Every investor wants to know what Airbnb return on investment they can expect before deciding to buy a property to rent out on a short term basis.
However, it is not an easy question to answer, as the ROI generated by a vacation rental depends on so many different factors. Moreover, the number is likely to change from year to year, based on local demand and supply, as well as changing daily rates and operating expenses.
Table of Contents
- Your Airbnb’s Location
- Rental Property’s Costs and Expenses
- Airbnb Laws and Regulations
- What Is a Good Return on Airbnb Investment?
- 3 Tips to Maximize Your Return on Investment
Airbnb offers great opportunities for anyone looking to make money in real estate. With 1.5 billion total guest stays worldwide, Airbnb investment rentals are the optimal real estate investment strategy for savvy property investors.
However, not all who rent out on Airbnb are making great returns. Why? For one, there are over four million Airbnb hosts who rent out more than 6.6 million active listings. The figure alone creates strong competition among themselves. Moreover, other factors determine what kind of Airbnb return on investment you can expect to gain.
To find out what they are and what you can do to maximize your real estate return on investment, just keep reading! Importantly, we will show you how to use the Mashvisor Airbnb data analytics calculator to boost your results.
Your Airbnb’s Location
Many real estate investors, especially beginners, looking to buy an investment property to rent out on Airbnb often think buying a property close to home is the most sensible decision. You know the housing market, it’s easy to get to for cleaning and maintenance. You might even know people who are renting out their place on Airbnb and are making extra cash.
However, in many cases, investing in an Airbnb rental property far from where you live can give you a significantly higher Airbnb return on investment. It is particularly true of locations with prohibitively high property prices or strict Airbnb laws that prohibit renting out on a short term basis.
When they expand their investment property search beyond the local area, real estate investors have the whole country to pick from. It allows them to find the best markets for the best returns on short term rental properties. Moreover, they can easily benefit from passive income by hiring a professional property manager to take care of their investment, which should further boost profitability.
But if you’re not limiting yourself to your local market, how do you choose the best real estate market for starting an Airbnb business? Here are the most important factors to take into consideration:
Market Factors for High Airbnb ROI
First and foremost, focus on cities and towns that attract a lot of short term visitors throughout the year. It means popular tourist destinations or busy business hubs. Seasonality is a key determinant of Airbnb profit, so you want to make sure it plays in your favor. Do not invest in a market where demand is only seasonal, as it will negatively impact your Airbnb occupancy rate and eventually return.
Second, especially as a first-time investor, go for a location with affordable home values. Even the best loans for investment property require a significant down payment and ongoing monthly payments. In addition, the property sales price directly affects all metrics of return on investment. You cannot optimize it unless you purchase at a good price.
Third, ensure that you go for a city that allows non-owned short term rentals with no limit on the number of rooms to rent out or the number of days per year to rent out for. You cannot run a legal short term rental in a legislatively limiting environment. Check out the Mashvisor short term rental regulations page to make sure you’re on the right track.
Last but not least, you should get access to reliable Airbnb rental data analysis to see what daily rates, occupancy rates, monthly revenue, and return on investment you can expect. At the end of the day, you want to buy an Airbnb investment to make money. It doesn’t make sense to choose a location with high demand and low prices if profit is negligible.
Rental Property’s Costs and Expenses
Every real estate investor needs to know that rental costs and expenses will affect their investment property’s cash flow and bottom line. Cash flow is simply the monthly rental expenses subtracted from the monthly rental income. If the costs of owning and running a short term rental property exceed the rental income, it results in a negative cash flow short term rental and loss of money.
Meanwhile, how much you spend on renting out and maintaining your vacation home directly affects all ROI measures, including the cap rate and the cash on cash return. If the operational expenses come close to the monthly Airbnb revenue, an Airbnb host cannot really expect a good Airbnb return on investment.
