There is a lot to like about the lucrative market of Airbnb for property professionals.
One major lure for investors and entrepreneurs are the different ways to become successful in the short term rental and holiday let industry, and take your slice of the pie. Each strategy can play on the resources available to you as well as your strengths as an entrepreneur.
In this article, we discuss the major strategies to grow an Airbnb business that we see today in the UK, together with their features, benefits and drawbacks.
If you are early into your Airbnb or short term let journey, or perhaps you are a first time entrant, we hope the breakdown below when read in relation to your own personal business goals can help inspire you to maximise the outcomes.
The 3 different strategies to grow your airbnb business
1. Ownership of Airbnb properties
This remains the de facto path for the majority of Airbnb and short term rental entrepreneurs out there. You own your home already and rent out spare rooms or unused spaces (e.g. an annexe). Or, perhaps you bought a second home for leisure purposes, and you are able to generate an income from it when it is vacant. However, and more interesting for those wanting to make this a full time business, many serviced accommodation professionals also act as property landlords who grow their business through buying more properties. This is often because the returns can be significantly better than other forms of property investing, such as Buy to Let and Commercial.
A benefit of employing this strategy is the flexibility ownership gives you. You can choose to operate the properties yourself, or you can employ the other Airbnb strategies we details below such as outsourcing to a property management company.
2. Airbnb property management companies
This is where you enter into a contract with the landlord of the property to manage the property on their behalf for Airbnb / short term let purposes. This strategy is a case of knowing your strengths and optimising all resources into creating a profitable and highly rated hospitality business.
How to monetise this? Typically, the landlord will receive all the Airbnb revenue direct and pay you your % share or you will receive the income first and pay the landlord their share of the pot. The range can vary and be dependent on the strength of your brand but it could range from 15-20% + VAT of revenue that you keep as a guide.
One of the many advantages of this approach is how quickly you can grow to manage tens and even hundreds of Airbnb properties in a relatively short space of time and really benefit from economies of scale as you improve the business operations. So while 20% revenue may not feel a high amount, it stacks up when you have lots of properties under your belt.
3. Rent to Rent (or rental arbitrage)
Similar to the management strategy, the key difference is here you agree with the landlord to sub-let the property on a formal contract promising a guaranteed rent. This then means all extra income on top of that rent is yours to keep. The practice is as old as markets themselves but it's become a unique business strategy by many Airbnb management companies wanting to grow.
What to consider when deciding on the different Airbnb strategies?
There are many key factors you must consider here and in particular how they align with your main business goals.
Upfront capital required
Ownership: Of course, to buy a property requires cash to put down as deposits, or other assets to refinance/remortgage for capital raising purposes. A property specifically for investment purposes can require typically a minimum 25% deposit. Furthermore, there is the additional capital required for refurbishment and any furnishing unless buying actively trading turnkey Airbnbs which can be ready.
You can learn more here about the different ways to finance the cost for an Airbnb purchase via raising a mortgage. There are specialist lenders in the space each with different criteria, stress testing and debt serviceability requirements.
Management: this should be cheapest of the 3 strategies in terms of upfront costs as the landlord bears the brunt of the property costs, and your expenditure is focused on the actual business itself. You will have to invest in the software costs to run the business effectively e.g. utilising a property management system like Guesty or Lodgify.
Rent to Rent: the upfront cost is often dependent on the deal you can negotiate with the owner. We often see 1 month's rent and a deposit as a standard requirement, and 12 month+ contracts are common. Longer contracts can give you peace of mind that you can invest into the property and partnership, too. And note, the furnishing costs may also sit with you, too.
Speed to acquire next Airbnb property
Ownership: the majority of buyers will require mortgages and this can be a 4-12 week process on average. There are ways to speed this up such as buying Airbnbs at property auctions where often seller and specialist auction mortgage lenders are geared for a quick completion, as well as selling active Airbnbs on the Airbuy & Sell marketplace to specialist STR buyers ready to complete on their next property.
Management: typically the quickest of the different strategies as you are finding the right properties that fit your ideal profile and contacting the owners direct. That said, the process of doing that can be time consuming and you may be waiting for the right property / owner to come in a similar timeframe to buying your own property.
Rent to Rent: similar to management, it should be relatively quick to strike up a new leasehold arrangement. You may find there are a smaller pool of landlords wanting to enter into formal sub-let arrangements however.
Profit margins and long term value
Ownership: undoubtedly, if you get it right this should be the clear winner. As a trading business, your profit is yours to keep (excluding tax). You don't have to pay a share of your margin out to a landlord. And most importantly, the price of the property should appreciate over time which remains one of the strongest assets to own.
Management: this business model really thrives from economies of scale and specialisation. If you are taking 20% revenue from the property (with the rest to the landlord) and you manage to reduce your overall costs per property to 10% from economies of scale (e.g. hiring full-time in-house cleaners rather than outsourcing or utilising overseas Virtual Assistants) then you are making a healthy 10% profit per property. The long term value will be derived from the trading business, and the brand you can build from successfully managing many properties successfully.
Rent to Rent: similar to management, the value in the business is from economies of scale as you will be taking a smaller margin from each property. The current long term rental market in popular cities across the UK is relatively high as at 2023 so the margin in this particular strategy is even thinner. It could be negotiating longer term contracts and for lower minimum guaranteed rents to keep as much of the margin as possible.
Cash Flow
Ownership: this strategy will take the biggest hit to your cash balance from the offset, and assuming you require a mortgage, you will have to service the debt from your profit after letting it out. You will also have to cover the other expenditure associated with the property which could include utility bills, water and council tax, and of course any property maintenance. All of this could lead to cash flow squeezes at different points in the months or year.
Management: given the landlord will handle the typical property expenses, your expenses will relate to the Airbnb business only which you may be able to plan for and bundle better. You may also agree to pay your landlord in quarterly instalments giving you more time to build up a buffer of cash from guest income.
Rent to Rent: this is similar to Management but it can be more challenging on cash flow as you'll have the monthly rent obligation as well as managing the property and business costs too.
Risk
Ownership: where ownership does provide a high degree of flexibility across other criteria, it is a fixed asset and the main risk stems from the property not performing as expected. The landlord remains responsible for the mortgage and utility costs. That said, when buying an Airbnb property via a marketplace like Airbuy and Sell, you can see the long term rental opportunity too so this should be a back up option if short term letting temporarily does not work.
Management: here, the risk lies in the lack of control. Ultimately, landlords can seize back properties after contract lengths or sell it despite the significant investment you may have put in. The more properties you have with multiple landlords, the lesser this risk of course.
Rent to rent: unlike management, you can negotiate longer contract lengths of 12 months+ which can give peace of mind for longer. However, similar to owning the property, should the Airbnb not perform you are liable for the guaranteed rent. Further, in a typical rent to rent operation, the landlord is still responsible for structural maintenance. Should issues arise and your landlord is slow to act, it could have a detrimental impact on your business.
There is no one size fits all when it comes to the Airbnb and short term rental business. And that should excite you! Play to your strengths and adapt as required. The old expression is very true in this industry: it's horses for courses. And you could take this more literally too as many Airbnb entrepreneurs do by employing different strategies for different properties. You may have an acquisition portfolio that is different to your management portfolio for example. A combination of the strategies is both possible and can often be very effective.
You can search Airbnbs to buy on the marketplace now, and you can read more of our articles on the blog to inspire and educate you further on the short term let and holiday home industry.
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