The Short Answer
Airbnb has over 6 million listings and has grown to major popularity in the short term rental properties market over the last few years. If you’re looking to invest in Airbnb property, here are the steps to take:
- Determine your budget
- Secure your financing
- Identify your ideal guests
- Choose a location
- Pick a property type
- Search for rental properties
When you’re choosing an Airbnb rental, make sure to consider comparable properties in the area, the ROI, your cash flow, the setup costs, and local short term rental market data. This will help you work out the profitability of the property and minimize your risk at the outset.
Take note of the risks which include the fact that some areas don’t allow Airbnb investment properties, the risk of vacancy is higher and there is stiff competition. However, these can be overcome using the tips below.
Jump To
Airbnb has become an increasingly popular way for people to make money by renting out vacation properties. With the success of this platform, more and more real estate investors are looking at ways they can leverage Airbnb properties to turn a profit.
If you choose to invest in Airbnb property, this can be a great way to diversify your portfolio and take advantage of the growth potential that the real estate market offers. Let’s take a look at some tips on how to get started investing in Airbnb rental properties.
Finding The Best Airbnb Property To Buy: Step-by-Step Guide
Being successful in real estate investing largely comes down to the property that is chosen. A successful investment property is typically one that provides the highest ROI for the longest period of time and appreciates in value. If you’ve chosen to purchase a short term rental property to list on Airbnb, here’s how to find the best property…
Step 1: Determine your budget
First things first, you’ll need to know how much money you can work with and what price range you’ll be looking in. This will impact the type of property you can search for, and the area you’ll be looking in. Establishing a budget upfront will save you many headaches in the long run, and get you aligned with your goals from the outset.
Consider all your sources of income, as well as every expense, when you’re working out your budget. Keep in mind that Airbnb charges a 3% service fee for each reservation that is made through their platform, so hosts are liable for this amount. The costs you can incur from an Airbnb property go beyond the mortgage repayments and include insurance, property taxes, cleaning services, maintenance fees, landscaping costs and more.
Step 2: Secure your financing
Now that you’ve established your monthly and overall budget, you can look at getting the right financing secured for your Airbnb rental. Conventional financing isn’t the only option, there are a number of alternative financing options to choose from, based on your credit score, investing history and investing goals.
The options for financing your Airbnb include DSCR loans, private money loans, crowdfunding, seller financing and cash-out refinancing. Asset-based loans are a good idea for those who don’t have a stellar credit record, or would prefer to use an alternative lender to traditional banks. It’s a good idea to look into each method and pick the one that best suits your financial needs and investing goals.
Step 3: Identify your ideal guests
Before you look for a property, or even a location to purchase in, it’s useful to know what type of guests you’d like to attract. This will help you determine the location that you should be looking in, the type of neighborhood and the type of property.
For example, if you’d like to attract business people, you may look at purchasing a property downtown, or near the central business district. A condo or apartment will likely be the property type to attract this kind of guest.
On the other hand, if you’d like to attract families who are on vacation, you could look at purchasing a single-family home in a popular vacation destination. This can be on the beach, near the mountains or close to tourist attractions.
Step 4: Choose a location
Now that you’ve decided what type of guest you’d like to attract, you can choose a location based on this, your budget and finances, the property prices in each area and the local real estate market.
Start by searching for the top Airbnb cities and neighborhoods. One of the key factors to look at is occupancy rate. The more your property is occupied, the more money you’ll be making and the lower your risk is. So, the location should have a high number of visitors in the form of tourists or business travelers, and a high occupancy rate. Also make sure that the location isn’t heavily impacted by seasonality and can offer a stable potential influx of guests.
Check the Airbnb property regulations in the location of your choice, as these can vary between areas. For example, some areas might prohibit Airbnb properties, and others may have specific regulations for hosts. It’s important to know the ins and outs of all the rules associated with owning an Airbnb rental in a certain area as you may even change your mind about the location based on these.
Some questions to consider:
- Is it legal to host an Airbnb property in the area?
- What are the taxes and/or fees for hosting an Airbnb rental?
- How many bookings are allowed?
- What are the regulations for hosts?
Step 5: Pick a property type
Now that you know which area you’ll be investing in and the type of guests you’d like to attract, picking a property type should be easier. The features of the property will need to fit in with what the location has available, and what is likely to attract the right type of guests for you.
For example, a beach location that is aimed at attracting families or groups of friends will require a larger house and the closer to the beach, the better. So, a property with at least 4 or 5 bedrooms would be a good place to start. An outside area for barbecues would be a useful feature, and a large living room where people can hang out would be great features.
