One of the major ways of investing in real estate is buying an investment property for Airbnb. How do you invest in these properties?
It’s without a doubt that Airbnb properties have changed both the travel and real estate industries. If you’ve booked one while traveling or on vacation, you might wonder what it’s like to own and operate one.
Table of Contents
- Pros and Cons of Buying an Investment Property for Airbnb
- 5 Steps to Buying an Investment Property for Airbnb
And we understand why you’re interested. Imagine the possibility of making a handsome passive income without having to lift a finger. Besides, you don’t even need to have a lot of knowledge or experience in investing to get started.
But there’s another side for you to consider. Simply buying any Airbnb investment property in any market isn’t a guarantee that you’ll reach your income goals.
In today’s article, we will look at the right way to find and buy an investment property for Airbnb.
Pros and Cons of Buying an Investment Property for Airbnb
Over the years, buying traditional rental properties has proven financially rewarding. But Airbnb rentals are becoming even more profitable if done right. Let’s look at the pros and cons of investing in Airbnb properties:
Pros of Buying an Investment Property for Airbnb
There are many reasons why many real estate investors are considering buying Airbnb investments. The reasons include:
Higher Potential Profits
Airbnb rentals have gained popularity for their potential to provide a higher monthly rental income compared to long term rental properties. While every investment is unique, Airbnb rentals will provide higher profits in high-demand markets.
Let’s look at Los Angeles, for example. According to Mashvisor, the average Airbnb rental income is $3,673, with an occupancy rate of 63.45%. On the other hand, the city’s average long term rental income is $3,100.
As you can see, there’s potential to make well over $44,000 a year with an Airbnb rental property in Los Angeles. It is roughly $7,000 more than you’d make with a long term rental investment in the same market.
Additionally, Airbnb rental investments are expected to remain profitable. While markets continue to melt and inflation remains high, the demand for Airbnb properties is still high.
The most recent international travel forecast by US Travel shows that there will be around 65 million foreign arrivals in 2023. It is a sign that people will continue to travel and spend money on vacations amid the high inflation. In fact, travel rates in 2023 are expected to beat the rates in the past two years.
It is the number one reason you may want to learn how to buy Airbnb property with no money.
Passive Income & Cash Flow
Cash flow and income are major reasons investors consider buying real estate investments. Cash flow refers to the amount left after you settle all property expenses.
A property that offers positive cash flow leaves you with handsome profits after paying for the expenses. With negative cash flow properties, you’ll need to pay for the expenses out of your own pocket. Of course, you want to invest in properties with positive cash flow.
Airbnb rental properties offer excellent cash flow if you invest in the right location. A good location receives a constant flow of visitors so that you enjoy a good occupancy rate across the year. A good occupancy rate means you’ll earn more money than the total property expenses.
The best thing about all of it is that you can charge as much as you want. For example, if you own an Airbnb investment property adjacent to the beach, you can raise the nightly rates once you experience increased demand.
Also, buying an investment property for Airbnb often requires significant effort at the beginning. Once you’ve set up the business, you can get a property manager to take care of the day-to-day property operations for you. It allows you to enjoy a monthly passive income.
Buying Airbnb investment properties gives investors a lot of flexibility. Firstly, as we’ve already mentioned, you get to choose your nightly rates depending on the season and rate of demand.
You can raise your rates when the demand is high during the peak season or on weekends. Similarly, you can lower the rates when the market is a bit dormant to encourage more bookings. You can also offer discounts for long-term or mid-week bookings.
In short, Airbnb properties allow you to try out different pricing strategies to see which one works best for you.
Secondly, you can rent out the property when you want. Some Airbnb owners pull their properties off the market during the off-season to use them themselves. You can also choose to host your friends or parties on your property.
No Lease Contracts
Many Airbnb property investors enjoy the fact that they don’t need to sign lease agreements with their tenants like they would with long term rental properties. The only situation when you may need to ask your guests to sign lease agreements is if you’re subletting.
Why don’t you need a lease agreement with Airbnb properties?
This is because the terms and conditions on the Airbnb platform are enough to protect you and your property. If one of your guests damages your property or furniture, you can simply contact Airbnb. There, you can lodge a complaint on the platform instead of going through time-consuming legal battles.
