Investing in property can be hugely profitable and advantageous – but what can you do with this property besides flipping and reselling it to see this profit?
Renting out your property is a great way to keep an investment that is accruing value while also making real-time income off of it. There are two main options for how you can rent your property out – as a short-term rental, such as an Airbnb, or as a long-term residential rental.
Deciding between making your property into an Airbnb or a long-term rental is a big choice to make.
On the one hand, Airbnbs are in high demand and offer the flexibility to turn a real profit during busy seasons. On the other, a long-term rental offers greater income stability and legal protection.
In this article, we will compare Airbnbs to long-term rentals to help you decide which is the best fit for your property. Keep reading as we compare pricing models, ongoing expenses, market demand, and more!
Factors That May Impact Your Rental Income
As you determine what type of rental you would prefer to make your property into, it is important to consider the various factors that impact your potential income.
Keep in mind that there are a lot of variables with both Airbnb and long-term rentals. Your income can be affected by many things, so it is crucial to have a thorough understanding of both the risks and rewards associated with different rental methods.
There are four main factors that we will focus on when comparing Airbnbs to long-term rentals, including:
- Pricing models
- Startup & ongoing expenses
- Potential profit
- Market demand
Let’s begin by taking a look at pricing for Airbnbs vs. long-term rentals.
Airbnb vs. Renting: Pricing
Airbnbs and long-term rentals are priced fairly differently, with an Airbnb property charging a set rate per night of a stay and a long-term rental charging monthly rent.
With an Airbnb, you can customize your nightly rate according to different specifications, such as cheaper rates during the weekdays and more expensive rates during the weekends. The Airbnb platform allows hosts to vary their nightly Airbnb rates in many different ways, offering 4 customization models:
- Smart Pricing: Smart pricing is an automatic tool offered by Airbnb that hosts can turn on to automatically adjust their prices based on fluctuating demand.
- Weekend Pricing: Weekend pricing allows hosts to set the optimal price for Friday and Saturday nights. To use weekend pricing, smart pricing must be turned off.
- Weekly/Monthly/Long-Term Pricing: Some Airbnb hosts choose to rent out their property for longer stays, or even long-term. For these hosts, Airbnb has a long-term pricing model that allows you to apply certain discounts for longer stays.
- Rule-Set Pricing: Rule-set pricing is a pricing model designed for hosts managing multiple Airbnb properties that allows them to set rules across the board for nightly rates, price adjustments, discounts, and more.
The Airbnb Help Center offers a full how-to article on setting and customizing nightly pricing for hosts.
Compared to the pricing flexibility of Airbnb, long-term rentals do not have the same freedom. A big reason for this is that a long-term rental is likely legally bound by a leasing agreement, tying the property owner into a set monthly rental price until the end of the leasing agreement.
As such, pricing a long-term rental does not provide the same level of customization or profitability during busier times of the year as Airbnb does.
Airbnb vs. Renting: Startup Costs and Ongoing Expenses
Aside from the startup cost of purchasing a property to rent out, there are several additional startup costs – as well as ongoing expenses – that affect both Airbnbs and long-term rentals.
There is a lot of overlap as well between an Airbnb and a long-term rental in terms of startup costs. For instance, startup costs for both Airbnb and long-term rental properties can include:
- Property renovations
- Appliance repairs or replacements
- Landscaping (if the property has a yard or outdoor space)
- Business licenses or permits (legal licensing requirements vary by location)
For an Airbnb rental, there is no initial startup cost for listing your property on the platform. However, there is an ongoing percentage that must be paid to Airbnb each time a property is listed. The majority of hosts pay a flat service fee of 3% of the booking total.
Additional ongoing expenses to consider for Airbnbs include:
- Utilities & WiFi: Many hosts will determine the average monthly cost of these expenses and work them into their nightly pricing model. Comparatively, most long-term rental properties leave these expenses to be handled by their residents.
- Consumables: Restocking consumable and one-use items is essential for Airbnb hosts to achieve a high rating on the platform. This can include items such as toilet paper, paper towels, coffee, tea bags, toiletries, etc. Long-term rental owners typically do not provide these items for their tenants and do not need to worry about these expenses.
