In the past few years, short-term rental properties have become a popular alternative for tourists looking for temporary lodging while on vacation. They have also become a great way to invest in real estate. The financial benefits of owning an Airbnb property are clear to investors. Sometimes, they can even make more money from short-term rentals than traditional long-term rentals.
While there is money to be made from investing in Airbnb, real estate investors really need to understand what they’re getting into before jumping in and realizing that the rules aren’t set in stone. To help you get started, Mashvisor’s put together this step-by-step guide to investing in short-term rental properties in 2019.
Step 1: Choosing the Right Location
One thing that doesn’t change in real estate investing regardless of your investment strategy is the importance of location. Some locations are favorable for traditional rentals and others yield higher profits for short-term rental properties. It’s your job to study and analyze the real estate market to determine which rental strategy is optimal.
To find the best places to buy Airbnb properties, real estate investors look at certain factors like the area’s desirability, affordability, Airbnb occupancy rate, short-term rental rates, and potential ROI. For example, locations with plenty of tourist attractions such as beaches, mountains, or a national park are typically the first choice for Airbnb investors. These are desirable locations, meaning the occupancy rate and demand for short-term rental properties are high.
However, before buying a vacation home rental, you need to check if these areas have positive investment potentials. So, look at home prices, demographics, and rents in the real estate market. Understanding all these factors is extremely important if you want to own a profitable Airbnb investment property. New York, for example, has plenty of tourist attractions. But, because it’s too expensive, Airbnb investors won’t get a good enough return on investment there.
Whatever your city of choice for investing in short-term rental properties, you’ll still need to find a profitable neighborhood. Our Heatmap Tool can help you do this! This tool allows you to check the listing price, rental income, occupancy rate, and cash on cash return of both traditional and Airbnb rentals in different neighborhoods in the same city. You can then compare them and identify which one has the best Airbnb investment opportunities. To learn more about our tool, click here!
Step 2: Working Out the Regulations
Getting your Airbnb investment up and running isn’t as simple as you might think. There’s much more involved than simply buying an investment property, listing it on Airbnb, and welcoming guests. For one thing, it might be illegal for real estate investors to rent out on Airbnb in the city you chose to invest in. A number of major cities across the US have placed a ban on Airbnb claiming it has a negative impact on the housing market. So, when you’re looking to buy short-term rental properties, make sure Airbnb is legal in the location you’ve chosen.
Even though it’s legal in many cities, it could still be heavily restricted. Every city has its own regulations in terms of what type of property you can list on Airbnb, how long you can rent a property out, if you have to be present during the stay, and if you have to collect taxes from guests and remit them to the city. As a real estate investor, you want to make sure your short-term rental property is in an Airbnb-friendly city where regulations are unlikely to affect your bottom line and return on investment.
As mentioned, every location is different so you have to check state and local regulations before buying a vacation home rental. Many cities in the state of California, for example, either completely ban Airbnb or have very strict regulations that make it almost impossible to profit off of short-term rental properties. On the other hand, the state of Arizona is extremely welcoming to Airbnb hosts and many cities there offer profitable Airbnb investment opportunities.
Step 3: Finding the Perfect Property
Finding profitable short-term rental properties requires the same amount of due diligence required to find profitable traditional rentals. Once you’re confident in your location, the next step is to decide what type of vacation rental property to buy. Common types include condos, single-family homes, and multifamily properties. Each type of investment property has different features that attract short-term guests. So, study the pros and cons of each type to see which one best fits your goals and criteria.
The next step is to find a number of properties in the area that you can turn into Airbnb rentals. Real estate investors then analyze these properties to find the one with the best investment potential. So, find out the purchase price, nightly rent, potential rental income, and the Airbnb occupancy rate of the different short-term rental properties, compare them, and find the best performing one.
Don’t want to go through the trouble of comparing investment properties? We’ve got an easier way for you to find the perfect Airbnb rental in any city across the US – the Property Finder Tool! Using a number of filters, you can set your preferred criteria and the tool will give you a list of properties that meet your criteria AND have the highest cash on cash return! With this tool, real estate investors turn their property search from 3 months into just 15 minutes!
Step 4: Accounting for All Rental Expenses
A vacation rental property can be a great investment and an enjoyable place to relax at the same time. However, don’t forget about the costs associated with ownership before you start investing in Airbnb properties. First of all, Airbnb charges the host a 3% service fee for each booking. Other costs that you’ll be responsible for include:
- Property taxes
- Hotel/lodging taxes
- HOA fees
- Management fees
- Rental income tax
Short-term rental properties usually generate higher rental yield than long-term rentals. However, these rental expenses can quickly add up and eat into your profits. Therefore, estimating all these expenses before investing is important to get a feel of how much your investment property could make.
