Estimating Airbnb Earnings Before Buying an Investment Property

One of the most lucrative ways for making a profit in real estate is through investing in short-term Airbnb rentals. But, what should you expect in terms of Airbnb earnings, and how do you go about analyzing an Airbnb property to know how much money it’s going to make?

In this blog, I will walk you through the ins and outs of Airbnb short-term rentals, Airbnb earnings, how to calculate them to find the perfect property to invest in, and I will share with you a list of the top 5 cities to invest in based on their Airbnb earnings.

Investing in Airbnb Rentals

Why should you invest in short-term Airbnb rentals?

Airbnb rentals rose to popularity due to their high potential for generating more monthly rental income than a traditional long-term rental, assuming that both properties are rented throughout the entire month.

However, Airbnb rentals are also riskier and harder to manage, because you’re not guaranteed to achieve a high enough occupancy rate on your property for it to generate a significant amount of money.

What I mean by occupancy rate, of course, is the percentage of time during a year when your property is occupied by a guest or tenant. A short-term rental that is occupied for 182 days per year, for example, would have an occupancy rate of 50% (365 / 182).

Combine that with the fact that short-term rentals have a much higher turnover rate since your guests will only be staying at the property for a couple of days.

For those reasons, Airbnb income properties require a lot of management. But if you’re not ready to take on that responsibility, then perhaps you should consider hiring a property management service, but keep in mind that it comes at a steep cost.

While your occupancy rate is a major factor that affects your Airbnb earnings, analyzing your rental property and predicting its return on investment requires a lot more than just knowing what your occupancy rate is going to be.

How to Predict Your Airbnb Earnings

When talking about your Airbnb or short-term rental earnings, we’re talking about two things: the amount of money that your property is generating each month and the amount of long-term return on investment that your property will generate in the future.

So, in order to accurately predict your Airbnb earnings, you will need to factor in all the different things that can affect your short-term and long-term profits.

This means that you will need to get as much information about the market you want to invest in as well as the property that you will end up buying.

Unlike other types of investments that rely on buying and selling for a direct profit, calculating the return on investment for rental properties means factoring in all income streams that your rental property is generating, all one-time costs that you pay upon purchasing the property, and all recurring monthly or yearly expenses that incur from owning and operating the property.

So, how exactly do you predict and calculate your Airbnb earnings based on all of this information? And how do you know what’s good and what’s bad when it comes to the different metrics that you will use to measure your return on investment?

Let’s go through the process of analyzing an Airbnb rental for its investment opportunity and predicting its future earnings, one step at a time!

Real Estate Market Analysis

When you first make the decision that you want to buy and operate an Airbnb rental property, the first thing you will want to do is a real estate market analysis.

A real estate market analysis is a type of analysis that lets you see the bigger picture of the real estate market to help you decide on where you want to invest.

Basically, what you need at this point is to identify all the markets that you can afford. By accessing online sources like Zillow or Mashvisor, you should be able to get data on the median property prices and average monthly rents in each state and city, which will help you narrow down your choices by eliminating markets that don’t match your search criteria.

Once you’ve identified the markets that you’re interested in, make sure to do some research on the laws and regulations concerning operating an Airbnb rental property in that city or state.

Some states have laws that can directly affect your Airbnb earnings, so it’s important to be aware of these laws if they exist and to consult your real estate agent or a legal advisor on the matter.

Once you’ve decided on the market that you will be investing in, it’s time to move on to the next step of your predictive Airbnb earnings analysis.

Investment Property Analysis

When it comes to rental properties in general, analyzing the potential returns of the property depends on many different factors that can change over time.

Since rental properties are long-term investments, many things can happen at any point during your investment that will have significant effects on your overall earnings.

For example, and unlike other types of real estate investments, you will need to factor in maintenance costs and utilities as these can add up over long periods of time and will make up a considerable portion of your expenses.

So, let’s talk about Airbnb rentals in specific and see how you will be using Airbnb earnings calculations in order to decide on the best property to invest your money in.

Airbnb Earnings Calculations

So, you’ve decided on a market to invest in, and now you’re looking at numerous lists of properties for sale trying to decide which one you’re going to spend your hard-earned money on.

If your goal is to buy a property that will bring in the most Airbnb earning potential, then there are a couple of metrics that you will want to compare in order to see the best pick for you: Capitalization Rate and Cash on Cash Return.

However, in order to calculate these metrics, there are a few other things that you’ll need to calculate, and these are the income and the costs related to the property.

As mentioned earlier, there are two types of expenses that you will need to include:

One-Time Costs

• Closing fees: The costs of legally owning the property, such as mortgage application, official recording…etc. They are usually within the range of 2-5% of the property’s price.
• Renovation costs: If you’re buying a distressed property that you need to repair or if you decide to renovate or redesign the property.
• Appraisal fees: When applying for a mortgage, the lender might ask you to get an appraisal on the property as proof of value to set the amount of the loan. This costs around $300 for single-family homes and $600 for multi-family homes.
• Home inspection: Sometimes buyers are advised to do a home inspection before buying a property to make sure it’s in a good condition. This costs anywhere between $200 – $500.