- Furniture Maintenance & Repairs: To keep an Airbnb looking presentable, the furniture must be regularly cleaned and maintained, as well as repaired or replaced as needed. This ongoing expense can sometimes be shared by long-term rentals if the rental offers a fully-furnished property.
Both Airbnb and long-term rental owners may also share the ongoing expense of a mortgage payment, depending on if the property is paid off or not.
What’s the Demand for Long-Term vs. Airbnb Rentals?
As we dive into a comparison of market demand for Airbnbs vs. long-term rentals, it is important to note that Airbnb allows its hosts to list properties available for long-term, monthly periods.
The key difference here is that there is no leasing agreement, enabling the Airbnb host to change the long-term rate between scheduled stays as needed. However, the availability of long-term rental options on Airbnb is important to consider, as it can give an Airbnb listing greater demand overall.
In Canada, demand for Airbnb rentals is incredibly high, with 1 out of every 3 Airbnb listings in Canada being rented out at least 90 or more days each year, according to the Hotel Association of Canada. Additionally, Canadian Airbnb hosts have earned more than $190 (CAD) billion in revenue since 2010.
The highest demand for Airbnb rentals is in the U.S., the company’s home country, with more than 99 million total nights stayed in 2021 alone.
When considering the demand for Airbnb in specific geographic regions, one of the biggest factors to consider is the size and profitability of the tourism industry within a given area. Destinations with a focus on tourism are more likely to need tourist accommodations, making these some of the best places for investing in Airbnb property.
On the other hand, demand for long-term rentals is a whole different story than demand for short-term rentals. With long-term rentals, the important factors are not tourism and total nights stayed, but rather how many people are looking for a place to live and what the average tenant’s budget looks like.
This, like short-term rentals, does depend on geographic location, as well as the general demographics of specific areas.
Zoning Rules of Short-Term Rentals?
A zoning code separates land into specific geographic zones (residential, commercial, mixed-use, etc.), each with its own legal regulations that dictate who can own property there and how that property can be used.
In most cities and towns in both Canada and the U.S., there are zoning laws that will prohibit short-term rentals (Airbnbs, Bed & Breakfasts, etc.)from operating in certain areas. Additionally, each individual city or town can determine the legal requirements for operating a short-term rental, such as if the property owner needs to obtain a business license.
As the relevant zoning laws vary depending on where your property is located, it is crucial to research these laws and local ordinances before turning your property into an Airbnb or long-term rental.
Short-Term Rental and Traditional Rental Tax Considerations
Taxes are yet another factor that is highly dependent on the geographic location of a property.
When calculating your estimated taxes owed on a rental property, the process for this calculation can vary drastically depending on where you are located. As Canada and the U.S. are two highly popular Airbnb destinations that are geographical neighbors, we will discuss tax considerations for both regions.
Let’s look now at the differences in tax considerations for short-term vs. long-term rentals.
In Canada, National law requires Airbnb to collect and remit taxes for hosts with listings that aren’t registered as Goods and Services (GST), Harmonized Sales Tax (HST), and/or Quebec sales tax (QST). Hosts with these registrations must provide them to Airbnb.
You can read more on tax collection and remittent by Airbnb in Canada here.
As for the U.S., the American Rescue Plan Act of 2021 changed the law so that Airbnb is now required to issue an end-of-year 1099 form to hosts. This form must be filed as part of your annual tax return. U.S.-based hosts will also need to check the specific state laws regarding taxes for short-term rentals.
To learn more about paying Airbnb taxes in the U.S., visit the Airbnb Help Center’s webpage on Frequently Asked Questions About Taxes.
Long-Term Traditional Rentals
When it comes to long-term, traditional rental property tax considerations, there are some key differences from short-term rentals that come in the form of exemptions.
For instance, in Canada, short-term rentals are subject to GST and HST taxes, while long-term residential rental properties are exempt. Additionally, the Canadian Income Tax Act requires long-term rental owners to pay 25% of the gross property income annually.
In the U.S., rental income is calculated as ordinary income and is, thus, subject to federal and state-level income tax rates. Both Canadian and U.S. rental property owners can claim various deductions to help lower their total taxes owed at the end-of-year.
