Disclosure: I do not work for AirBnB but I do work for a tech company in Silicon Valley. The views expressed in this post are solely mine. AirBnB did not pay me for this post. (But they could if they want to.)
It is no secret that my wife and I prefer long-term tenants over short-term because of the lower maintenance and consistent rental income. We built an Accessory Dwelling Unit (ADU) in our backyard and tried AirBnB for a couple of months but found it high maintenance despite the greater income potential over long-term rentals. We never imagined that a pandemic caused by coronavirus followed by a shelter-in-place order could decimate the AirBnB market which caters to mostly travelers.
Sadly, with no travelers to book short-term rentals, AirBnB had to layoff 25% of their staff. I believe AirBnB could have avoided such a fate had they expanded their product to address long-term renters which are always in demand. True to my Silicon Valley roots, a Product Manager would say, “As a landlord, I want to find reputable long-term renters by vetting renters through the rating system created from AirBnB.” I believe that AirBnB has created a platform that could be honed towards long-term rentals to help both renters and landlords. In this post, I will showcase the economics I learned from conducting a real-life A/B test between renting my ADU for both short-term and long-term use-cases. Let me first start with breaking down the use cases using the Three W’s Framework.
First W: What is AirBnB
For those not familiar, AirBnB provides an online platform that uses network effects to connect travelers with hosts who own listings. AirBnB created a new market for travelers looking to indulge in new experiences outside staying in traditional settings such as hotels or hostels. The platform provides tooling that encourages listings and bookings in the following ways:
- A marketplace of listings that advertise to potential travelers in the form of photos, location, and conveniences (i.e. free internet, public transportation, self check-in, in-unit laundry).
- Ratings can be left for both travelers and hosts, therefore, rating score reputation act as an essential currency for AirBnB users.
- Calendar scheduling makes it easy to show listing availability for reservations.
Opportunity for Long-term use-case
All of the above-mentioned AirBnB tooling features can be directly applied to both short-term and long-term use cases. The platform experience of matching renters and landlords would be almost identical to how it is today with travelers and hosts. Long-term use-case tooling in the form of a recurring rent collection product could be added for convenience along with a deposit escrow feature.
Second W: Who can use AirBnB
The types of users AirBnB primarily targets for its platform are individuals interested in short-term use cases such as vacation, business travel, or leisure. Network effects really come into play here as the desires of each persona are mutually satisfied from using AirBnB to connect.
Persona: Hosts
Hosts start the process flow by creating listings. A host will mostly have monetary reasons for wanting to create a listing on AirBnB. Reasons could include:
- Generate a new income stream
- Want to meet new people
- Create a business
- Sublet the apartment while away
Persona: Guests
Guests are the next process that make reservations. Guests looking to indulge in new experiences generally consider AirBnB listings. Reasons could include:
- Experience something different than a hotel
- Location convenience for event or destination
- No hotels available
- No availability at hotel
- Size of group with limited options
- Amenities such as in-unit laundry, kitchenette, space size
During my 2-months being an AirBnB host, I had a total of 8x bookings with guests that all had different reasons for staying in my backyard ADU. The most interesting story was from a couple moving cross country so they needed to wait for their moving van to arrive with furniture.
Long-term Personas
Continuing to make my case for AirBnB to include long-term rentals, we should examine the related personas of renters and landlords.
Persona: Renters
Unless you own a home or travel full-time, which some FIRE enthusiasts do, you are likely a renter. A renter is looking for stability in terms of where they live. Unlike a traveler, a renter shuns mobility due to the trouble related to moving. Other desires include:
- Prefer to stay long-term (i.e. 6-months or longer)
- Want space for baggage
- Convenient location
- Affordability
Persona: Landlords
Just like in my favorite boardgame Monopoly, landlords want to collect rent. In addition to collecting rent, landlords favor long-term tenants who pay rent on-time and maintain care for the property. Other desires include:
- Prefer long-term tenants (i.e. 6-months or longer)
- Reputable tenants (AirBnB rating system could help here)
- Tenants with good credit
- Collect rent on-time
- Extras consideration for handy tenants that enjoy DIY
Third W: Why AirBnB should Pivot towards Long-Term Rentals
Sadly, with no travelers to book short-term rentals, AirBnB had to layoff 25% of their staff. I believe AirBnB could have avoided such a fate had they expanded their product to address long-term renters which are always in demand. Two of the strongest reasons are:
- The platform already provides tooling that encourages listings and bookings which could be honed towards long-term rentals.
