AirBnB vs Long Term Rental: Which Strategy Works Best
Renting an investment property as a long-term rental or an Airbnb has tradeoffs. Learn about the tax, income, setup, management, legal and insurance considerations.
The tradeoff between an AirBnB and a long term rental is often between higher income and greater stability. Your location plays a major role in these choices. A property in a major vacation hub is going to have different risks and considerations than a property in a residential area.
Rental Income of AirBnB vs LTR
Renting your property out as a short term rental via AirBnB can make you more money than a long term rental. Regular turnover makes it easier to respond to changing market rates. You can raise rates in peak seasons or around major events in your location. This quick response time to rental market changes often means more money in the long run. Additionally, it may take less time to start making money since you can list the property on AirBnB immediately when it’s ready.
But while you can make more nightly via AirBnB, lack of consistency can be a problem. You’ll make more money during popular travel seasons, and there may be times of year when rental income dries up. It’s also more difficult to offload maintenance to a property manager, and it tends to cost more than it would be for a long term rental property.
In contrast, a long term rental may make less money monthly, but it’s consistent. You know what you’ll make from the property each month and it doesn’t change in down seasons. The resale value of a long term rental may be higher since fewer people will be using the space. Tenants also have greater investment in maintaining a long term living space. Property management in long term rentals is well established and often costs less than it does for short term rentals.
Set Up Costs of AirBnB vs Long Term Rental
In addition to regular rental amenities, AirBnB owners need to provide all furnishings and utilities including power, water, and internet. This can be a costly and time-intensive process. In addition to water and power, AirBnB owners will need to set up and pay for amenities that long term rental tenants usually pay for themselves, including water, power, and internet. AirBnB is a hospitality business, so décor needs to be welcoming and eye-catching. If you own more than one property you’re planning to list, you may be able to save money through bulk buying furnishings.
It's free to list your property on AirBnB, and your first time listing gives you a natural algorithmic boost on the platform, putting your property in front of thousands of eyes immediately. It’s important to have a photo-ready space and good photos so that you can take advantage of this boost right away.
Long term rentals also require preparation, though less than for a short term rental. Most long term rentals don’t need to be furnished, so set up costs include fewer variables. Although you’ll still need to do some setup such as painting, flooring, and purchasing major appliances, most of the furnishings will be provided by the tenants and they will pay for many of their own utilities.
Legal Rules of AirBnB vs LTR
Short term rentals are generally more regulated than long term rentals. AirBnB is comparatively new, and the laws regulating short term rentals vary quite a bit from city to city or state to state, so get a sense of your local regulations before you get started. However, the regulations are also in flux in many cases, meaning that you can’t count on dealing with the same limitations and taxes from year to year. While guests have fewer legal rights than long term tenants, be aware that guests can sometimes gain tenant rights after a stay of 14 to 28 days, depending on your state.
Regulations around long term rentals are generally well established, and, like many other aspects of long term rentals, stable. However, tenants are protected by laws that can work to your disadvantage. It can be hard to evict or remove a bad tenant. In most cases, you are bound by the lease for its duration.
Short-term vs Long Term Rental Tax Considerations
You will not have to pay income tax on your AirBnB if it is rented out for 14 days or fewer during the year, but any longer and the profit is taxed as income tax. Filing requires a 1099 and can be more involved than a long term rental property. It also offers fewer tax write offs than a long term rental.
Most long term rentals are taxed as passive income, though there are some exceptions. A security deposit that includes first and last month’s rent is taxable income in the year it is received, although a security deposit that is not intended for use as rent is not. Many costs of long term rentals can be written off in taxes. Although you will still need to pay taxes on the property, the concessions are well established and easy to claim.
Vacation vs Traditional Rental Insurance
The good news: AirBnB pays insurance premiums on your property. The not-as-good news: That coverage leaves many gaps, so you’ll probably still need to purchase insurance, and you may need to find specialty insurance packages. Regular turnover generates greater liability than a long term rental.
Long term rentals are easier to insure than AirBnBs, and rental insurance is generally straightforward. In both short and long term rentals, some of the insurance costs can be offset by requiring a security deposit.
AirBnB vs Renting Long Term: Pros and Cons
Some benefits of listing an investment property on Airbnb include:
- Possible to have higher income than with a long term rental.
- Greater flexibility.
- Easier to change rates.
Some benefits of finding long-term tenants for an investment property include:
- Stable income.
- Greater stability in laws and regulations.
- Passive income.
- More tax write offs.
- Greater discretion in choosing tenants.
Most investors stand to make more money with an AirBnB. If you value stability over a high but volatile income, however, a long term rental may be a better choice for you.