Additionally, there are other unexpected yet potential expenses that must be considered. For example, what if your guest is injured in the rental? What if you’re the victim of theft? What if you can’t rent it out right away or have a slow period of vacancies? Can you afford that? Make sure to account for all of this before buying an investment property to rent out on Airbnb.
Step 5: Calculating Rental Yield and Returns
As a real estate investor, you want to buy a vacation home rental that you’ll enjoy but one that also makes financial sense. So, after you find a potential property and estimate all your rental expenses, you should perform an investment property analysis to make sure it’ll be profitable. A short-term rental should make positive cash flow so you can afford it even when it’s vacant.
First, decide how much you’ll need to earn in order for the Airbnb investment to be profitable. Then, look at the vacancy rates in the area in addition to short-term rents and compare them to your monthly rental expenses. You can find out if the investment property has a positive cash flow by simply deducting the monthly rental expenses from the monthly rental income.
If you’re not sure how to get this data for short-term rental properties, a good source to check out is Mashvisor.com. This site gives Airbnb hosts a quick view of their local market. This can help estimate how many days you can expect your property to be rented out during the month, what the average pricing, vacancy rates, and other metrics for your local market are.
Mashvisor’s Investment Property Calculator can also help you with your property analysis. Mashvisor provides real estate investors with an estimated Airbnb rental income for top neighborhoods in hundreds of US cities. Simply input the expenses from your research into the calculator (or use the estimates) and you can see what ROI you can expect to earn if your assumptions are accurate. To give it a try, start out your 14-day free trial with Mashvisor now.
Step 6: Preparing and Listing Your Rental
Buying an Airbnb property and listing it online is not enough to get you bookings. Remember, tourists and vacationers choose to stay in short-term rental properties not only because they’re cheaper than hotels, but also because they have a homey feel. So, decorate and furnish your Airbnb nicely and provide guests with anything they may need during their stays like Wi-Fi, clean towels, kitchen cutlery, and other essentials to make your Airbnb guests’ experience as pleasant as possible.
Once your investment property is ready, it’s time to list it and market it to vacationers. When it comes to Airbnb, presentation is everything. Your goal is to make your property’s listing appealing enough to stand out from the competition. The main image is the driving factor that will push people to view your listing. So, the first thing to do is take high-end photos to showcase your vacation home rental. This will give you a higher host ranking which, in turn, gives a higher likelihood of guests selecting your property over another.
Following photos, we would recommend reviewing the current competitive listings in the market and noting how they are presented for rent. Ultimately, you want a great guest rating and positive reviews. To achieve this, work on making your listing description accurate, detailed, complete, and highlight what makes your Airbnb rental unique. Moreover, it’s also important to outline the amenities and features of your space. Soon enough, you’ll get bookings from guests who are looking for exactly what your vacation home rental has to offer.
Step 7: Managing Short-Term Rental Properties
The last step of investing in short-term rental properties is, of course, managing your investment. There are two ways to do this: You either do it yourself or hire a professional property management company to do it for you. Managing an Airbnb rental is different than renting out a traditional investment property. There are additional requirements like cleaning the property, organizing how guests will access the property, and other management needs that are not typically required from a traditional landlord.
If you’re going to manage the property yourself, you’ll need to hire operational services like cleaning services, maintenance, and exterior landscaping care. You’ll also need to have a system to let service staff and guests into the property. Some property owners offer “self-check-in” options that allow people to come and go as they please while also ensuring the security of the property.
Alternatively, you can hire a management company and it’ll take care of operational services for you. Many prefer this option as it makes the investment a passive one – you’ll be making money in real estate without doing any work in return. However, you’ll need to add their fees to your rental expenses. Typically, property management fees for short-term rental properties range from 25 – 50%, with 28% of the rental income being the average. So, make sure you can afford this fee before hiring professional property management.
Ready to Start Investing in Short-Term Rental Properties?
There is definitely a potential to make money in real estate from short-term rental properties as Airbnb investors and success stories exist. You don’t have to have a background in real estate investing to be a successful Airbnb investor, but it can take time to master. In addition, vacation home rentals can yield high profits, but also have costly expenses associated with them.
Therefore, we recommend starting slow and doing your research before getting started. Allow yourself as a real estate investor to figure out what works and what doesn’t, what mistakes to avoid, and what seems to click with Airbnb guests. For additional tips on how to succeed with Airbnb (and traditional) rentals, keep reading our real estate investment blog.
To start your search for the best short-term rental properties in the city of your choice, click here!