Which is more profitable: a house or an apartment?

[Kevin1244]

I'm thinking about taking the plunge into STR hosting, and I'm trying to determine which is more profitable, a stand-alone house, or an apartment. IMPORTANT: WE ARE TALKING ABOUT AN 'ENTIRE PLACE' SCENARIO, NOT A PRIVATE ROOM IN MY OWN HOME.

Got two questions:

1. You live in a mid-size city where both apartments and houses are plentiful, and the suburbs are just as popular as the downtown area. You have two STR properties. One is a 2- or 3-bedroom house. The other is a 1-bedroom apartment/condo. Theoretically, if both units are performing at the same occupancy rate, which one is more profitable for you? In other words, if both units book 20 nights this month, which one made more money for you?

2. Which type of property is more popular among traveling guests: a house or an apartment? This matters because if the demand for apartments is higher than for houses, then apartments would be more profitable, even if houses have a wider profit margin. Because your house might be sitting empty, while your apartment is performing at a higher occupancy rate.

I realize there are a lot of variables here, and you might want to say that there's no right answer, but that's not what I'm seeing when I read conversation threads on various forums on the internet. I am getting the sense that houses have a bigger profit margin in general. We're talking general rule of thumb here.

Finally, would your answers change if I told you that I am thinking of subleasing (rental arbitrage) instead of using a property that I own myself?

[Tim-and-Holly0]

@Kevin1244:
I operate three homes; a 1 bedroom, a 2 bedroom and a 3 bedroom. Noted- they are all houses, not apartments, but perhaps some of my experience of the last four years will help you.

Occupancy:

1. The most rented home (91% annually) is the two bedroom with maximum 5 guests. We have found that single guests to full occupancy will rent this home. It is popular with friends or co-workers traveling together but not wanting to sleep together as well as families needing more than one bed.

2. The second most rented home is the three bedroom (85% annually). Usually it is rented by either people needing three bedrooms or who have a pet. Rarely do we rent the three bedroom for people needing only one or two bedrooms.

3. The one bedroom home rents the least at 81% annually.  Understandably it is most commonly reserved by individuals and couples.

Income & Expenses:

1. The one and two bedroom homes rent for very close to the same dollar amount.

2. The 3 bedroom home rents for only about $25 more than the other homes.

3. Even with 6% lower occupancy rate the 3 bedroom home generated about 25% more gross income, but only about 12% more net income due to the higher expenses in cleaning, utilities, mortgage, and wear and tear.

Other Considerations:

1. The larger the home the more guests will be invited, thus the more potential for problems.

2. Apartments have closer neighbors who may not like the Airbnb guests and cause problems.

3. Apartments usually have pretty nasty sublease terms.

4. If I had my choice I would be starting a fourth home- a 2 bedroom one bath.

Like I said, perhaps this will help you.

[Kevin1244]

Tim, thank you for an excellent response. And BTW, your web site content is of exceptionally high quality. I plan to take copious notes from it and will likely give you some consulting business at some point before I go live with my listing. 

One question about your #4 above: why would you opt for a 2-bed home as your next venture, if your 3-bed is more profitable? 

[Tim-and-Holly0]

@Kevin1244:
I would opt for the smaller home due to time. I clean my own homes. I can clean a small two bedroom in about an hour (1 1/2 hours if dirty) but the minimum time for a three bedroom two bath is 2 hours to 3 hours if dirty. I can clean two smaller homes in the time it takes to clean one larger home. Figure twelve minutes per bedroom and per bathroom to clean, dust, replace linens, towels, restock, mop/vacuum, etc.  In a larger home your common areas tend to be larger too so cleaning time is also extended. And the final straw is laundry time. I can do all the laundry in a two bedroom one bath home in two loads, but a three bedroom two bath home requires a minimum of three loads, so automatically the cleaning time is extended at least one hour to wash and dry. If you choose to use a cleaning service that extra hour for laundry is going to add up.

[Mark116]

@Kevin1244 

Why is the apartment only a one bedroom, LOL?  

Profitability depends on what kind of premium pricing you could be using, so it depends on what attracts guests to your area, if they want to be downtown, then a 2 bedroom apartment might be able to be listed at a very profitable rate.  If you are in a vacation type of area where people are looking for 'vacation houses' then a house would probably command a better fee.

However, you should be aware, if you aren't, that there are many locations that are/have/will consider anti STR laws, so any investment should be predicated on the fact that you can still make money if it is rented in the normal long term manner.

It also depends on what type of guests you want to attract...sightseers who be out and about/an apartment, people who are coming primarily to stay at the house itself [partiers] will be more interested in a house.  Each of these presents different challenges and potentials for problems.

[Kevin1244]

Good question. I'm puzzling over the fact that in my mid-size city (about 1/2 million), there are very few apartments on Airbnb that have more than one bedroom. Why? I don't know. Could it be that people who have enough members in their party to book a place with more than one bedroom automatically prefer a house over an apartment? I can see that happening. I live in a very 'balanced' city, where houses and apartments are both popular and plentiful. Whatever the explanation is, I'm just going with the flow.

Thanks for your suggestions -very helpful!

[Tim-and-Holly0]

@Kevin1244:

The fewer number of apartments is due to anti-subletting clauses in the leases. I would conjecture that the majority of apartments you see are actually condos that are purchased by the host.