Investing in Airbnb is one of the best ways to make money, but to assure optimal ROI, you need to accurately estimate vacation rental income before buying.
As we’re exiting the disturbance that the pandemic caused to the real estate market and the short term rental industry, Airbnb is reemerging as the best rental strategy. On average, short term rental properties produce a better return than their long term counterparts across the US market.
Table of Contents
- Perform a Real Estate Market Analysis
- Conduct an Investment Property Analysis
- Do a Comparative Market Analysis
- Use Real Estate Investment Tools
The respective cap rate numbers for the two strategies are 4.58% vs. 3.29%, based on a nationwide analysis conducted by the Mashvisor team in October 2022. Moreover, according to our housing market predictions for 2023, the difference is likely to expand further. That’s because travelers are trying to make up for opportunities missed during the worst months of COVID-19.
However, investing in rental properties to run an Airbnb rental requires serious work even before you buy one. Just purchasing any house and renting it on a short term basis does not guarantee good results.
Part of the work is to figure out an accurate and reliable Airbnb estimate of the monthly rental income that you can expect to make from the property. This basically means trying to come up with a rate or figure that represents the investment property’s potential for generating money. The higher the number, the higher the potential of that income property.
In this article, we’ll take you through the three steps to finding out your potential vacation rental income prior to purchasing a rental property. We’ll also show you a shortcut on how to obtain the expected numbers right away.
Hint: This includes using the tools available on the Mashvisor platform.
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. This means not only a market that is profitable but also a market where non-owner-occupied short term rental properties are legal.
The main factors that make for the best short term rental markets include the availability of tourist attractions, a large number of visitors year-round, and further demand for more vacation rentals. In terms of legality, you need to locate a market where buying an investment property with the sole purpose of renting it out on a daily basis is legal and does not face many restrictions.
Hint: You can check out the Mashvisor short term rental regulations pages to find out if a location is Airbnb-friendly or not.
When you find a potentially good market for your Airbnb rental property, you should look for an estimate of the Airbnb monthly income that you can get in this location. This will be a good approximation of the average revenue of a typical short term rental property there. To do this, you need to conduct a real estate market analysis.
What Information and Data the Airbnb Rental Market Will Give You
Performing Airbnb market research on your selected location will provide you with the following information:
- The real estate market analysis will reveal a lot about the short term rental demand in the area. You want to pay attention to this as well as seasonality trends since it will have a direct impact on your Airbnb daily rate and Airbnb occupancy rate. These, in turn, will define your Airbnb rental income.
- Using historic Airbnb data as well as current rental data in combination with predictive analytics, the best market analysis will “predict” the future of that specific location. In this way, you can learn about possible real estate market trends in the future and how they will affect your Airbnb income.
- It tells you if the location you have chosen is a good fit for buying Airbnb investment properties. Sometimes, specific areas are better suited for traditional rentals, meaning you won’t produce as much income as you might like with the short term rental strategy.
- Analyzing the potential of the market will also tell you the typical real estate appreciation rate for that location. This will show you how much money you can expect to make in the long term, once you’ve decided it’s time to sell your investment property.
- Once you successfully gather all this information from your market analysis, you’ll have a rough Airbnb income estimate for the location.
Conduct an Investment Property Analysis
The next step on how to estimate Airbnb rental income is to complete an investment property analysis. Since you have found a suitable location for your investment goals, it’s time to start looking for Airbnb properties for sale there. Once you spot a few rental properties that have caught your attention, you want to work out the following Airbnb return on investment metrics:
While figuring out the monthly rental income that a vacation home can bring is not easy, finding an estimate of the Airbnb daily rate is more doable. The daily rate—or nightly rate—is how much you are able to charge guests to stay at your property for a day.
The short term rental daily rate varies depending on seasonal changes in demand. For example, weekdays vs. weekends, holidays vs. regular days, and summer vs. winter all call for a different daily rate to strike the best balance between daily rent and occupancy.
Meanwhile, the average daily rate throughout the year will give you a very accurate estimate of the expected Airbnb revenue when combined with the occupancy rate.
Another metric to take a look at during the Airbnb rental property analysis is the occupancy rate. In other words, this is the time for which an income property is rented out compared to the total number of days for which it is made available by the host.
Similar to the nightly rate, the occupancy rate fluctuates based on seasonality. Certain times of the week, the month, and the year just attract more tourists to a particular location. This depends on things like the weather, popular tourist attractions, and major events in the area.
So, when you get the average daily rate of a short term rental and multiply it by the occupancy rate, you will get a pretty good estimation of the expected Airbnb income.
Estimating the expected Airbnb income of a rental property for sale is so important because it helps you calculate other crucial measures like cash flow. The cash flow is the Airbnb rental income minus the monthly rental expenses.
