How Airbnb Works

What Is Airbnb?

Airbnb is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in specific locales.

The company has come a long way since 2007, when its co-founders first came up with the idea to invite paying guests to sleep on an air mattress in their living room. According to Airbnb's latest data, it has in excess of 5.6 million listings, covering more than 100,000 cities and towns and 220-plus countries worldwide.

In this article, we break down how Airbnb works, how it makes money, and the pros and cons of using its online marketplace.

Key Takeaways

  • Airbnb is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in specific locales.
  • Airbnb offers people an easy, relatively stress-free way to earn some income from their property.
  • Guests often find Airbnb is cheaper, has more character, and is homier than hotels.
  • Airbnb makes the bulk of its revenue by charging a service fee for each booking.
  • Cons of using this service include not getting what you expected, and, for hosts, renting your place to someone you haven’t had the chance to meet first.

How Airbnb Works

Airbnb has revolutionized the hospitality industry. Prior to 2008, travelers would have likely booked a hotel or hostel for their trip to another town. Nowadays, many of these same people are opting for Airbnb.

The idea behind Airbnb is simple: Find a way for local people to make some extra money renting out their spare home or room to people visiting the area. Hosts using this platform get to advertise their rentals to millions of people worldwide, with the reassurance that a big company will handle payments and offer support when needed. And for guests, Airbnb can offer a homey place to stay that has more character, perhaps even with a kitchen to avoid dining out, often at a lower price than what hotels charge.

Airbnb stands for "Air Bed and Breakfast," a name that reflects the company’s early origins—its co-founders invited paying guests to sleep on an air mattress in their living room to help cover the rent.

To make a booking, you generally need to take the following steps:

  1. Open the Airbnb website.
  2. Log in or create an account, if you haven’t already done so. Signing up can take a bit of time. Among other things, you’ll need to verify your phone number and upload some form of identification.
  3. Specify the location and date(s) you’re after and then begin looking for a place that’s available, using the site's various filters to customize your search.
  4. When you’ve found the ideal accommodation, make a booking or reserve it—sometimes bookings won't be fully validated until the host accepts.
  5. Pay for the accommodation and receive notification of your booking, including the address where you'll be staying. For longer-term stays, it’s possible to arrange a payment plan by which you’ll pay an initial deposit and the rest in installments.

Reading reviews is a key part of finding the right place to stay. However, they can't always be 100% relied on: Reviews sometimes tend to be more generous than usual, perhaps because guests are worried a bad review will lead the host to fire one back.

How Does Airbnb Make Money?

Airbnb’s business model is quite profitable. The company, like Uber, Lyft, and others, has capitalized on the sharing economy, essentially making money renting out property that it doesn’t own.

Every time a reservation is made, Airbnb takes a cut. When you click on a property, you'll find to the right of the page a breakdown of the fees you'll be charged if you go ahead and book. One of these fees is a service fee, which covers the cost of running the platform and providing support; this basically makes up the bulk of Airbnb's revenue.

According to the company’s website, most guest service fees are under 14.2% of the booking subtotal. Hosts, meanwhile, are charged 3% or more of the total amount earned for each booking.

Airbnb also operates an alternative payment structure that you might see from time to time. It's mandatory for hotels and some specific types of hosts (including software-connected ones) located in certain regions of the world to cover the service fee in full rather than split it with guests. When this is the case, the person offering accommodation will usually be charged about 14% to 16% of the booking subtotal. Exceptions include mainland China, where the host-only fee is fixed at 10%.

Airbnb competitors

Though relatively unique, Airbnb does face competition, including from the likes of Agoda, Booking.com, Expedia, HomeToGo, Google, TravelStaytion, Tripadvisor, TUI Villas, and Vrbo.  

Some of these competitors, such as Vrbo, offer solutions that are similar to Airbnb's. Others are effectively online travel agencies that help travelers find hotels and other private accommodation in the area they are visiting.

Advantages and Disadvantages of Using Airbnb

For hosts, participating in Airbnb is a way to earn some income from their property, but with the risk that the guest might do damage to it. For guests, the advantage can be relatively inexpensive accommodations, but with the risk that the property won’t be as appealing as the listing made it seem.

Here's a more in-depth look at some of the pros and cons:

Pros
  • Wide Selection: Airbnb hosts list many different kinds of properties, from single rooms, apartments, and houses to houseboats, caravans, and even castles.

  • Free Listings: Hosts don’t have to pay to list their properties. Listings can include written descriptions, photos with captions, and a user profile in which potential guests can get to know a bit about the hosts.

  • Hosts Can Set Their Own Price: It’s up to each host to decide how much to charge per night, per week, or per month.

  • Customizable Searches: Guests can search the Airbnb database—not only by date and location, but by price, type of property, amenities, and the language of the host—and add keywords (such as “close to the Louvre”) to help narrow their search.