10 Airbnb Rental Costs and Expenses
When you invest in Airbnb for sale, there are certain costs that you need to cover right away. They are known as startup costs and are usually paid once. However, once you start operating an Airbnb business, there are plenty of other expenses that you need to cover every month or year. They are called operating or recurring costs. They affect your ROI, so it’s important to know what they include:
- Property insurance: While each home needs insurance, Airbnbs require special vacation rental insurance to protect investors against damage and liabilities.
- Property tax: Every real estate property must pay a property tax, which depends on the location, size, and age.
- Rental income tax: Based on federal laws, you need to pay income tax on the Airbnb revenue that you generate from your investment.
- Local transient occupancy tax: In most US markets, short term rentals need to pay local taxes, similar to hotels.
- Property maintenance: Maintaining a short term rental entails a higher cost than maintaining a long term rental or a primary home due to increased wear and tear.
- Property management: If you manage an Airbnb yourself, you need to account for the cost of automation tools, travel, home office supplies, etc. If you hire a property management company, they usually charge a percentage of the monthly income.
- HOA dues: When you invest in a condo or another property within an HOA, you need to pay monthly fees.
- Utilities: As an Airbnb host, you cover the cost of electricity, gas, water, internet, etc.
- Supplies: You should supply your vacation rental with what’s required for a comfortable stay, like coffee, tea, salt, paper, toilet paper, tissues, etc.
- Airbnb fee: Hosts pay a fee equivalent to 3% of bookings to the Airbnb platform.
4 Tips to Minimize Rental Costs and Expenses
It’s important to understand that short term rental business operating expenses are not fixed; they can change depending on multiple factors. Meanwhile, if you find a smart way to minimize them without compromising the quality of your property, you’ll be able to improve your Airbnb return on investment.
Here are a few tips to cut down recurring costs:
- Invest in an affordable market: When you choose a location, look at not only property prices but also the general cost of living. Buying a short term rental in a more expensive market translates into higher utility bills, supplies, etc.
- Find a cost-efficient property manager: Airbnb rental management companies charge a range of fees and costs. Talk to a few different managers and go for the one that offers the most effective pricing structure.
- Buy supplies in bulk: You can save a significant amount of money if you buy your Airbnb supplies in bulk rather than buying them each time between guests. Look for local stores that provide quality goods at reasonable prices.
- Take advantage of tax benefits: Vacation rental homes come with major tax advantages that can help you save hundreds of dollars per year. Make sure you file taxes in the proper way.
Airbnb Laws and Regulations
Depending on where you choose to invest in real estate short term rentals, listing an investment property on Airbnb can be highly regulated and limited or even altogether prohibited. You cannot run a profitable Airbnb business in a place that makes it illegal or problematic.
Additionally, from a regulatory point of view, even in markets where vacation rentals are legal, it might involve various costs, such as licenses, permits, inspections, and taxes. It will most certainly affect what Airbnb return on investment you can expect. You need to understand exactly what fees you’ll be expected to pay before buying an income property to ensure positive cash flow and good ROI.
3 Cities With Strict Airbnb Laws and Regulations
In most cases, the most prohibitive short term rental laws are imposed in big cities with a lot of tourism and business activities. But some small towns that get flooded with short term rental visitors also impose restrictions on the Airbnb industry. The main reasons are usually to protect the security and peace of local communities and solve affordable housing crises.
In New York City, NY, for instance, it is not allowed to rent out an apartment when the host is not present on the property, as well as to take in more than two guests at a time. It means you cannot operate a non-owned occupied short term rental there.
As another example, in Los Angeles, CA, you cannot operate an Airbnb business for more than 120 days per year. Such a restriction would result in a major negative impact on a property’s occupancy rate and lead to suboptimal ROI.
Maui, HI, another popular tourist destination in the US market, does not allow the issuance of new short term rental licenses for two years. It means that no one can launch a new vacation rental business there at the moment.
