Owning an Airbnb rental property is a very profitable investment, but is it always?
The answer is, as always: it depends.
Airbnb has been gaining momentum in the US real estate market. More investors are switching to investing in the home sharing service seeing how popular it’s becoming among guests in cities nationally and internationally. Airbnb has conquered the lodging market to a point where traditional hotels are financially affected. At the same time, many concerns have been arising to its misuse, lack of registration and legislation, absence of administrative supervision, along with consequently the lack of adherence to the tax collection.
As a result of this, owning an Airbnb has become a little tricky in some cities where legal issues have risen. In most cases, we would recommend owning an Airbnb investment property. There are times, however, when owning an Airbnb is just not worth it. Check out when those instances are below!
You Can’t Invest Out of State
If you live in a city with little potential for real estate investing, you may consider out of state investing. Out of state investing entails investing in a city or state in which a real estate investor does not reside. And opposite to what many investors believe, investing ‘out of state’ doesn’t have to mean out of state. Say you live in Bethesda, Maryland. You may note that investment potential is better for Baltimore real estate. Choosing to invest in Baltimore properties can also be considered out of state investing even though you’re still investing in the state of Maryland.
Investing out of state can be a great alternative when owning an Airbnb in the city or town you reside in is not a profitable investment. You would need to choose a good market, an investment property, look up local laws and regulations for your city of choice, and make connections there. And while it’s rather challenging, owning an Airbnb out of state can be very profitable.
The problem arises when you can’t invest out of state for whatever reason, and the area you’re in has no potential. In this case, it’s simply best to just not own an Airbnb altogether. There’s no point in investing in real estate somewhere where there’s no possibility of generating profits.
Related: How to Find Investment Properties Out of State
When It’s One of Those Cities
Are all cities in the US real estate market Airbnb friendly?
First, let’s define what we mean by Airbnb friendly. A city is Airbnb friendly if it has few or no Airbnb legal issues, and if owning an Airbnb is generally easy there. The majority of cities in the US housing market are Airbnb friendly. Among these best places to invest are Cleveland, Columbus, Dallas, Indianapolis, Louisville, and San Diego. So if you’re planning on owning an Airbnb, these are your top choices.
Related: Buying a Short-term Rental Property? Invest in the Most Airbnb Friendly Cities
In contrast, Los Angeles, New York City, San Francisco, Atlanta, and Denver have lots of legal issues. Moreover, at the beginning of 2018, Kirkland, WA and Austin, Texas were added to the list of US cities with the most Airbnb legal issues. Some of these cities are even currently undergoing battles against the home sharing service. Criticisms are directed towards commercial investors in the home sharing industry, or any real estate investor looking to use Airbnb as an investment, rather than renting part of their property for an extra buck. Several of the above cities are concerned about local neighborhoods and communities. The hotel industry is also apprehensive about how much popularity Airbnb is gaining over hotels and other lodging options.
When Cash on Cash (CoC) and Cap Rate Values are Negative
When buying an investment property, be it traditional rental or Airbnb, you need to watch for real estate indicators such as rental income, cap rate, cash on cash return, occupancy rate, among others. If the investment property (or neighborhood) you’re interested in buying yields negative cash on cash return, it may not be the best idea to invest in it. The same goes for cap rate and return on investment (ROI). You should be able to generate positive cash flow and returns when owning an Airbnb, so make sure the values add up when making an investment decision.
For easy access to the above information, in addition to expected rental income per month, cost assumptions, and optimal investment strategies in different neighborhoods and cities, use Mashvisor! Our investment property calculator will make investing in real estate ten times less challenging. Moreover, you’ll no longer have to worry about using spreadsheets for real estate analysis. So make sure to check out our features to make the best out of your investments!
Related: Investment Analysis Spreadsheet Has Become Obsolete with the Investment Property Calculator
If You’re Not Going to be There
Unlike traditional rentals, Airbnb investment properties require more upkeep. Guest/tenant turnover rate is much higher. So unless you’re using property management, you’re going to have to be the one who tends to restocking property inventory, scheduling cleaning services, handling property bookings and contacting guests, among other tasks that come with owning an Airbnb. And many investors do not have the time and cannot be there on the clock for their guests/tenants.
One way owning an Airbnb can become easier is if you hire professional property management services. These are services of real estate professionals who can manage your Airbnb or traditional property. Hiring the service can be beneficial because it gives you more time, flexibility, and can actually help you yield more profits. Unfortunately, if you cannot hire property management services, nor be available to tend to the property yourself, we don’t recommend owning an Airbnb.
All in All…
Owning an Airbnb investment property can be a great way to make money in real estate. Owning an Airbnb rental property especially is a profitable investment. So when looking into the option of owning an Airbnb, make sure to consider the Airbnb friendly cities listed above, and the most profitable locations for real estate in general. Also make sure to use Mashvisor to know where to invest in real estate, and to optimize your investment. Whether it’s traditional rentals or Airbnb rentals, real estate investing is a great idea. Investing in real estate will provide you with steady cash flow, tax advantages, property appreciation, and leverage, among other benefits.