  • Additional Services: Airbnb offerings include experiences and restaurants. People searching by location will see a list of experiences, such as classes and sightseeing, offered by local Airbnb hosts. Restaurant listings also include reviews from Airbnb hosts.

  • Protections for Guests and Hosts: Airbnb holds each guest's payment for 24 hours after check-in before releasing the funds to the host. For hosts, Airbnb provides up to $1,000,000 to cover unreasonable damage inflicted on the property. This protection comes at no extra cost but doesn't cover everything.

Cons
  • What You See May Not Be What You Get: Individual hosts create their own listings, and some may be more honest than others. One way to avoid disappointment is to read comments from previous guests.

  • Potential Damage: Although most stays go without incident, property damage is probably the biggest risk for hosts. Airbnb’s Host Damage Protection program provides some assurance, but it may not cover everything, such as cash, rare artwork, jewelry, and pets. Hosts whose homes are damaged may also experience considerable inconvenience.

  • Added Fees: Like hotels, Airbnb imposes a number of additional fees. For each booking, both guests and hosts pay a service fee to Airbnb, which can be steep. Banks or credit card issuers may also add fees, if applicable.

  • Taxes: Hosts and guests in several countries may be subject to a value-added tax (VAT). And depending on their location, hosts may be subject to rental income taxes. To assist with U.S. tax compliance, Airbnb collects taxpayer information from hosts so they can provide an account of their earnings each year via Form 1099 and Form 1042.

  • It Isn’t Legal Everywhere: Before listing a property on Airbnb, a would-be host needs to check local zoning ordinances to make sure it’s legal to rent out their property. Hosts may also be required to obtain special permits or licenses.

If your trip gets canceled at the last minute due to COVID-19-related issues, you will only be refunded if the host allows it. A notable exception is if the guest or the host tests positive for the virus, which is covered by Airbnb's extenuating circumstances cancellation policy.

Is Airbnb Cheaper Than Hotels?

In many cases, yes. Airbnb prices tend to be lower than those of hotels, in part because the owners of these places don’t have the same overhead costs.

Can You Stay in an Airbnb Long Term?

Yes, some hosts provide an option for longer-term stays and may even throw in a
discount for these types of reservations. Bear in mind, though, that stays longer than 28 days require paying each month upfront and are subject to Airbnb’s long-term cancellation policy, which states that guests must give 30 days' notice before checking in to receive a full refund. If you miss this deadline or wish to cancel during your stay, you will be billed for 30 days or the total cost of the reservation if it is for less than a month.

What Is Airbnb’s Refund Policy?

When the reservation has been made, you may be able to get a full or partial refund if you decide to cancel. Generally, the amount you’re entitled to depends on the host’s policy and how much time is left before checking in. If you click on the option to cancel your reservation, you’ll be presented with a complete breakdown of how much you‘ll get back if you proceed.


It’s also possible to get a partial refund after you’ve checked in, provided you file a request within 24 hours.

What Are the Rules for Having an Airbnb?

People interested in renting out a spare room or property need to do their homework before adding a listing on Airbnb. In many cities, there are licenses and permits that must be obtained before a property owner is legally permitted to take in paying guests. Certain restrictions may be put in place, too.


Failure to abide by these rules, or to report all earnings to the Internal Revenue Service (IRS) or local tax authority, could lead to a hefty fine.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Boston Globe. "Where Did Airbnb Get its Name?" Accessed Dec. 23, 2021.

  2. Airbnb. "About Us." Accessed Dec. 23, 2021.

  3. Airbnb, "When You’ll Pay for Your Reservation." Accessed Dec. 23, 2021.

  4. Airbnb. "Airbnb Service Fees." Accessed Dec. 23, 2021.

  5. Airbnb. "Host Damage Protection." Accessed Dec. 23, 2021.

  6. Airbnb.com. "What Is VAT and How Does it Apply to Me?" Accessed Dec. 23, 2021.

  7. Internal Revenue Service. "Instructions for Form 1042 (2019)." Accessed Dec. 13, 2021.

  8. Airbnb. "Extenuating Circumstances Policy and the Coronavirus (COVID-19)." Accessed Dec. 23, 2021.

  9. Airbnb. "Cancellation Options due to COVID-19." Accessed Dec. 23, 2021.

  10. Airbnb. "How Do I Get Started With Longer Stays?" Accessed Dec. 23, 2021.

  11. Airbnb. "Find the Cancellation Policy for Your Stay." Accessed Dec. 23, 2021.

  12. Airbnb. "Canceling Your Reservation for a Stay" Accessed Dec. 23, 2021.

  13. Airbnb. "What Regulations Apply to My City?" Accessed Dec. 23, 2021.

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