Learning how to estimate rental income is crucial if you plan to be a rental property owner, especially when it comes to short term rentals.
Table of Contents
- How to Calculate Expected Short Term Rental Income Using Mashvisor
- Why You Need to Estimate Your Short Term Rental Income in Advance
- How to Know if a Short Term Rental Property Is Worth It
- Wrapping It Up
Real estate investing is a numbers game. Your return on investment is determined by different types of information and market data. The income from rental properties also varies depending on certain other factors such as location, job market, and economic conditions. But overall, knowing how to estimate rental income using the different variables is a handy skill for everyone.
In this article, we aim to answer concerns like:
- How to calculate expected short term rental income
- How to calculate if a short term rental property is worth it
By answering the above questions, we hope to give you enough information to make more accurate projections of your ROI. Hopefully, as you read this article, you will better understand rental income calculations. We also hope it gives you a better idea of why it is essential to do it with the right tools, like Mashvisor’s rental estimate calculator.
How to Calculate Expected Short Term Rental Income Using Mashvisor
To start, one of the things you need as a real estate investor is access to the right tools and information. These investment tools will help you conduct a proper rental market analysis and give you highly accurate results.
Nowadays, investors turn to real estate platforms to aid them with their property search and investment property analysis. Knowing how to utilize technology-aided property searches and data analysis will speed up the process of landing good investment deals. As an investor, it is important to take advantage of what modern technology can offer to be more efficient.
One of the top real estate websites countless investors trust is Mashvisor. It specializes in helping real estate investors locate the right properties for their traditional and vacation rental businesses. The website provides users access to up-to-date real estate market data across the entire 2022 US housing market. Its massive database is regularly updated with data from reliable sources like Zillow, Realtor.com, and Airbnb.
Additionally, Mashvisor also offers investment tools that are crucial in knowing how to estimate rental income. Its investment property calculator allows you to make the most accurate ROI projection and rental income estimate, regardless of whether it’s a long term or short term rental property.
How Is Short Term Rental Income Estimate Determined?
The rental rate you can charge for a specific vacation rental depends on its location, seasonality, property type, rent control laws, conditions, and features. These factors affect how much your income will be on your short term rental.
But more importantly, to obtain accurate rental income estimate results, you will need to look at three key metrics below:
- Cash Flow. To come up with a rental income estimate for your vacation rental, you need to ensure that the rent you charge will cover all recurring expenses. Thus, it is important to choose an investment property that will give you a positive cash flow.
- Capitalization Rate. The main reason you would want to estimate your rental income is to see what your ROI will be like. The cap rate is one of the key metrics in determining a property’s profitability, regardless of whether it’s a traditional or vacation rental. It measures the property’s rental income relative to its market value.
- Cash on Cash Return. Another crucial metric for determining profitability is the cash on cash return. Its main difference from the cap rate is that it measures the property’s net operating income relative to the total amount of cash initially invested.
We also recommend looking at rental comps in the market you’re considering. Rental comps are rental properties that are closely similar to the subject property. Taking them into account will give you a clearer picture of what the rental market is like in the area. Using rental comps in your calculations is a great way to come up with accurate rental income estimates.
Find Your Short Term Rental Income Estimate Using Mashvisor: 5 Steps
As a rental income estimate tool, Mashvisor is quite easy and simple to use. It is powered by sophisticated artificial intelligence that makes it highly interactive and intuitive. You can use the default numbers provided by the system when you compute your rental income estimate. However, you may also customize them by entering numbers according to your research. This makes estimating rental income far more accurate.
We’ve provided a few simple steps below on how to estimate rental income for your vacation rental using Mashvisor.
Step 1: Enter a Location
Once you log on to Mashvisor.com, you will have access to a massive database that covers almost all locations in the country. All you need to do is enter a location in the search field. It will then give you a list of investment properties in the area of your choice.
Upon hitting the Start Analyzing button, you will be taken to the real estate heatmap page. The page is made up of a heatmap that dominates it and a sidebar for investment properties available in the area.
The sidebar is made up of three tabs: Investment (Properties), Airbnb, and Traditional. The Investment tab shows you properties for sale in the area. The Airbnb and Traditional tabs contain a list of rental property listings that show how much rental income they get in a month.
You may enter a city, town, neighborhood, street, or an exact location in the search field. The more specific your search, the more specific the results will be.
Step 2: Adjust the Real Estate Heatmap Filter
Once you have the real estate heatmap before you, you may adjust its filter by clicking on the dropdown menu in the upper left corner of the screen. The dropdown menu has the following choices:
- Turn Off Heatmap
- Traditional Cash on Cash Return
- Airbnb Cash on Cash Return
- Airbnb Rental Income
- Traditional Rental Income
- Listing Price
- Airbnb Occupancy Rate
Select Airbnb Rental Income to show you which areas and properties in the neighborhood are performing extremely well (highlighted in green) and those that aren’t doing okay (colored in red).
Each filter should give you different results with pins representing the available properties in the location. Hover over a pin to get a text box showing what it has to offer as a vacation rental property. The pin’s text box also gives you an idea of what type of property it is and the number of bedrooms and bathrooms on it. It will also show you what its income-earning potential is by displaying the property’s actual cash on cash return, cap rate, and rental income.
Step 3: Use Rental Comps
When you already have a subject property, you may now compare it to other similar short term rentals. You can do this by clicking on the pin. It will open a window that outlines all the details and information about the specific property. Just scroll down a bit and click on the Rental Comps & Insights tab.
