The key to the success of any real estate investment business is finding the right property in a top location. The same holds true for investing in an Airbnb rental property.
No matter how great of a property manager and an Airbnb host you are, you cannot do well and make a lot of money unless you buy a profitable Airbnb property first.
You may even be able to secure a few off-the-market properties to explore as Airbnb options. You should also look out for properties with long-term tenants, as these will pose more complicated lease-related issues.
To help the beginner as well as more experienced investors in this quest, we’ve put together a list of the most important steps to follow in order to find the best Airbnb rental.
Buying any traditional investment properties can be rewarding, but investing in an Airbnb vacation rental business has the potential to provide you with greater returns if you play your cards right. Let’s take a closer look at the pros and cons of owning Airbnb vacation rentals:
If you’ve decided to enter the industry and buy your own Airbnb property, there are a few steps that will guide you along the way. Follow these key steps to ensure you start your business on the right foot:
One of the most critical determinants of your return on investment with Airbnb rentals is the occupancy rate. Naturally, the more guests you have and the fewer days a month your property stays vacant, the more money you will make. Rental homes in your chosen location need to have an average occupancy of over 60% to be worth your while.
This means that you should look for a city that enjoys a large number of visitors – whether tourists or business travelers.
Start out with some popular travel destinations, but don’t forget smaller towns too as they can also make for top markets for Airbnb investments. Keep in mind that the most visited states include California, Florida, Nevada, Texas, and New York.
To choose a good location for your rental property, you should find the occupancy rate at the city level as well as at the neighborhood level to assure that your future investment property will enjoy the highest possible rental demand. Always remember the real estate mantra location location location.
After the tremendous growth of the short-term rental industry in the last decade, local authorities in many places across the US, as well as globally, have started imposing strict regulations and sometimes even prohibitions on the work of Airbnb rentals, especially non-owner-occupied ones.
The last thing that you want as a real estate investor is to break the law and face legal and financial penalties. Consequently, before you make your final decision on a housing market for your vacation rental, you should research the local Airbnb rules and regulations governing short-term rentals.
Check out local government websites, the Chamber of Commerce website, local newspapers, and other online sources. Make sure that you understand well under what conditions you can operate an Airbnb business in the given market and what taxes and fees you will be expected to pay.
Don’t forget about property taxes, hiring a property management company, and managing your Airbnb properties with help from property managers. The Airbnb market can be a profitable investment for an Airbnb host but to generate income and manage cash flow, you’ll likely need to consult secondary services like property management software and so on.
It’s also a good idea to work with real estate agents or a property finder tool. Also, don’t forget to include your monthly mortgage payments when deciding on your pricing structure.
The nature of your market will dictate the best property type to invest in. For example, if you go for the city center of a busy city flooded with business travelers, it makes the most sense to buy a small apartment or a condo, provided that the homeowners association allows short-term leases.
The property type will determine how attractive your property is to guests, which will push your occupancy rent and hence your rental income up or down. Moreover, the type of rental property you buy will also set the price you have to pay for it, which affects the return on investment.
Speaking of property value, the best investment property is one that you can comfortably afford without risking a default on your mortgage payments and a consequent foreclosure.
To achieve this goal, you have to budget carefully. Take into consideration all your regular sources of income as well as your ongoing expenses in addition to your savings. Set a maximum price that you can afford with your budget and stick to it. In the property search process, don’t get tempted by perfect-looking properties beyond your budget.
Remember that the actual price of the property is not the only cost you will have to cover. There are many additional, sometimes hidden expenses associated with buying an investment property such as closing fees, appraisal, inspection, property tax, insurance, etc. Altogether they can add up to several thousand dollars.
Of course, there are also financing options available to help real estate investors purchase a property. There are also ways to enter the short-term rental industry without owning a property at all. Here are some of the most popular options for financing your short-term rental business:
An Airbnb loan is a financing option designed specifically for helping budding Airbnb hosts to purchase Airbnb rental property. While it will work similarly to other home loans, the terms, interest rates, and other conditions may be slightly different.
Also known as a second mortgage, a home equity loan is a common financing option for a property owner who already has a primary residence and looking to purchase a second property. With a home equity loan, you will receive a lump sum or a line of credit with which you can finance your investment.
It will, however, use your primary house as collateral in case you miss your payments. So, you will need to make sure you can afford the installments before you commit yourself to more debt.
If you are looking for a way to start an Airbnb business without owning property, rental arbitrage is a good option. This entails renting out a new property from another owner with the intention of listing it as a vacation rental home.
