Airbnb has seen a dramatic rise in popularity over the last decade, creating a new avenue of income for property investors. From the outside, it looks like an extremely lucrative investment – and why wouldn’t it be?
In 2018, over 3.85 million tourists visited Edinburgh and contributed £1.3 billion to the Scottish economy. So, without a doubt, Airbnb can be an extremely profitable investment. However, its success depends on your individual circumstances.
Do you like meeting new people? If so, how frequently? Can you cope with void periods? What about increased wear and tear of your furniture?
Depending on how you answer these questions, long term rental might be a more suitable strategy for you. In this article, we’ll explore the important pitfalls that come with Airbnb and why long term rental could be a more viable strategy for your property investment.
What are the benefits of Airbnb?
First things first, the advantages of Airbnb property investment can go far beyond just financial gain. True, if leveraged effectively, it can be a great way of generating a lot of income. But it can also give you so much more. Here are the main advantages that Airbnb has to offer:
- Meeting new people. The Airbnb model is designed for short term rentals. If you love meeting new people frequently, then this is an excellent way of making lots of new connections.
- It can be highly profitable. Short term rentals with higher rates mean you can potentially earn more from one week than you would from one month in a long-term lease.
- Greater flexibility and freedom. A steady flow of new guests prevents you from being tied to any long term relationships with tenants.
- More demand for short term property. The demand for short-term property is on the rise, so as long as you are proactive, you shouldn’t have too much difficulty in attracting tenants.
Although on paper the Airbnb model can be an attractive one, as with any business decision, it’s important that you are aware of the many pitfalls that could potentially give you more than just a headache.
OK, so why wouldn’t I sign up to Airbnb?
To begin with, Airbnb requires you to be very proactive as a property investor in order for it to be profitable. While you can charge higher prices for short-term stays, it’s mandatory that you attract a consistent turnover of guests renting your rooms to avoid empty rentals.
If not, you lose money. Void periods are costly and they may become an inevitability if you don’t have the time to keep on top of attracting renters. And even if you are on top of it, sometimes the circumstances are completely outside your control.
Covid-19 is a perfect example of this, as its devastating impact on tourism has completely crippled the Airbnb industry. And rental voids lead to income voids — a scenario that will continue for the foreseeable future.
Conversely, if you had opted for a long-term tenancy for your buy-to-let property, such a commitment would have provided you with enough protection to weather the brunt of the storm and maybe even come out the other side unscathed.
What can be just as concerning is the possibility of attracting unfavourable guests. Your high turnover of tenants increases the chances of you bringing in a guest that ends up being problematic.
Airbnb horror stories are never hard to find. Secret brothels, illegal raves, drug-spots, and, even worse, deaths, are just a handful of the terrifying events that deserve your attention.
Another reality you will have to face is that most mainstream home insurance providers aren’t willing to cover Airbnb rentals because of these very reasons. Your inability to screen prospective tenants and higher turnover rate immediately puts you into the high-risk category.
And then there’s the problem of convincing mortgage lenders to allow you to rent your investment property out as an Airbnb. Generally speaking, this doesn’t sit well with lenders and it will be an obstacle that you’ll have to overcome if you have a mortgage as their terms and conditions are usually designed to only be compatible with traditional renting and not the short-term lets that come with Airbnb.
What are the benefits of long-term rentals?
Traditional renting gives you two indispensable assets: stability and financial consistency. Tenants have to commit to monthly rent, providing you with a guaranteed income that allows you to budget accordingly and plan more reliably for the future.
You also have the power to screen all of your prospective tenants. Asking for landlord references, employer references and financial statements will provide you with enough evidence to make an informed decision on who’s the safest option.
Additionally, unlike Airbnbs, long term rentals aren’t dependent on tourism. This provides you with greater protection against disasters that can directly inhibit tourists coming into the country. As we mentioned above, Covid-19 has had a devastating impact on Airbnbs, causing many buy-to-let investors to lose money from sustained rental voids while investors who have long-term tenants are still receiving an income.
How Covid-19 has impacted Airbnbs
British tourism is expected to lose £37bn due to the impact of Covid-19. As you can imagine, the repercussions for Airbnbs have been nothing short of catastrophic. Airbnb’s chief executive, Brian Chesky, states that their forecasted revenue for 2020 is expected to be less than half of their earnings in 2019.
There’s also been a huge backlash from landlords at Airbnb’s decision to allow guests to cancel and claim a 100% refund for trips beginning before the 31st of May. To make matters worse, there is no sign of the situation improving until the Covid crisis is fully resolved, which may be many months away.
Chesky claims that around 50% of Airbnb hosts rely on the company to pay their rent or their mortgage. Just imagine if they had opted for long-term tenants instead…
Airbnbs have always been a riskier investment than traditional buy-to-let properties, but the recent pandemic has fully exposed perhaps its greatest pitfall — its over-reliance on tourism. Landlords who have been seduced by the higher profit margins offered by Airbnbs are now having to face the likelihood of long-term rental voids and the loss of income this entails.
Conversely, the resilience of traditional renting has proven to be indispensable, as many landlords are still receiving their monthly income despite the pandemic. Even without its reliance on tourism, Airbnb still has many risks, making it difficult to justify it as a more financially viable investment than traditional letting.