How to Estimate Airbnb Income Before Buying a Rental Property

The question every beginner real estate investor must ask: How to estimate Airbnb income before buying a rental property?

Investing in rental properties to use with the Airbnb strategy require serious work even before you buy one. Part of this work is the Airbnb income estimate process. This process is basically when you try to come up with a rate or figure which represents the investment property’s potential for generating money. The higher the number, the higher the potential of that income property. So, how do you estimate Airbnb income to find beneficial income properties?

Perform a Real Estate Market Analysis

First and foremost, before you try to estimate Airbnb income of a specific rental property, you need to find a good location for your Airbnb investment property– one that is profitable. And when you find one, you can estimate Airbnb income for the overall location. You do all of that, of course, by conducting a real estate market analysis. In essence, this procedure helps the real estate investor find out the following:

1. Learn the real estate appreciation rates for that location.

2. Uses historic Airbnb data as well as current rental data in combination with predictive analytics. In other words, you’ll have data that “predicts” the future of that specific housing market. This way, you can learn about possible real estate market trends in the future and how they will affect your Airbnb income.

3. It tells you if the location you have chosen is fit for Airbnb investment properties. Sometimes, specific areas are better for traditional rentals, meaning you won’t produce as much income as you might like.

4. The real estate market analysis will reveal a lot about the rental demand in that area. You want to pay attention to this since it will have a direct impact on your Airbnb rental income.

Once you successfully gather all this information from your market analysis, you’ll have a rough Airbnb income estimate for the location.

Learn More: How to Perform a Real Estate Market Analysis

Perform Investment Property Analysis

The next step to estimate Airbnb rental income is to complete an investment property analysis. Since you have found a suitable location, start looking for Airbnb properties for sale. Once you spot a few rental properties that have caught your attention, you want to work out the following Airbnb return on investment metrics:

Cash Flow

estimate Airbnb income by calculating cash flow You can estimate Airbnb income by first analyzing cash flow. The cash flow is primarily the Airbnb rental income minus the monthly rental expenses. Let’s say you rent out your short-term rental property for $1000/mo, and you spend $600 on the mortgage, maintenance, and insurance. You deduct $600 from $1000, and you will have a positive cash flow of $400.

Capitalization Rate

The next step is to use that cash flow analysis to calculate the capitalization rate. In essence, the cap rate is the rate of Airbnb returns relative to the property price. So, the cap rate formula looks like this:

Cap Rate = Net Operating Income/ Property Price

The net operating income in this formula is the annual cash flow. So, if we take the previous example of an Airbnb investment property, we multiply $400 by 12 which would be $4800 in net operating income. Now, if we suppose that the owner is selling it for $160,000, that would be a cap rate of 3%.

Cash on Cash Return

The final return on investment measure to estimate Airbnb income is the cash on cash return. This measure is very similar to the capitalization rate. However, instead of dividing the net operating income by the property price, we only divide it by the actual money you paid from your pocket. In this case, investment property financing is involved. So, you would have provided 20% as a down payment which is $32,000 while the mortgage covered the rest of it. So, we apply the cash on cash return formula as follows:

CoC Return = Net Operating Income / Actual Cash Investment

CoC = $4800 / $32,000 * 100% = 15%

Of course, this cash on cash return calculation is simplified. There will be other factors to consider for the actual cash investment like closing costs and maybe even renovation costs if they apply. Learn more about how to calculate cash on cash return.

Perform a Comparative Market Analysis

So, now that you know how to estimate Airbnb income through real estate market analysis and investment property analysis, the question is: How do you find the Airbnb data to calculate it all? For instance, where do you get the rental income estimates or the price of the property? This requires a combination of Airbnb analytics and comparative market analysis.

For the comparative market analysis, you should search for real estate comparables to help you find the Airbnb income estimate. In other words, you need to find Airbnb investment properties that are within the same location and have similar property features. Check how much they rent for, what the Airbnb occupancy rate in that neighborhood is, and use that as the basis for your estimate. Put everything together as we demonstrated above and you will find out how profitable the rental property is. If it’s high, you are good to go. If not, run the other way!

Use Real Estate Investment Tools

If there is one thing we know here at Mashvisor, it’s the fact that there is no way you can estimate Airbnb income manually or by using a real estate investment analysis spreadsheet. Every real estate investor, especially a beginner, needs the proper real estate investment tools to perform such estimates. Therefore, we encourage you to explore the Airbnb profit calculator to help you estimate Airbnb income efficiently.

A unique feature of the Airbnb profit calculator is that it can perform a heatmap analysis of neighborhoods. As mentioned, you need to do a real estate market analysis but it should include analysis of neighborhoods. The heatmap displays all neighborhoods with Airbnb properties for sale in the location of your choice. Not only that but also it shows the return on investment measures for both the traditional and the short-term rental strategies. This way, you can decide for yourself if the location is a good fit for your rental strategy and easily be able to estimate Airbnb income correctly.

To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.

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