Step 6: Search for properties
It’s now time to begin searching for rental properties. A good place to start is with online listings but don’t limit yourself to the MLS, take a look at other real estate websites and platforms like FlipScout which not only list the property and its details, but also information on the ROI of the property and other useful insights.
Once you have chosen the right property, it’s important to maximize its ROI by ensuring that it is up-to-date and equipped with all necessary amenities. You should also consider marketing techniques such as offering discounts or special packages that will attract more guests to your rental property. Additionally, enlisting professional cleaning services after each stay or offering flexible check-in times can help increase occupancy rates and overall bookings for your rental property – ultimately leading to higher profits.
Online Tools That Can Help You Find Airbnb Properties
This online platform has useful heat maps that can help you identify the most popular destinations for travel and therefore short term rentals. The website also has detailed information about each area including occupancy rates, median property prices, average Airbnb rental income, Airbnb cash-on-cash returns, Airbnb cap rates and more. The platform pulls its data from a host of websites and public records, to provide the most accurate insights.
This platform offers valuable data analysis on short term rentals which can be very useful for finding Airbnb investment properties. The platform offers historical data, as well as future predictions for real estate investors to use for estimating their potential income from properties. AirDNA has two tools called Rentalizer and MarketMinder which give real estate investors more details about specific markets and address concerns that investors may have.
Analyzing The Potential Profitability of an Airbnb Property
1. Compare to similar properties
Research properties in the same area that are also rented out on a short-term basis and compare their rental prices. These properties should have the same number of bedrooms and bathrooms, be a similar size, and have similar features. They should all currently be active as rental properties, or at least within the last few months, to get the best comparison.
2. Calculate your cash flow
To figure out how much income you could potentially make from an Airbnb rental, use your estimated daily rate and multiply that by the year-round occupancy rate. For example, if you charge $100 per night and the occupancy rate for the area is 80% for 365 days, you’d make $29,200 per year on the property. Make sure to factor in your expenses here, in order to get an accurate idea of your actual profit and cash flow.
3. Work out your setup costs
It’s important to take into account what the total costs of the Airbnb investment property will be upfront so that you can use this to calculate the potential return on your investment. Consider the following factors:
- Property purchase and sale costs
- Furniture and appliances
- Décor
- Repairs
4. Local market data insights
Take a look at the local real estate market and consider the occupancy rates, annual revenue trends, types of amenities and the annual rental growth. These figures will give you a good snapshot of the general short term rental market conditions and what this means for your investment property’s potential profit generation. Airbnb rentals can be very successful as a short term rental business, but this depends heavily on the local real estate market.
Risks Involved When Investing In Airbnb Property
- Stiff competition: There are literally millions of Airbnb investment properties available, so one of the largest risks to consider is the stiff competition that comes with owning an Airbnb property. Airbnb currently has over 6 million listings in over 100,000 cities worldwide, so investors need to beat the competition to make their Airbnb property successful. The trick is to make your listing unique so that you stand out from the competition, either with interesting property features or better prices.
- Vacancy: Investing in an Airbnb property means that there is a risk of having vacancies. Any period of time where the property is left vacant means that no income is being generated. Airbnb properties can be erratic with occupancy, due to seasonality. A high vacancy rate will lead to a negative cash flow, and the property will become less profitable. So, it’s crucial to choose a neighborhood with high vacancy rates and many attractions.
- Airbnb legalities: Currently, Airbnb rentals are not legal everywhere, so this is an important factor to check before purchasing an Airbnb investment property.
- Property damage: The problem with hosting many guests is that the risk of property damage is high. Guests who are on vacation are typically more careless and the damage to furniture and other expensive items can be frequent. This can be costly for the property owners, so it’s important to have a plan in place for this. Some hosts charge guests for damages and some use Airbnb’s Host Guarantee.
- Managing guests: With the high turnover of guests, the management of Airbnb rentals can become very time-consuming. Particularly when there are problematic guests to deal with. Hiring a property management company to manage this is a way around it, however this comes at a price.
Final Thoughts
Airbnb rental arbitrage is an alternative option for real estate investors who don’t want to purchase an Airbnb rental property just yet but would like to enter the short term rentals property market and invest in Airbnb property somehow. This a business model whereby people can sub-let properties that they are renting via Airbnb instead.
Investing in an Airbnb rental property can be very lucrative if done correctly – but it requires careful planning and research beforehand. By familiarizing yourself with the local real estate market and finding the perfect real estate investment property for your needs, you can maximize your ROI from an Airbnb investment property and even create a successful short term rental business.