Airbnb or Rental? Choose the best strategy with these 4 questions

Real estate investment strategies can be divided into two high level camps: short term rentals such as those listed on Airbnb, and long-term rentals with terms of 6 months or longer. At different points in my time as a real estate investor, I have gravitated towards each of these camps, and I’ve found exactly how to choose the strategy that is right for you.

Your goals will determine whether an Airbnb or long-term rental strategy is right for you at any given time in your investment journey. To choose the right direction, you should determine how active you would like be in the investment, the terms in which you are looking to make money, what the property itself is optimally suited to, and what strategy best matches your personal strengths.

Your answers to each of these questions will be unique to you, which is why a solid understanding of your personal goals is so important. Read on to dive deeper into how you will evaluate and gain a deeper understanding of what these goals will mean in your case.

Question 1: do you want an active or passive investment?

The truth is that neither an Airbnb or long-term rentals are completely passive investments. However, Airbnbs are generally considered to require much more day to day involvement. This makes sense, as Airbnbs occupy the hospitality space, where your level of service and amenities are key. With that said, long-term rentals are not completely passive either. There are fewer day to day tasks, but the more occasional activities can have a greater impact on your overall success. For example, a poor tenant selection on a long-term rental could leave to a host of future problems and cost a great deal in the long run.

The following side-by-side comparison breaks down some of the common tasks and activities involved with each investing strategy. As you read through the list, think of what tasks you would enjoy doing, and have the capacity to do within your current time constraints.

Type	Airbnb	Long-Term Rental
Daily Activities	> Communicate with prospective and current guests > Address issues and questions during a guest stay > Coordinate cleaning > Restock consumables > Monitor booking statuses > Respond to and address reviews	> None
Frequent Activities	> Monitor and adjust pricing > Replace broken/lost supplies	> Monitor monthly rental payments
Occasional Activities	> Replace wearables such as sheets and towels > Perform repairs & maintenance activities	> Perform repairs & maintenance > Communicate with tenants > Perform walk-through inspections > Renew leases > Re-list property and evaluate prospective tenants

Clearly, the Airbnb model is weighted much more heavily to the day-to-day activities, while a long-term rental requires active involvement more occasionally. Many experienced investors will work to implement tools and systems to automate many of these tasks, however it is important to understand how these changes will work and how they might impact the experiences of your guests and tenants.

Questions to ask

How much daily involvement in the investment are you able to provide, and do you want?
Can you provide a 5-star hospitality experience for each and every person?
Can you put in the work and effort to automate the activities that you aren’t as skilled at?

What if both are too active for you?

If you have reached the end of this section and still want to invest in real estate but are not able to be as active as would be required, perhaps becoming a passive equity partner is a better fit. As an equity partner, you would team up with someone that would be the active managing party, who would handle the day to day management. The exact terms of responsibility are typically spelled out in a legal Joint Venture agreement, and can be divided up in any way that works best for the two or more parties involved.

Question 2: how do you want to earn money?

One of the greatest things about real estate investing is that it offers countless different ways to earn money. From different asset classes to multiple revenue streams, you really can build your own path. When choosing between short and long-term rental properties, there are a few income related differentiators that are important to consider:

Cash flow

Generally speaking, it is possible to make the greatest monthly cash flow with an Airbnb. This assumes of course that you have selected your market properly, have a desirable listing, and have your pricing dialed in accordingly. In order to compensate for those added daily tasks and activities, you are able to charge a premium for a nightly stay over an annual lease agreement. You are also providing a finished product, fully furnished and ready to host, which add value over an empty unit despite the upfront costs involved. There is one catch, in that monthly revenue is much more volatile as you are unable to predict your occupancy rate on a monthly basis.

Even with this considered, where I would expect $100-500/month in positive cash flow on an annual lease, I would expect at least 2-5x that with an Airbnb.

Start-up costs

The costs to get your investment off the ground diverge significantly between short and long-term rentals. With an Airbnb, you will have to consider all of the furnishing costs, including tables, chairs, sofas, beds, rugs, lights and miscellaneous decor items. Not to mention that you will have to outfit your space with amenities, including dishes, pots and pans, cutlery, bed sheets, towels, pillows, soaps, coffee and other convenience items. You should expect your furnishing costs to range from $5,000-15,000, depending on the level of finish and the square footage of your space. In a long term rental, you simply have to provide a clean and functional space. Any startup costs outside of your construction or rehab budget will be comparatively minimal.

Equity, appreciation and principal pay-down

Here’s the best part - no matter which you choose, you will gain from the benefit of your renters paying down your mortgage principal each and every month. Not to mention, your property should gain in value over time with appreciation. These two factors mean are what make real estate investing so valuable, especially in the long term.

Quick example: on a $500,000 property with $100,000 down @ 3.29% over 5 years, you will have paid $56,218 towards the principal. Over that same year with a modest 2% appreciation, you will have earned $52,040 in appreciation, for a total of $108,258! Even without the appreciation, the $56k in principal pay-down is a fantastic return on an initial $100k investment!

The equity earned is yours no matter the strategy you use to rent it out, so you will win either way. Just make sure to choose a great property in a location with good economic fundamentals, and you should do very well in the long run.

Question 3: do you already have the property?

“In general, a short term rental is best centrally located, near an attraction or tourism draw, whereas a long-term rental is best suited to more established locations where people want to live. ”

Although most properties can be effective as either short or long term rentals, some certainly work better in certain situations. The neighbourhood demographics, the municipal bylaws, the proximity to work centres and attractions, and the property type itself are all important factors to consider in how you will ultimately list it.

For example, my first basement apartment conversion is located in a mature residential suburban community, within walking distance to local schools. It is on a quiet street with well established neighbours. It is not near any major employment centres or attractions and is largely dependent on cars for transportation. It is perfect as a long term rental. However, if it were a condo near downtown in a trendy area, it would be well suited to an Airbnb.

Question 4: which strategy matches your skills, or the skills you want to build?

All of the questions above can help you build a perfectly rational argument as to which investment strategy will work for you. However, if you are honest with yourself, which do you think you would be better at? Which activities from question 1 favour your skillset the most? Which could you see yourself doing in the long run? Does either one of these feel right to you?

I started in long-term rentals as they felt the best for me at that time. They felt manageable, having one tenant at a time that I could focus on. Also, as a new investor I felt that the skills required upfront would be less demanding. It was less demanding. I’d get a few calls here and there for the occasional maintenance work or question, but otherwise things were relatively hands-off. Once I got the first rental under my belt, it was fairly straightforward to add a second. As time has gone on and my comfort level has increased, I have begun to take a real interest in Airbnbs. I love the interaction with my tenants and the opportunity to create a great experience for them. So for me, it feels like a perfect transition into the short-term rental space.

So, what feels best for you, and what could you be great at if you had the chance?

Lastly, if you don’t like it, you can always change!

With all of this said, remember that you can always change at a later time! If you try out being an Airbnb host and decide it is not for you, you can either hire someone to manage it for you, or convert it to a long-term rental. And if long-term rentals just aren’t energizing you the way you thought, you can always try an Airbnb on your next property. Or, change it over when your tenant moves out. The bottom line is that you’re never stuck in real estate investing, and there’s never one right way to do it. If you are creative and keep an open mind, you’ll always have options available.

So, which strategy do you love? Do you use one, or both? What draws you to that strategy?