Recurring Expenses

• Mortgage Payments: If you’re borrowing money from a lender to pay for the property, then mortgage payments will probably be the biggest recurring expense that you have until your mortgage is fully paid off.
• Rental Income Tax: Just like anything else, there will be taxes on Airbnb earnings. Luckily, however, you will get tax deductions for all of the other expenses on this list.
• Property Maintenance: One of the downfalls that come with Airbnb rentals is that they have higher maintenance costs than traditional rentals as short-term guests feel less inclined to take good care of a property that they will only be staying at for a couple of nights to a week.
• Property Management: As mentioned earlier, Airbnb rentals require a lot of effort to be put into property management if you want them to perform well. If you think it’s too much to handle, you can hire property management, which costs around 8-12% of the property’s monthly rent.
• Permits: Depending on the state or city you’re in, you might need to pay for a business license or other fees to be able to run a short-term rental.
• Utilities: Unlike traditional long-term rentals, your guests won’t be paying the property’s bills. This means that utilities such as water and electricity will be deducted from your own income.
• Insurance: Not much to say here. It is a requirement by most lenders, and it protects you from legal hazards with your guests.
• HOA Fees: If you’re buying a property in a residential community where the Home Owners Association is active, you will have to pay the HOA fees (which will cover some other expenses on this list such as property maintenance). However, keep in mind that Airbnb rentals and the Home Owners Association don’t usually work together very well.
• Emergency Budget: This isn’t a required fee like others on the list, but it is highly recommended that you put a portion of your Airbnb rental income on the side as an emergency budget. You will need it.
• Cleaning Fees: If you want your property to perform well, then you will want it to be sparkling clean every time a new guest checks in. This means a lot of cleaning, and you’ll probably opt-in for using a cleaning service.

Occupancy/Vacancy

The vacancy rate of the property is unique when it comes to Airbnb earnings due to how volatile it is for this type of property.

Some Airbnb rentals can have a very high rental rate, but if their vacancy rate is very high, they might not be able to generate enough annual income to cover their expenses.

And while it’s hard to predict an Airbnb rental’s vacancy rate, you can get an idea of how the property has performed in the past and use that to predict its future estimate Airbnb income.

Luckily in this regard, Airbnb provides historical data for properties that are listed on their platform, allowing you to calculate the vacancy rate for each property by simply looking at the days that it was occupied vs the days that it was vacant during previous years.

If that seems like too much work, am happy to tell you that Mashvisor does the work for you and provides you with the percentage for each property based on Airbnb’s data.

While many Airbnb rentals have varying vacancy and occupancy rates based on seasonality, location, demographics, and other dynamic factors, it’s important to keep in mind that managing the property correctly can drastically improve its occupancy rate.

This means that you might find Airbnb rentals that have low vacancy rates, and upon further investigation, you might find that their high vacancy rate was due to bad property management. So, if you believe you can manage the property in a better way, you can significantly increase its occupancy rate, and that’s how to maximize Airbnb earnings.

Cash Flow

One of the simplest metrics that is used to compare different Airbnb rentals is cash flow.

The cash flow of a rental property is the amount of monthly income it’s generating minus its monthly expenses.

It’s pretty simple: if a property is generating $1500 per month from rental income, and it’s costing you $1000 per month to pay the mortgage, bills, repairs…etc., then its cash flow is $500 per month.

If the property’s cash flow is negative, it means that it’s costing more money than it’s generating.

It’s worth noting here that the cash flow is different from the Net Operating Income (which is the more accurate representation of the monthly Airbnb earnings report) in that the cash flow doesn’t account for the property’s vacancy/occupancy rate.

This makes it a good metric to compare properties based on if you’re confident in your ability to maintain a high occupancy rate since the cash flow will be pretty close to what you will actually be making if the occupancy rate is high enough.

Capitalization Rate

The cap rate is one of the most important metrics when it comes to analyzing rental properties.

This metric tells you your Airbnb price to earnings.

The formula for calculating the cap rate is:

Cap Rate = Net Operating Income / Property Price

So, what this formula tells you basically is how much of your property’s price are you making in profit each month.

For example, if your net operating income is $1,800, and the price of your property is $360,000, this is what the calculation would look like: 1800 / 360000 = 0.005

To get the percentage, you just multiply by 100. In our example, this would be 5% of the property’s price is being generated as income by your rental property each month.

This is a great indicator of a rental property’s rate of return and it is the closest thing that you get to an ROI metric when calculating Airbnb earnings estimate.

Cash on Cash Return

The cash-on-cash return is another metric that most investors use when calculating their Airbnb earnings expectations.

This is a very similar metric to the cap rate. The difference is, unlike the cap rate, the CoC’s calculation is based on the amount of cash that you’ve invested in the property, not its market value or price.

So, the formula is as follows:

Cash on Cash Return = Net Operating Income / Cash Invested

To elaborate, let’s get back to our previous example and assume that we’re getting a mortgage to cover 80% of the property’s price, so we’re only paying 20% in cash.