You will then see a Valuation Analysis section, which allows you to compare the subject property with rental comps for both long term and short term rentals. This section should give you a better idea of how to estimate rental income on vacation rentals. Simply select the top three to five properties closely similar to yours and get the average rental income.
While the average rate does not necessarily apply to your property (you have other variables to consider), it gives you a good idea of how much you can make monthly.
Step 4: Use Mashvisor’s Rental Property Calculator
One of the things that Mashvisor’s users find most helpful is its investment property calculator. It is not just your typical investment calculator found on other platforms. What makes Mashvisor’s calculator unique is that it helps you identify which properties make for good vacation rentals. You just need to learn how to utilize its different features.
First, it allows you to factor in financing options using its Financing Calculator. You can use this feature to fiddle with your calculations based on the mortgage type, down payment, and loan amount. Since it is also powered with the same AI tech the database uses, it is highly intuitive and will make the necessary adjustments based on your inputs.
Second, the calculator will also show you which rental strategy works best for your subject property. It will give you profitability projections for both long-term and short term rental strategies. This will allow you to make a side-by-side comparison so you can make the wisest decision.
Lastly, the rental property calculator also factors in all the expenses involved in the property purchase. This includes both startup costs and recurring expenses.
To learn more about how Mashvisor can help you find lucrative investment properties, schedule a demo today.
Step 5: Repeat
Once you get familiar with computing rental income estimates, it will be easy for you to perform investment property analysis on whatever subject property you own. The key to accuracy here is using rental comps in your computations. Sure, all the other factors like seasonality, property type, and location have roles to play in determining your rental income. However, rental comps paint a better picture of the actual market conditions.
Using Mashvisor is simple and easy. You no longer need to use different calculators to do your tasks. Whether you’re computing for ROI or estimating rental income, Mashvisor is the only tool you’ll need to up your investing game.
Why You Need to Estimate Your Short Term Rental Income in Advance
Knowing how to estimate rental income on a short term rental property is crucial if you want to start an Airbnb business. Investing in a vacation rental involves risks.
One, you can’t earn as regularly compared to a traditional rental. Two, not all states are friendly to short term rentals. And three, your property’s income will vary depending on its location, seasonality, and how the tourism industry is performing.
If you’re keen on buying an income property for sale to turn it into a short term rental, you need to know how to make an income projection. It will help you determine whether a property is worth investing in or not.
How to Know if a Short Term Rental Property Is Worth It
Property valuation is another crucial aspect of real estate investing. Just because a property is for sale does not mean it’s a worthwhile investment. You need to conduct a proper investment property analysis to see if it’s a good short term rental investment or not.
To do the analysis, you need to consider the following:
- Tourist Appeal. Ideally, vacation rentals should be located in areas where tourism is high. Such areas cater to people who are on vacation and those on business trips. If you notice, areas with higher Airbnb occupancy rates are those that also have higher tourist traffic.
- Local Economy. Other than tourist appeal, you also need to consider whether a place has a thriving or growing economy.
- Cost of Living. Managing a vacation rental property also involves knowing how much utilities, taxes, and rent prices are going for in a location. Can you afford to maintain a short term rental property in a place with a high cost of living?
- Airbnb Analytics. How is the vacation rental market doing in your chosen location? Are the rent prices reasonable for the neighborhood? Is the occupancy rate higher than the vacancy rates? You need to remember that as a short term rental owner, your rental income will greatly depend on your occupancy rate.
- Target Market. What is your target market? Are you going for young professionals? Families? Older adults? Knowing your target market will somehow point you in the right direction.
When all five of these coincide with your investment goals, then the subject property can be considered a good investment.
To compute the ROI on a short term rental, let’s take a look at the following scenario:
You bought a rental property for $100,000 in cash. The closing cost for the transaction was $1,000, while rehabilitation costs ate up around $9,000. The additional expenses bring your total initial investment to $110,000. As a vacation rental owner, you collect $2,000 each month.
A year later, you earned $24,000 in income for your short term rental property for 12 months. Your annual expenses (utilities, maintenance, taxes, etc.) were at $2,400 or $200 monthly. It makes your annual return $21,600 ($24,000 – $2,400).
To calculate your ROI, simply divide your annual return ($21,600) by the total investment ($110,000).
ROI = $21,600/$110,000
ROI = 0.196 or 19.6%
Your ROI for your vacation rental property is 19.6% or almost 20%. According to industry experts, a good ROI for a rental property is above 10%. In this case, your ROI of 19.6% is pretty good.
The 1% Rule
When it comes to rental property income, investors and industry professionals go by the 1% rule. The rule simply states that a rental property should make at least 1% of its purchase price every month to be considered a profitable investment.
Using the same numbers as above, your $110,000 investment in your rental property should translate to a minimum monthly income of $1,100. The amount should be able to take care of your mortgage, utilities, and other recurring expenses and leave you with enough to take to the bank. Given that your property’s ROI is almost 20% at about $1,800 a month, it passes the 1% rule and is considered a good investment.
Wrapping It Up
As an investor, knowing how to estimate rental income on short term rental properties will serve you well. Investing in a vacation rental property entails certain risks. As an investor, you need to keep that margin for error as minimal as possible. Coming up with a rental income estimate will help you achieve that.
To come up with highly accurate estimates, we recommend signing up for Mashvisor’s services. As a subscriber, you get access to an up-to-date real estate database, as well as the most versatile real estate investing tools.
Get your hands on Mashvisor’s real estate investment tools now. Click here to sign up for a 7-day free trial today, followed by a 15% discount for life.