If you feel the need to, you can draft an Airbnb property agreement for you and your guests. While it might discourage some potential guests from booking, those who do end up being great guests.
Cons of Buying an Investment Property for Airbnb
Like many other good investments, buying Airbnb properties also comes with a few potential drawbacks. Here’s what you need to know about them before investing:
Higher Upfront Costs
Airbnb property investors often need to spend a lot of money after buying to make their properties appealing and inviting to guests. Guests want a combination of the coziness they get from home and the comfort and cleanliness they get from hotels.
As a result, you need to invest a significant amount of money in furnishing your Airbnb with fine appliances and fancy decor. You must also buy stocks that your guests will appreciate, such as tea, coffee, and snacks.
Also, since you want to keep the job professional, you might need to hire an interior designer. It will ensure that you achieve the intended vibe.
You will also need to employ a professional photographer to take high-quality photos of the property for listing. It is very important; yet, many investors tend to overlook this aspect.
Higher Operating Costs
While the potential income is significantly higher, the operating costs are also high. You can expect the following expenses:
- Airbnb fees
- Cleaning and maintenance
- Airbnb property insurance
- Stocks, such as beverages and snacks
Remember, the cleaning and maintenance costs are a bit higher since you must clean the property every time a guest checks out. You’ll also have to pay the property manager to ensure everything runs smoothly.
Airbnb guests are constantly checking out, sometimes as often as daily. It presents a greater risk when it comes to property damage. Some rowdy guests may host parties that leave you with broken windows and doors or stained carpets.
Unlike long term property tenants who treat your property like their home, Airbnb guests may not feel responsible for maintaining your property or leaving it as they found it.
You can minimize the above risk by vetting your guests and going through the reviews left by previous hosts on their profiles. Also, ask some additional questions before accepting a rental.
Most importantly, get Airbnb insurance to ensure that you’re covered in case of any damage.
Success Isn’t Instant
With long term rentals, you simply need to market your property, find a long-term tenant, and start earning a consistent monthly income. It isn’t the case with Airbnb properties.
While you might invest in one of the hottest markets for Airbnb rental properties, you might not receive consistent bookings in the beginning.
You first have to build a good reputation as an Airbnb host. It means you must receive a few five-star reviews on the Airbnb platform. More positive reviews get you more bookings.
Since you’re just starting, you might have to lower your nightly rates than your competitors to attract your first few guests.
Once you have a few five-star reviews and you’re experiencing at least a 90% monthly occupancy rate, you may now adjust your rates to match the demand.
5 Steps to Buying an Investment Property for Airbnb
Now that we’ve covered what you need to know about buying an Airbnb property, how do you actually choose the most profitable one? Here’s a step-by-step guide to help you choose the most lucrative Airbnb property.
1. Create a Budget and Line Up Financing
As we’ve seen, Airbnb investment properties require significantly higher startup costs. The best way to go about it is to devise a budget. Decide what you’re willing to pay for the investment property to avoid taking mortgages you can’t afford.
How do you budget well?
Account for all your sources of regular income, savings, and ongoing expenses. It will help you identify the maximum amount you can pay for a property without stretching your pocket.
Once you’ve drafted a budget, stick to it. Don’t fall into the temptation to go buying perfect-looking and luxury properties that are way beyond your budget.
Remember that the actual purchase price isn’t the only property cost you’ll need to cover. Many additional and sometimes hidden expenses come with buying an Airbnb rental property. The expenses include:
As you can see, all the above expenses can add up to a few thousand dollars.
If your budget doesn’t allow you to invest in a lucrative Airbnb property in a good market, you can consider some financing options. Here are some options that are popular with Airbnb rental investors:
Some financial services providers offer Airbnb loans specifically to investors to invest in Airbnb rentals. Such loans may work almost the same way as conventional loans. However, pay close attention to the details since the interest rates, terms, and other conditions may differ slightly.
Home Equity Loans
A home equity loan is also referred to as a second mortgage. It’s a common financing option for investors who already own a primary home and are buying a second investment property. The loan gives you access to a certain amount of money or a credit line to allow you to buy the property.
Keep in mind that you will need to use your primary property as collateral in case you miss payments. To avoid any problems, make sure you can afford the monthly payments before committing to more debt.