So, out of the $360,000 property price, we’re only paying $72,000 in cash.

Consequently, the calculation would be as follows: 1800/72000 = 0.025

As you can see, the cash-on-cash return comes out as a much higher percentage than the cap rate, and naturally, this will always be the case if you’re taking a mortgage on the property.

Read: Cap Rate vs. Cash on Cash Return in Real Estate

Comparative Market Analysis

Now that you know how to analyze each rental property and see what its Airbnb expected earnings look like, it’s time to use that knowledge to finally determine the property that you want to invest in.

To do this, you will need to conduct a comparative market analysis.

This type of analysis requires you to do the above calculations for each candidate property that you think you might want to invest in.

To narrow down your search, you can use the cash flow of the properties to reduce the number of properties that you will be comparing on a deeper level.

Once you’ve identified the final handful of candidates, you will want to compare them based on their cap rate and/or cash on cash returns.

Based on this comparison, you can finally choose one to three properties that you want to buy and extend an offer to the sellers to try and negotiate a lower price to further boost your long-term Airbnb projected earnings.

Keep in mind that while your end goal is to maximize your profit, you shouldn’t make your decision solely on the potential earnings of each property. Make sure to pick a property that you’re comfortable with and that you’re certain you will be able to manage properly.

Read: Airbnb Rental Income in 2021: The 100 Best US Cities

Use Tools to Know Your Airbnb Earnings

The great thing about investing in today’s real estate market is the abundance of online tools and sources that you can use to make the entire process much easier.

When it comes to investing in Airbnb rental properties, you can find tools for your every need – from searching for a property to analyzing and calculating the different metrics, to comparing large numbers of listings.

If you’re looking for the best online tools for real estate investors, then Mashvisor has got you covered!

Mashvisor Tools

With an online platform that specializes in helping real estate investors, especially in the long-term and short-term rental market, then Mashvisor is the platform for you!

The platform includes a wide set of tools that can all help you on your journey to becoming a successful investor:

Our Property Finder helps you locate investment properties that are for sale across the US with the help of flexible filters and an easy-to-use interface. The tool also includes a heat map feature that helps you find markets based on their traditional and Airbnb rental income, traditional and Airbnb cash on cash return, traditional and Airbnb occupancy rate, average prices, and much more.

The Investment Property Calculator and Airbnb profit calculator lets you do an Airbnb analysis with ease by modifying fields related to the property’s income, costs, and recurring expenses, as well as a mortgage calculator which is directly linked to the property or Airbnb earnings calculator to give you the most accurate results.

Finally, the Neighborhood Analytics allows you to compare any number of properties with one another based on their cap rates, cash on cash return, occupancy rates…etc. to help you find the best performing property in each neighborhood which you can invest in.

Mashvisor Data

All of that said, Mashvisor also provides you with large amounts of data for each property listed on the platform, including its historic Airbnb data and the property’s projected returns based on the data we have for that property’s rental income, cost, and recurring expenses.

Mashvisor also gets data from other sources such as the MLS and Zillow.

To help you get a sample of what Mashvisor offers, and to help you find the best property to invest in, here is a list of the top 5 markets for Airbnb earnings summary based on our data and insights.

Top 5 Markets for Airbnb Earnings

Here are the top 5 cities with the highest average cash on cash return for Airbnb rental properties:

Elkton, MD

Median Property Price: $401,990

Average Price per Square Foot: $260

Average Airbnb Cash on Cash Return: 8.75%

Average Airbnb Occupancy Rate: 76.3%

Price to Rent Ratio: 23

St. Robert, MO

Median Property Price: $198,914

Average Price per Square Foot: $98

Average Airbnb Cash on Cash Return: 8.65%

Average Airbnb Occupancy Rate: 66.1%

Price to Rent Ratio: 18

Ridgeland, SC

Median Property Price: $312,715

Average Price per Square Foot: $173

Average Airbnb Cash on Cash Return: 8.54%

Average Airbnb Occupancy Rate: 65.3%

Price to Rent Ratio: 21

White Settlement, TX

Median Property Price: $279,130

Average Price per Square Foot: $164

Average Airbnb Cash on Cash Return: 8.49%

Average Airbnb Occupancy Rate: 63.3%

Price to Rent Ratio: 17

Springfield, LA

Median Property Price: $353,740

Average Price per Square Foot: $161

Average Airbnb Cash on Cash Return: 8.46%

Average Airbnb Occupancy Rate: 53.4%

Price to Rent Ratio: 22

Bottom Line

Investing in Airbnb rentals is a great idea for making good profits in the long term, as long as you’re willing to carry the weight of running an Airbnb property.

Airbnb earnings can be great when you make good investment decisions. That means choosing the right market and analyzing properties before investing your money in them.

Make sure to check out Mashvisor’s platform as the tools we provide can drastically help you and make the process of investing in great Airbnb rentals much easier and faster.

And check out our blog for more guides, tips, and market reports to help you become a more knowledgeable investor and make smarter decisions in the future!