Long-Term Rentals vs Airbnbs: The Case for Buying Both
TL:DR: Follow the money
This one is dedicated specifically to one of my favorite coworkers: she is a powerhouse and I can’t wait to see which route she chooses, and therefore conquers - and to anyone who has questioned this predicament.
The best option we’ve found is truly to evaluate both options in your area, taking into account your down payment, interest in getting a property manager, and determining which one is most likely to get you the best income minus expenses return.
The Exceptions (because why not list them first)
1. You want to live in this home with permanent roommates. Well, this would be a house hack and I’d recommend reading that post. I would recommend still finding a home where you can get roommates but also has the potential for Airbnb if there’s a break between renters and the space can be easily furnished.
2. You want to be able to vacation their regularly. If you want to be able to use this property as well, it’s a little tougher to if you have yearly rentals in the property, making a great case for Airbnb. Just block out the weeks you wanna go!
Factor’s Which Shouldn’t Affect This Discussion
1. You’re not currently living in the area. This one doesn’t actually matter. See if you can make more from Airbnb or long-term tenants. Hopefully, you’ve lived in this area before for some time and are familiar with the area – or can become familiar with the market since you already know the town!
2. You’re not from and familiar with the area: I find this risky either way. It’s one thing to not currently live there, but I believe you should always be familiar with an area before buying a home, especially if it’s one of the earlier homes you buy. Now if you’ve done this a dozen or so times, well, you’re more experienced than me and you’re welcome to comment below and layout wisdom for us all. (not kidding – I’m always down to learn)
How to Evaluate:
1. What are the yearly costs of the property you’re considering buying?
Include monthly payments, insurance, property taxes, possible furnishing costs, and repairs
How much extra will it cost to have a property manager if that’s what you want to do?
2. What is your possible income from this property?
Include vacancy rates and evaluate across a variety of possible incomes
Examples
This could look like $1,600 - $1,800 for 10 out of 12 months a year for a long term rental
This could look like $200-$300 a night for 100-150 nights for Airbnb/VRBO
3. Which of these has the largest positive difference?
Which property brings in more money than it costs to own?
Subtract the amount it makes from the amount it costs. Which ones gives you more in your pocket?
4. Special Consideration: How does this compare to the initial down payment?
For examples: If you have a million-dollar property that yields 10k a year, and a 300k property yielding 5k a year, you’ll be able to pay off the 300k one sooo much sooner it may be worth going with the cheaper property for the tradeoff.
However, if both this million-dollar property and 300k property can both be paid off by renters in 15 years, and at that point your total income goes way up, it could be worth reconsidering
What that looks like: The million-dollar property brings in 10k profit a year while you have a mortgage. After the mortgage is paid off in 15 years, you would make the 10k profit + the 7k monthly (used to be going towards monthly payments)
At this point, it also comes down to your risk and ability to borrow.
5. Run these numbers and see what feels right according to your risk averseness.
Talk to an agent with investment experience to confirm your expectations for returns are reasonable.
Emotional Factors to Consider:
Do you prefer doing a thorough background check and keeping the person for 1+ years or taking a risk with someone each week?
I personally prefer Airbnb as most of them are fantastic and if they’re not, I don’t need to wait a year to get rid of them.
Nonetheless, I know a few landlords who have had the same tenant for years on end, and absolutely love them! When I had my favorite set of renters, I honestly probably could’ve kept them for the next 10 years as well
Things to consider for either purchase:
Can it be a long-term rental
Can you rent it out to friends/family if an ’08 style crash happens again and you’re desperate
Can it be an Airbnb
Can you sell it even if the market takes a pretty strong downward turn
Can you get a job making significantly less and still cover payments with minimal income coming in?
These are a few questions we ask ourselves to be prepared for any ‘what if’ possibilities. What if:
The market turns, is it in a neighborhood we can still still sell for a little while? Do we have enough down that we could pull out without having to pay money to cover the difference?
They outlaw Airbnb in this HOA? Can we use it for a long-term rental or invite friends to use it to cover the cost?
Either way, if the laws, market, or my financial position change, I want to be as prepared as possible, and I always recommend you are too.