- Long-term rentals are always in demand, unlike short-term use-cases that are seasonal and vulnerable (e.g. travel restrictions, NIMBY, pandemic lockdown).
Reason 1: Platform for Long-Term Rentals
I believe that AirBnB has created a platform that could be honed towards long-term rentals to help both renters and landlords. Much of the tooling required for landlords and tenants to find each other already exist on the AirBnB platform. The existing tooling would just require some minor upgrades to cater towards rentals such as:
- A new “Long-Term Rental” category for the marketplace to match renters with landlords who have listings.
- A rating system that could also be used to provide scores for not just tenant and landlord but also rental space score.
- A Calendar to showcase listing availability and include contract length.
Reason 2: Addressable Market Opportunity for Long-Term Rentals
There are currently 4.1 million active mortgages that have asked for forbearance due to coronavirus. Assuming 30% of forbearance mortgages are for rentals, that means AirBnB missed an opportunity to address 1.2 million new customers. Assuming an average rent price of $500 per month, I estimate a $600 million market opportunity that AirBnB could easily address if they focus on long-term rentals. This is only for coronavirus affected mortgages, therefore the long-term rental opportunity is much larger if you include landlords who are free and clear of a mortgage.
Economics of Short-Term versus Long-Term Results
Finally the moment we have all been waiting for. Let’s examine economics and define the key performance indicators from the short-term and long-term results collected from renting my ADU. In true A/B test fashion, I was able to obtain actual field-tested results to learn from when my wife and I decided first to try AirBnB with our backyard ADU.
Short-Term Rental Results
My ADU listing on AirBnB performed well in a very short period of time of only 2-months. We had an occupancy rate of 92% with a perfect 5-star rating where the unit averaged $114.56 per night. There was a total of 36-nights booked across 8 reservations that totaled $4,124.00. The longest booking duration was for 10-nights.
Long-Term Rental Results
After experimenting with AirBnB for 2-months, my wife and I quickly transitioned our ADU into a long-term rental. My wife and I prefer long-term rentals because it has a predictable recurring revenue with low turnover. We currently have a tenant who has signed a 2-year agreement at $2,000/month. That is a reduction of 26% over our best performing AirBnB month of October at $2,716. We never imagined that a pandemic caused by coronavirus followed by a shelter-in-place order could decimate the AirBnB market which caters to mostly travelers. We were just lucky that the decision turned out better for us.
Summary of A/B Results
I created the following chart to help summarize the results of my ADU experiment. Clearly the Short-Term Rental Projected Revenue is 60% higher than the Long-Term Rental Projected Revenue, however that is assuming 92% occupancy rate over the course of 24-months. That already sounds like too much work in terms of maintenance (i.e. cleaning, rotating linens, fresh coffee pods, refilling toiletries). No thank you. I would rather collect the rent passively.
| Short-Term Rental | Long-Term Rental | |
| Best Month | $2,716 | $2,000 |
| Average Daily Rate | $114.56 | $66.67 |
| Longest Contract Duration | 10-days | 24-months |
| Occupancy Rate | 92% | 100% |
| Projected Revenue 24-months | $76,938 | $48,000 |
Conclusion
I believe AirBnB could have avoided layoffs had they expanded their product to address long-term renters which are always in demand. AirBnB has created a platform that could be honed towards long-term rentals to help both renters and landlords. I estimate a $600 million market opportunity that AirBnB could easily address if they focus on long-term rentals. This is only for coronavirus affected mortgages, therefore the long-term rental opportunity is much larger if you include landlords who are free and clear of a mortgage. Based on my A/B experiment results from my backyard ADU, the reduced income potential for long-term rental is 26% less than short-term rental. However, my wife and I prefer long-term tenants over short-term because of the lower maintenance and steady projected revenue. Long-term rentals are always in demand, unlike short-term use-cases that are seasonal and vulnerable (e.g. travel restrictions, NIMBY, pandemic lockdown).