3 Cities With Favorable Airbnb Laws and Regulations
While the State of Florida is one of the few US states that require a short term rental license all across, most cities in the Sunshine State have favorable Airbnb laws. For example, Naples, FL recently made running a vacation rental business easier to benefit the local economy and Airbnb host community. There are basically no regulations there.
Austin, TX is another place where both owner-occupied and non-owner-occupied Airbnb rental properties are legal and not very restricted. While licenses are required, it is not a major impediment as long as hosts calculate the associated costs in their investment property analysis before buying.
Durham, NC is one of the few North Carolina cities that has not introduced any regulations on Airbnb properties. It means that investors can start a short term rental business without any legal hurdles, and that’s an important factor in boosting ROI.
What Is a Good Return on Airbnb Investment?
What is a good Airbnb return on investment depends on a number of factors, including the market, the property type and size, the management strategy, and general US housing market trends. Generally speaking, when we look at Airbnb cap rate, a range of 8%-12% is considered optimal for rentals. For Airbnb cash on cash return, values from 8% to 15% mark a good ROI.
Having said that, you might still be wondering:
What Kind of Return Can I Expect From an Airbnb?
We will take a look at Airbnb rental data analysis conducted by the Mashvisor calculator across the US market to see what ROI Airbnb hosts can expect. Our analysis includes cities and towns where median property prices do not exceed $1,000,000 (to account for affordability). We also focus on locations where there are at least 100 active Airbnb listings (to exclude underdeveloped markets).
According to February 2023 data, the average city-level Airbnb cap rate in the US ranges between 0.06% in Atlanta, GA and 8.08% in Northlake, IL. The Mashvisor calculator sets the average city Airbnb cash on cash return from 0.06% in Atlanta, GA to 7.94% in Northlake, IL. The median values for the two ROI metrics are 3.18% and 3.13%, respectively. The means are 3.28% and 3.23%, correspondingly.
For comparison, the median and average long term rental cap rate and cash on cash return values are around 2.70%. It means that in short term rentals offer a more profitable opportunity than the more traditional rental strategy.
Meanwhile, Airbnb hosts can expect to make between $1,101 in Snowshoe, WV and $6,664 in Southwest Harbor, ME in monthly Airbnb income, according to the Mashvisor rental income calculator. The revenue calculations are based on average Airbnb daily rates, ranging from $68 in Silverton, OH and $722 in Eastport, NY.
Is Owning an Airbnb Profitable?
Yes, owning an Airbnb can be very profitable as long as you conduct careful real estate market analysis and rental property analysis before buying. While ROI rates around 3% might look insignificant, keep in mind that these are only city averages. Some vacation rentals are doomed to underperform because of being unfit or poorly managed.
Meanwhile, some neighborhoods and properties offer extremely profitable chances to make money from real estate.
3 Tips to Maximize Your Airbnb Return on Investment
The return on your Airbnb rental property is not set in stone. There are things you can do to improve the ROI of your property and maximize the amount of money you make.
Here are the 3 top tips for boosting your Airbnb return:
1. Have a Smart Pricing Strategy
Successful Airbnb investing starts with the right rent price, which can be adjusted daily, unlike with long term rentals. As a host, you want to make enough money per day while still getting a good occupancy rate. It is how you optimize revenue—and thus, ROI—with short term rentals. You need to stay competitive; otherwise, guests will go to other properties around.
You need to come up with a flexible Airbnb pricing strategy and get rid of the one-size-fits-all model. Account for things like seasonality, holidays, special events, travel trends, and competition (comparable listings) in your pricing strategy. Research the price of similar listings in your area, accounting for amenities and experiences. Put together a range of daily rates that they charge.
An easy way to access Airbnb comps is to use the Mashvisor Airbnb profit calculator. For properties listed on the platform, as well as for off market properties, you can see a list of short term rental comps. They include their similarity, daily rate, occupancy rate, and monthly income. They will help you quickly and efficiently decide on the best price for your rental property.