While this could take some convincing, if a property owner is happy with you managing their property as a vacation rental, you could profit by outearning the rental expense you’d have to pay.
Once you know how much you can spend on your Airbnb rental, start searching for actual properties on sale. Exhaust all possible sources such as online listing websites, the real estate sections of local newspapers, friends, and acquaintances.
Don’t go for MLS properties only but also actively look for foreclosures, bank-owned, and off-market properties as they can bring your return on investment significantly higher due to the low price you’ll have to pay for them.
Throughout the property search, keep your budget in mind. Don’t fall for a property that you cannot afford. After all, you are buying an investment property to make money from, so your decision should be rational and based on numbers. You are not buying your dream home to live in.
Hiring a real estate agent can help you find a good property for your Airbnb rental business. Agents and brokers are professionals who have access to the best deals on the market. Moreover, they have the necessary negotiation skills to get you a much better price than what you can achieve on your own.
In addition, it is the seller – not the buyer – who pays the agent fees, so you don’t have to worry about adding more costs to your budget. To achieve the best results, look for an agent who has experience with Airbnb rentals. In this way, they will be able to advise you on the top neighborhoods, the best property type, and the local legal and regulatory framework.
Also, consider the reputation of any agency you partner with. Finding a respected and experienced industry professional at a company like SquareFoot Homes will streamline your experience of buying a property.
Once you have identified a few properties which match your budget and other search criteria, make sure to perform careful analysis. Start with comparative market analysis or CMA.
This means finding a few properties similar to the ones you’re interested in which are located in close proximity and which were sold no more than a couple of months ago.
Check out their prices and account for the differences between them and the properties you are considering. This will help you establish the fair market value of your Airbnb rental and assure that you don’t overpay for it.
The next step in your real estate analysis is to analyze the properties themselves. Investment property analysis starts by estimating the monthly rental income which you can expect to get from your short-term rental based on the average occupancy rate in the market and the predominant daily rate.
Make a list of the one-time, startup costs as well as ongoing expenses related to buying and owning a rental property. This is the only way to make sure that your property will yield positive cash flow. Do not ever settle for a property with negative cash flow or that barely breaks even, in the hope of better luck soon. Only invest in favorable cash flow properties.
In addition, you should calculate the expected return on investment in terms of cap rate and cash-on-cash return. While real estate experts fail to agree on what constitutes good cash-on-cash return as it depends on your method of financing, a good cap rate is above 8%.
After reading about the last step, you might have started getting a bit worried about all the data you have to collect and all the calculations you have to run before being ready to buy a property to rent out on Airbnb or another similar platform. Actually, it is absolutely true that real estate analysis takes a lot of time and effort.
Many times investors realize that the property they have been analyzing for a few weeks or even months has already been sold before they are able to determine if it will bring them money or not.
However, there is an easy solution to this problem in real estate investing. The advancement of machine learning and AI have made possible the emergence of very sophisticated real estate investment tools which make the life of property investors much easier and more enjoyable.
Because of the use of big property data and predictive analytics, they make real estate analysis not only faster but also more accurate, reliable, and efficient. If you want to succeed in the growingly competitive world of real estate investments in general and short-term rentals in specific, you should use these tools.
Also, you can learn more about how to start a short-term rental business and invest in Airbnb property by listening to Real Estate 101’s Airbnb Investing Deep Dive episode.
Real estate investing is one of the best ways to make money in both the short and the long term. From the many options that property investments offer, Airbnb rentals are emerging as a top opportunity as in most US markets they provide a higher return on investment than traditional, long-term rentals.
The key is to buy the right property, and now you know how to do that by following the 8 steps outlined above.
If you’re looking for a profitable Airbnb rental property to buy, check out Mashvisor, a real estate data analytics platform that helps investors find lucrative rental properties in a matter of minutes.
You will find readily available data and analysis of hundreds of thousands of properties across the US. Mashvisor’s rental property calculator, property finder, and heatmap turn 3 months of research into 15 minutes. Moreover, enjoy 25% off your first subscription as an iGMS user.
No matter how great your investment property is, if you struggle to manage it correctly, it is unlikely that you will achieve your desired ROI. To avoid any mismanagement and be sure that you don’t overlook any crucial aspects of your business, start using vacation rental software.
With iGMS, you will be able to put your business on autopilot by having access to the following features:
Daniela Andreevska is Marketing Director at Mashvisor. She has been writing about real estate investing for a number of years. Previously, she worked in economic policy research and fundraising. Daniela holds a Master’s Degree in Middle Eastern and Mediterranean Studies from King’s College London.
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