimizeMyBnb.com shares this piece of advice for potential Airbnb hosts: "The main thing people need to understand is that they are stepping out of the employee role and into a business owner role (i.e., the guest is always right). Most people have problems with customer service. The best hosts are great at customer service and understand they're running a business that needs continuous improvement."
When it comes to listing your property on Airbnb, preparation is your best line of defense. Understanding your obligations and know your options to make your choice with confidence.