Rental arbitrage is a great option for investors who want to become Airbnb hosts without necessarily owning the property. It involves renting a property from another owner with the intention of listing it as an Airbnb rental.
The only downside to the rental arbitrage option is that it might require a lot of convincing. Not many property owners would be willing to rent their property for you to host different guests. However, you can generate considerable profits and outearn your rental expenses.
2. Identify Suitable Locations for Airbnb Investment
By this point, you’re already aware that location is one of the most important real estate investment factors. You must learn how to research top markets for Airbnb investments with the return on investment in mind.
Most Airbnb investors already have a location in mind before they start their research. In most cases, they choose locations that are near where they live. While it may be convenient, the nearby location may not always be optimal for Airbnb rentals.
It is why you need to expand your search and think of markets beyond your city and state. You can consider up to five different cities.
What will you be looking for when searching for the best Airbnb markets?
Favorable Airbnb Laws
In the past few years, many local governments have passed laws to regulate the Airbnb industry. Some have banned such rentals outright, while others have ordinances with strict guidelines.
For example, Las Vegas and Los Angeles don’t allow non-owner-occupied Airbnb rentals. It means you can only rent out an extra room in your primary residence. You can’t purchase a property in these cities purposely for the Airbnb business.
You must research a market’s Airbnb laws and regulations. Make sure not to fall into legal trouble due to something you overlooked.
If the market allows non-owner-occupied Airbnb rentals, dig deeper to learn more about the laws. Look out for details such as:
- Zoning laws: While some cities may allow Airbnb rentals, they may restrict them in some areas. In short, you can’t buy and rent one in some zones.
- Airbnb taxes: All cities have property taxes. However, you may need to pay more taxes for Airbnb properties. Find out how much you’ll have to pay and whether your rental will remain profitable.
- Occupancy limits: Some cities limit the number of guests you can host at any particular time. Others have a maximum number of nights you can rent your Airbnb rental out in a year.
- Airbnb licenses and permits: You might be required to obtain an Airbnb license depending on your location. These come with one-time and recurring fees.
Tourism Forecast and Statistics
Tourism is another vital factor to consider. Yes, Airbnb rentals can be legal in your desired city, but is the demand enough to make it sustainable?
Here are some questions to ask yourself when carrying out research on local tourism:
- How many tourists visit the city annually on average?
- Has the number been increasing or decreasing?
- What is the forecast for the local tourism industry?
- Is the Airbnb rental demand subject to seasonality?
Your best bet is with a city that receives a good flow of tourists all year round. For example, Florida received a record number of more than 137 million visitors in 2022, up 12% from 2021. It shows the state is one of the best places to invest in an Airbnb rental property.
However, you also need to consider that you’re also getting competition from hotel rooms and cheap lodgings.
So, how do you determine that tourists will choose your Airbnb over a hotel room?
Optimal Airbnb Statistics
Besides favorable tourism statistics, the location also needs to have great Airbnb statistics. Here are the statistics you need to watch out for:
- Airbnb rental income: A good Airbnb investment market will have a high Airbnb rental income.
- Airbnb daily rate: The daily rate is the amount you charge for hosting your guests per night. It should be high since it accumulates to become your monthly rental income.
- Airbnb occupancy rate: The occupancy rate demonstrates how many nights you can expect to receive bookings in a year. While it’s impossible to achieve 100% Airbnb occupancy, go for a location with at least a 50% Airbnb occupancy rate.
- Airbnb return on investment: This is usually indicated using cap rate and cash on cash return metrics. A good return on investment figure is between 8% and 12%.
That said, you need to use a tool that provides you with all the above statistics under one roof. The best tool for reliable and accurate Airbnb statistics is Mashvisor.
Sign up and start your 7-day free trial to access all important Airbnb statistics.
3. Spot Profitable Airbnb Neighborhoods
Once you’ve gone through the checklist above, you’ll have narrowed your list down to two or three potential locations. The next process is to carry out an in-depth neighborhood analysis to choose a profitable neighborhood.
Conducting a neighborhood analysis is an important process that many investors tend to ignore. You need to know that different neighborhoods within the same city may yield different returns on investment.
While such an analysis is important, it’s not a walk in the park for many investors. There are many analytics and metrics involved. If you were to gather the data manually, the market would have already changed by the time you get results. Also, manually calculating data is prone to a lot of human errors.