Pros & Cons: Airbnb vs. Renting
Now that we have covered some of the biggest considerations and differences between Airbnbs and long-term rentals, let’s now consider the pros and cons of both.
By the end of this pros and cons list, you should have enough information to make an informed decision on whether to list your property as an Airbnb short-term rental or a residential long-term rental.
Without further ado, here are the pros and cons of Airbnb and long-term renting:
- Maximise Income
When you rent your property through Airbnb, you benefit from the freedom the platform provides you.
Rather than being stuck in a legally-binding lease agreement, Airbnb owners can adjust their nightly rates to reflect market demand, competitor pricing, and more.
- Flexible Pricing
With Airbnb’s many different pricing models – including the fully-automated smart pricing – you can rest easy knowing your Airbnb always has the optimal nightly price.
Additionally, this gives you the freedom to experiment with different pricing to see what attracts the most guests, as well as showing you what pricing model is the most sustainable within your area.
- No Long-Term Lease Agreement
Not being bound to a leasing agreement is a huge advantage.
Without a leasing agreement, an Airbnb owner can change their nightly rates between every reservation if they so choose. Plus, Airbnb owners have greater freedom to accept or reject various guests, providing greater control over who can access your property.
- Airbnb Host Guarantee
Airbnb provides host damage protection as part of the AirCover for Hosts.
This host damage protection states that Airbnb will provide hosts with $1 million in coverage in the event is damaged or stolen. To receive this coverage, the host must file for reimbursement and provide evidence of the damage in the form of photos, videos, repair and cleaning estimates, or receipts.
Learn more about the filing process and what the host damage protection covers here.
- Damage to Property & Maintenance
Although Airbnb provides host damage coverage, hosts are still liable for normal wear and tear of their property, as well as damage from natural disasters.
As such, minor damage is not likely to be covered under AirCover unless the host has extremely credible evidence of the guest causing the damage. In turn, there are maintenance costs the host must consider to deal with ongoing repairs for minor damage to the property.
- Greater Expenses
Unlike a long-term rental, an Airbnb host maintains the responsibility for keeping all the property bills paid – from a mortgage payment to utility and WiFi bills.
While an Airbnb host can certainly adjust their pricing to cover these expenses, it is an important consideration and may require tighter monthly budgeting compared to a long-term rental.
- Fluctuations in Occupancy & Income
Depending on the popularity of your location, your Airbnb will likely have an “off-season” – a time of the year when vacancies are higher.
These fluctuations in occupancy and income require the proper financial planning to ensure you have enough money saved from busier times to get you through the slower times.
- Steady Income
With a long-term rental property, you have the protection of a leasing agreement that ensures you receive consistent rental income every single month.
- Permanent Guests
Unlike an Airbnb, a long-term rental has long-term guests. This can be beneficial for property owners, as it allows you to build lasting relationships that ensure your rental stays occupied.
Additionally, having permanent tenants allows you to easily identify the source of damage to your property in certain circumstances.
- Set Pricing
Although set pricing can provide a long-term rental owner with a steady income, it leaves little room for growth. Since a long-term rental must be provided to a tenant at a set price, the property owner cannot adjust their pricing according to market demand or other factors until the current lease ends.
This can result in a major loss of potential income that Airbnb hosts can earn on weekends, holidays, and other special occasions.
- Lower Overall Income
Unless you have a rental property that is rented out for a monthly rate way above average, your total overall income from a long-term rental property is going to be lower than that of an Airbnb.
- Tied into Lease Agreement
While a leasing agreement can be great legal protection, it can also greatly limit what you can do with your property. Along with being locked into a set pricing model, a leasing agreement also determines how long your property will remain occupied for – which can bar you from taking on more profitable opportunities if they occur within the leasing period.
Final Thoughts: Should Your Property be an Airbnb or a Rental?
Overall, renting your property out as an Airbnb is likely to be the more profitable choice.
With an Airbnb, you have the freedom of flexible pricing models to make the most out of each night your property is reserved. Plus, you have more total guests, which can lead to excellent word-of-mouth marketing.
Remember that you always need to check the local regulation and zoning laws before listing your property as either an Airbnb or a long-term rental. Respecting local laws is the key to running a great business and avoiding hefty fees.