Rabbits can live happily either indoors or outdoors, as long as their key needs of companionship, space and exercise are met...
Traditionally, rabbits have always been kept outdoors in hutches or in sheds and this is still the most popular way to keep a rabbit. However, more and more people are choosing to keep their rabbit indoors, either in a cage or just like a cat i.e. with a litter tray.
There is no right or wrong way to keep your rabbit, as long as it has enough space, companionship and exercise. Indoor rabbits have a longer lifespan on average, mainly due to the lack of predator attacks and the fact that any health issues are picked up much quicker.
To keep your rabbit outdoors you will need to invest in a good hutch and exercise run. The hutch should be made of solid wood, be large enough that the rabbit can stretch up on its hind legs and take three full hops in any direction (if you are keeping two rabbits, increase the dimensions). An exercise run will allow your rabbit to stretch its legs and they should be able to exercise at least once a day.
The Rabbit Welfare Association & Fund's minimum recommended hutch size is 6ft x 2ft x 2ft with an attached exercise run of 8ft x 4ft x 2ft for a pair of rabbits.
Pros: if you have cats or dogs the rabbit may be safer in a hutch and you will not need to rabbit proof your house
Cons: your rabbit will need companionship from another rabbit (opposite sex, both rabbits neutered) to avoid emotional suffering
Indoors rabbits can either be kept confined to a cage and let out for exercise or allowed free run of the house or a room (house rabbit). House rabbits use a litter tray, just like a cat. The size of an indoor cage should be similar to that of a hutch, however, if you let your rabbit out frequently it is not quite so important to have a large cage. If you have a house rabbit, they can obviously take all the exercise they need when they want.
Pros: you will have a closer, more rewarding relationship with your rabbit and it's not so critical to give it another rabbit as a friend
Cons: a house rabbit may nibble at furniture and cables so safety measures need to be taken (known as rabbit proofing)
In terms of cost, a house rabbit will always be the cheapest option as there is no need to buy a hutch or cage. However, for many people this is simply not practical, either due to other pets or small children, or simply a concern about damage to their furniture.