After setting a base price, it’s important to keep adjusting the nightly rate, depending on fluctuations in demand and supply. You can increase your daily rate by a few dollars over peak seasons without compromising occupancy. Then, you should lower it a bit during the low season to catch some bookings.
For a beginner host, it’s crucial not to overcharge. It will prevent you from getting any reservations, so you won’t be able to kick-start your business.
To start analyzing the daily rates of comparable Airbnb rentals, sign up for a 7-day free trial of the Mashvisor calculator.
2. Use Airbnb Analytics
If you want to be a successful Airbnb host, using reliable short term rental analytics is a must. Airbnb analytics (provided by the best online calculators) uses past data and trends to predict future outcomes through traditional and predictive analytics. By using large sets of historical data, you can make accurate projections for future market and property trends.
Using reliable analytics from a good calculator helps Airbnb real estate investors make wise investment decisions with confidence and reduce the risks of investing in vacation rental properties. As we showed above, you can’t even price your Airbnb right without access to good data.
Another advantage of using Airbnb analytics is that it gives you an analysis of key Airbnb return on investment metrics. In this way, you’ll get a better projection of your investment property’s profitability and how it’ll perform over the long term. With this kind of data, a smart real estate investor will be able to identify profitable Airbnb opportunities and find the best investment before anyone else.
The metrics provided by the Mashvisor calculator include—
- Comparable rental income
- Estimated rental expenses
- Cash flow
- Cash on cash return
- Cap rate
- Airbnb occupancy rates
- Rental comps
With the Mashvisor Airbnb investment calculator, you can search for top-performing Airbnbs in the US market. Moreover, the calculator allows you to perform a detailed rental property analysis to know exactly what ROI you can expect from a property before buying it. The tool allows you to remove the guesswork from investing in short term rental properties for sale.
3. Optimize Your Airbnb Listing
Though using a top Airbnb profitability calculator is key, it’s not enough to optimize return. As a smart host, don’t let a boring Airbnb listing hold you back from achieving the best Airbnb return on investment. Instead, optimize your listing to stand out and reach as many potential short term guests as possible.
Add all the required information to your host profile and listing page. Include high-quality appealing photos that highlight all the best features of your rental. List all applicable amenities and extras. Write an optimized property title and description that would make guests want to stay at your property, without lying.
Make sure your pricing is competitive and corresponds to the amenities that you provide. Try to offer an experience, not simply a space. Be responsive to questions and proactive in communication with guests. Write reviews to guests and encourage guests to leave reviews. Work hard towards preventing negative reviews.
Look at your Airbnb listing as a guest and not as a host. Also, ask family and friends to take a look and give their feedback. Your listing should give a good first impression to optimize occupancy rates and ROI.
The Mashvisor investment property calculator can help you by showing you the ratings and the number of reviews for comparable rentals in your market. In this way, you can evaluate how many 5-star reviews you should get before you can expect a boost in the performance of your Airbnb.
The Bottom Line
Following the massive success of the Airbnb platform, investing in short term rentals quickly became the best way to make money in real estate – and outside real estate – for beginner investors. However, what kind of Airbnb return on investment you can expect depends on numerous factors. The factors include location, property price, travel trends, regulations, expenses, and daily pricing.
As a general rule of thumb, you should keep in mind that this year, short term rentals are set to bring better ROI than their long term counterparts, on average. But as an Airbnb host, it is your responsibility to research the factors you don’t have control over (like prices and laws). Also, you need to put effort into those you have control over (expenses and dynamic pricing).
If you want to boost your profit, make sure to start with one of the best Airbnb locations. Choose a market that allows non-owned occupied short term rentals and places relatively few regulations. Use analytics when analyzing listings for sale. Then, optimize your Airbnb listing and Airbnb pricing strategy. If that seems too much work, consider hiring a professional property manager.
To learn more about how the Mashvisor calculator can help you find a property with high potential for Airbnb ROI, schedule a free demo of the platform.