Let’s say you rent out your short term rental property for $1,000/month. You spend $600/month on the mortgage, maintenance, short term rental insurance, and everything else related to owning and running an Airbnb business. You deduct $600 from $1,000, and you will have a positive cash flow of $400.
The next step is to use that cash flow analysis to calculate the capitalization rate. In essence, the cap rate is the Airbnb rate of return relative to the property price.
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 $4,800 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% ($4,800/$160,000 x 100%).
Cash on Cash Return
Another return on investment measure that uses the estimated 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 our 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:
Cash on Cash Return = Net Operating Income/Actual Cash Investment
Cash on Cash Return = $4,800/$32,000 x 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.
Do a Comparative Market Analysis
Now you know how to estimate Airbnb income through the use of the Airbnb daily rate and the Airbnb occupancy rate. Moreover, you know why finding out the Airbnb revenue is so crucial—because it factors in all ROI metrics in real estate investing. But the question that remains is: How to find the Airbnb data needed to calculate all these?
For instance, where do you get the nightly rate estimates or the price of the property? This requires a combination of Airbnb analytics and comparative market analysis.
Step 1: Find Rental Comps
For the comparative market analysis, you should first search for short term rental comparables—or rental comps—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 as the one that you’re analyzing.
To do that, you can check out some of the top short term rental property platforms like Airbnb, Vrbo, and Booking.com. You will easily find the seasonal daily rates for comparable properties, but figuring out what occupancy they generate will be more challenging.
Alternatively, you can try to reach out and connect with more experienced local investors and Airbnb hosts to inquire about the performance of their rental portfolios. Real estate meetups, forums, and social media groups are particularly good places to find like-minded fellow real estate investors.
Step 2: Find Out Comps’ Performance
By now, you should have been able to locate a few vacation rental properties similar to the one that you’re analyzing. Then, you need to check how much they rent for and what Airbnb occupancy rate they bring and use these numbers as the basis for your estimate of the Airbnb income of your rental.
Put everything together as we demonstrated above, and you will find out the profit potential of the rental property for sale that you are considering. If the forecast profitability is 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. It’s nearly impossible to make an estimate with the required level of precision and accuracy to strike a profitable deal as well as efficiency.
Every real estate investor, especially if they’re a beginner, needs the proper real estate investment tools to perform the analysis necessary for such estimates. Therefore, we encourage you to explore the Airbnb profit calculator available on the Mashvisor real estate investing app.
But what exactly can you do with the Mashvisor Airbnb profitability calculator?
Find Out the Average Airbnb Revenue of a Neighborhood
Mashvisor is not just a rental property calculator; it’s also an investment property finder. You can use the platform to analyze the investment potential of markets and figure out the best areas for Airbnb investing in any US city.
Simply use the Mashvisor real estate heatmap to obtain a color-coded representation of any real estate market. You can use different colors to search for the neighborhoods with the highest Airbnb rental income, Airbnb occupancy rate, or Airbnb cash on cash return. You can also use this tool to ensure that these areas have low listing prices.
Upon identifying a few areas that seem to match your investor expectations, you can zoom in on the local market analysis with the Mashvisor neighborhood analysis pages. On these pages, you will find a detailed market analysis for all neighborhoods in all US cities. You are sure to find an estimate of the average Airbnb rental income that short term rentals get in the area.
Estimate the Airbnb Income of a Property for Sale
In addition to locating good areas for investing in Airbnb, you can also use the Mashvisor real estate app to search for properties for sale with your expected Airbnb estimate. Just enter your search criteria, and you will immediately get a list of properties for sale that meet your expectations.
Most importantly, each listing—whether from the MLS or an off market property—comes with comprehensive rental market analysis. This includes all the crucial metrics that we listed above: Airbnb income, occupancy rate, rental expenses, cash flow, cap rate, and cash on cash return.
Moreover, you get a side-by-side comparison of the expected performance of this property if rented out on a long term basis to confirm that Airbnb is indeed the optimal strategy.
In addition, all Airbnb estimates and analytics are based on actual rental comps and reliable sources of short term rental data like Airbnb itself. This means that the Mashvisor Airbnb profit calculator not only makes estimating Airbnb income much easier and faster but also much more reliable and accurate than manual analysis.
So, all that’s left is to sign up for a 7-day free trial of Mashvisor to start finding Airbnb properties with top income levels.
While being able to estimate Airbnb income is not necessarily easy, it is a must to guarantee money-making short term rental property investments. Traditionally, this involved three levels of analysis: real estate market analysis, investment property analysis, and comparative market analysis. And these, in turn, required months of hard work.
However, the advancement of real estate technology has made it possible to forecast not only Airbnb rental income but also all other major ROI metrics with a few clicks. The Mashvisor platform helps you search for profitable Airbnb properties for sale and analyze their potential before buying. Now high-ROI short term rental properties are just a few clicks away.