Mashvisor provides the best tool for neighborhood analysis. Our heatmap analysis tool will help you spot the best Airbnb neighborhoods based on your search criteria. You can set up your search criteria using the following filters:
- Property selling price
- Airbnb rental income
- Airbnb occupancy rate
- Airbnb cash on cash return
The heatmap tool is color-coded. It uses different colors to represent different results. The dark blue color is for neighborhoods that perform well based on your criteria, while gray is for dormant ones.
For example, let’s say you want to find neighborhoods with the highest Airbnb return on investment. Simply set what cash on cash return you wish to get from your property. The heatmap tool will mark the neighborhoods that meet your ROI requirements in green.
4. Search for Airbnb Investment Properties
After spotting a few neighborhoods with a high potential for Airbnb rentals, you can now start the actual search for the properties. For long term rental properties, you can simply check newspaper ads or drive through the neighborhoods looking for “For Sale” signs.
But Airbnb properties are different. Just because a city shows high Airbnb potential doesn’t mean that all properties in that city are good for the business. Many factors influence a property’s Airbnb profitability.
It is why you need to use Mashvisor’s Property Finder. The tool uses Airbnb’s past performance data and predictions to help you find a property that matches your investment and financial goals.
The first step when using the Property Finder tool is to set the location you desire to invest in. Afterward, use the following filters to set your search criteria:
- Miles (the distance from your preferred property)
- Optimal rental strategy (in this case, choose Airbnb)
- Property type (single family homes, multifamily homes, condos, or townhouses)
- The number of bedrooms and bathrooms
Once you’ve set the filters, the tool will display a list of property listings that fit your criteria. The properties are ranked by order of performance. In short, the properties with the highest ROI are ranked first.
5. Conduct Airbnb Property Analysis
Before reaching out to the property sellers, you might want to wait a bit and carry out a comprehensive property analysis on each of the properties you’re interested in. It is to make sure that the properties indeed come with Airbnb potential.
Many investors will consider opening a spreadsheet and adding all property details to compare (and contrast). But that’s not the right way to do it. You need to use the right tool for this task.
This is where the Airbnb profit calculator comes in. With the tool, you don’t need to worry about data reliability and accuracy. Our data comes from reliable sources, such as the MLS and the Airbnb website itself. Also, the data is as recent as the past 12 months and is from actual Airbnb hosts.
You won’t even need to do much. Simply click on any listing you like, and the Property Analysis page will load. Here, the Airbnb profit calculator displays the following Airbnb data:
- Estimated monthly Airbnb rental income
- Estimated Airbnb one-off and recurring costs
- Airbnb cash flow
- Airbnb occupancy rate
- Airbnb cash on cash return
- Airbnb cap rate
The best thing is that the tool provides metrics for both long term and Airbnb rental strategies. It allows you to perform a quick side-by-side analysis in order to choose the optimal rental strategy.
As for the cash on cash return, you can see the real value of your property based on the financing method. You can use the mortgage calculator and select either cash or mortgage. If you select the mortgage option, be sure to provide the following details:
- Mortgage type
- Down payment
- Interest rate
- Loan term
With the above information, the Airbnb calculator will show different cash on cash and cap rate results.
Making an Offer
At this point, you’re now ready to make an offer. You can run a quick comparative market analysis (CMA) using real estate comps to make a reasonable offer and start working with a local and experienced real estate agent.
Ready to Invest in Airbnb Rentals?
Buying an investment property for Airbnb is a perfect way to build a consistent stream of income. Many investors love this option due to the high potential income and the flexibility it offers. However, you also need to know that the property expenses could also be higher.
Just because Airbnb rentals are expected to generate good returns this year doesn’t mean that you should invest in just any property in a random location. You need to learn how to do it the right way.
Set up a budget based on your financial situation and stick to it. Don’t bow to pressure and get into loans you can’t afford. Also, realize that your location determines your investment’s profit potential. So, invest in the right city and neighborhood.
Most importantly, use the right tools to carry out your property search and property analysis. Mashvisor is the best tool for this job.
Learn how Mashvisor’s tools can help you invest in the right property. Sign up for a 7-day free trial now, followed by 15% off for life.