Trying to decide on whether to rent out your property as a long-term rental or vacation rental? Here’s a quick tale to illustrate the two options…
Jack and Emma were colleagues and worked out at the same gym. When Emma decided to invest in real estate in the fall of 2015, Jack followed suit.
Jack bought an 1800 sq. ft. 3-bedroom, 2.5 bath single-family home, located close to popular local attractions and shopping.
Emma bought a 2200 sq. ft. 4-bedroom, 2.5 bath single-family home, located in a nice community within walking distance to a neighborhood park.
Both properties were located on well-kept lots with a pool and were in excellent condition – fully remodeled in the last five years. The two homes were purchased for similar prices. Jack’s had the advantage of convenience to local attractions, but Emma’s home had higher-end updates – solid wood floors, larger renovated kitchen, etc.
Jack registered with Airbnb, while Emma turned her home into a long-term rental property.
Jack wanted to maximize his income, so he charged more on weekend nights than during the week and he gave discounts for longer stays. Those efforts allowed him to average about $155 per night on the home (included cleaning and service fees). The average rental funds per week of full occupancy totaled $1085, which equates to just over $4,700 per month. Jack is a warm and friendly host who communicates with clients and provides a sparkling clean, well-furnished home in a prime location. He’s able to keep it almost fully booked during the high-season, but it’s slower in the less popular months. Over the course of the year, his occupancy rate is about 70% so he earns $39,480 annually before expenses.
Emma’s home rented for $2200 per month with a 12-month initial lease. Her first renter stayed for 15 months. Three weeks later, her second renter moved in, but extenuating circumstances forced the second renter to leave after six months. Although Emma released the vacating renter from some of the lease requirements, she was paid for the month the home was empty plus the cost of obtaining her third renter. Her third family is still there almost three years later. That’s a 97% occupancy rate and $26,400 annually before expenses.
On the surface, it appears that Jack made the wiser choice in connecting with Airbnb and earning 2x more rent, but there is more to consider…
Jack’s expenses of both time and money are considerably higher. He had to purchase all the furnishings for his property (furniture, decorations, linens, plates, etc) before he could even rent the home. He pays a 3% fee per booking to Airbnb and about $4800 annually in utilities (water, sewer, trash, electric, cable, internet). He hires a cleaning service between each renter and has a landscaper maintain the yard every two weeks. Jack covers ALL maintenance – down to replacing light bulbs and hair dryers when they burn out. He also keeps his rental stocked with tp, paper towels, dish, and hand soap, etc. at the start of each rental period. Jack’s liability insurance is also higher due to ‘revolving’ guests.
Emma, on the other hand, has it much easier. She never had to purchase furnishings and her renters pay all the utility bills and maintain the yard. As a matter of fact, they love the home and treat it as their own. She also doesn’t have to worry about the frantic coordination between visitors or being available for the various questions that arise with new guests.
Fast forward to the 2020 Pandemic. Jack thought he was facing his best year. Bookings were at an all-time high, but when the quarantines started, so did the cancellations. To make matters worse, Airbnb expanded its extenuating circumstances policy, allowing almost all travelers to cancel their reservations penalty-free. Jack’s rental income quickly bottomed out, but his mortgage, taxes, insurance, and maintenance expenses still demand to be met.
Meanwhile, back at Emma’s rental, Mrs. Renter was laid off, and Mr. Renter’s hours were reduced. They met with Emma and worked out a plan. She will be bringing in less rent for a while, but eventually, she will be paid in full. That’s a much better scenario than what Jack faces.
In fact, Jack has been listing his rental on additional websites, such as Vrbo, HomeAway, Zillow, Apartments.com, and even Facebook Marketplace and Craigslist. He is also considering converting to a long-term rental like Emma’s.
Jack is not alone. Many Airbnb and other short-term rental property owners are discovering the downside. According to a BiggerPockets post by Sterling White, there are six reasons why short-term rentals are hard to sustain.
