4. Read this article and learn everything you need to know about Airbnb investing.
As inflation erodes the value of money throughout the world, people are looking for sensible ways to invest their earnings. From gold to cryptocurrencies, there's an endless stream of “sound investments” promising guaranteed returns. Yet, futures, options, cryptocurrencies, and more are all extremely volatile – and there's a steep learning curve.
Airbnb as an investment is perhaps one of the safest options. Conventional wisdom says you should rent your real estate to long-term tenants: longer tenancy equals more income, right?
Not really. Short-term bookings charge more per night, which means, even if you're not 100% booked up all year round, you'll be able to earn more money from an Airbnb investment property than on the conventional investment market.
In fact, Airbnb is continuing to see record growth. In 2021, for instance, 300 million bookings were made on Airbnb, a 55% increase in 2020. According to Airbnb, as of October 2020, hosts worldwide have earned more than $110 billion with Airbnb investment properties – and there's still more to be made.
Becoming an Airbnb host means diversifying your income, investing your money in a safe asset, and maximizing the earnings on your property. We can see the appeal!
Below we'll explain how to invest in Airbnb, from choosing the right Airbnb investment property to balancing the benefits of Airbnb investing compared to the traditional real estate rental model.
Let's get started!
How to invest in Airbnb
Investing in Airbnb can be a daunting process, especially for those unfamiliar with this relatively new real estate model. Joining the short-term rentals (STR) market is a lucrative move; however, with careful planning, you can begin to build your property portfolio (or just earn a little additional money each month).
You should follow these steps when looking for Airbnb nvestment opportunities:
Consider your market
Choose the right Airbnb investment property
Estimate your returns
Seek advice from an Airbnb business consultant
For more information about how to invest in Airbnb, read our interview with Tim Hubbard, Co-Founder, and CEO of MidTown Stays.
Consider your market
Airbnb investing isn't a single market. In the US alone, there are thousands of markets where returns can differ substantially. Customers seeking an STR in Sacramento, for example, can have wildly different expectations than in Denver or New Orleans. Everything from the price point to demand for additional services can change between markets.
Tim Hubbard, Co-Founder and CEO of MidTown Stays, advises exploring places outside your neighborhood and comfort zone. You never know what niche or lucrative Airbnb investment opportunity you'll find.
If you're set on a certain location, consider the nature of the local market – and the attractions and activities near the area where you are thinking of investing. Ask yourself:
- Does this area attract a large number of travelers all year? For example, Lahaina in Hawaii is a popular destination year-round, making it among the most profitable destinations.
- Is the demand seasonal? For instance, a property in a ski resort will likely peak in the winter.
- What are the local rules regarding Airbnb? Some jurisdictions prohibit, limit, or regulate Airbnb properties.
- Is it a high-value location? Are you likely to make a significant return on investment? Cheaper rentals may appeal to a broad market but can be located in areas experiencing fewer visitors. On the other hand, the more lucrative a market, the more competition you're likely to experience.
Here's another consideration: many popular tourist destinations ban Airbnb and vacation rentals completely. At the same time, others have restricted Airbnb rentals to those living onsite, e.g., Airbnb Los Angeles and Las Vegas real estate markets.
In addition to the specific Airbnb laws, you'll also need to find out:
- Zoning laws. Airbnb investing may be restricted to certain zones in some cities, increasing the difficulty and expense of finding a property.
- Licenses and permits. Applying for a permit or license is used to dissuade would-be Airbnb investors in some cities.
- Taxes. Speak to an accountant about the relevant taxes. Are there additional taxes relating to an Airbnb investment? If so, how will they affect your profit margins?
- Occupancy limits. Even if your jurisdiction allows Airbnb as an investment, they may restrict the number of guests you can host or limit how the property can be rented in a year.
- Rental property codes. These codes will not affect your ability to acquire an Airbnb investment property; they are useful to know, however.
Choosing the right Airbnb investment property
Seasonality and potential earnings are two critical factors to bear in mind when evaluating Airbnb investment opportunities. After all, you're purchasing a property to make money.
You'll want to investigate your city's tourism statistics. Find out how many tourists visit annually – and if this figure is increasing or decreasing. If there is any seasonal demand for short-term rentals, and if there is ample growth forecast in the local tourism industry. The last thing you want when Airbnb investing is to put all your money into a dead or dying market.
Take Palm Springs, CA: its revenue potential is $54,571, and its rental demand (60) and rental growth score (99) are substantial. The city sees significant year-round demand, peeking in winter and for festivals like Coachella and Stagecoach. Savannah, GA, on the other hand, is severely hampered by a lack of rental demand.
Balancing these factors is key to finding a lucrative Airbnb investment property.
Estimating your returns
There are a few key housing market indicators that can suggest Airbnb rental properties are in high demand:High average Airbnb daily rateHigh average monthly Airbnb rental income
What you can charge for your Airbnb property is largely determined by local demand. Despite a low occupancy rate, you can still earn a reasonable profit from a high Airbnb daily rate. However, the best Airbnb rental markets tend to experience a combination of both factors.
You shouldn't expect an occupancy rate of 100% – anywhere from 50% to 70% is typically normal.
All these factors – e.g., listing price, rental income, occupancy rate – can differ between neighborhoods, not just cities. Appraise these different factors to find the best city and location you want to invest in.
Based on these factors, you can now estimate your returns. Account for local property and business taxes and forecast any upticks in season custom. You should analyze comparable Airbnb properties in the area.
Use Mashvisor's Airbnb profit calculator to discover if an Airbnb investment opportunity is worth it. This remarkable tool delivers the following information:
- Airbnb Cash Flow
- Airbnb Cap Rate
- Comparable Airbnb Rental Income
- Estimated Airbnb Costs
- Airbnb Cash on Cash Return
- Airbnb Occupancy Rate
- An Airbnb vs. Traditional Rental Strategy Comparison
Best of all, the Airbnb profit calculator allows you to select individual properties, displaying all the relevant information on a Property Analysis Page.
Securing your financing
If you've already got savings you want to invest in, then exploring your financing options won't be necessary. For most investors, some form of financial assistance is needed.
That's not so easy! Even investors with immaculate credit scores and impeccable finances can struggle to secure a loan. Indeed, you may be rejected by 80% or more of lenders before you receive a yes. We advise speaking to a local broker or small bank rather than going for the biggest financial institutions. They're more likely to be flexible to the local market – and local brokers can even help secure “local deals.”
Just as every market is different, so too is every lender. Familiarizing yourself with their requirements and ensuring all your paperwork is presentable is critical.
For first-time Airbnb investors, Tim Hubbard of MidTown Stays suggests starting small: buying a studio apartment makes securing future financing substantially easier. Then, as you expand your business, you can acquire further properties and loans. Plus, it reduces the initial investment needed to get started.
You can also explore alternative funding avenues. Nectar, for instance, converts your monthly cash flow into upfront cash you can use for Airbnb investing.
Learn more about how you can leverage Nectar's capital to buy an Airbnb investment property or expand/improve your existing units in our insightful podcast episode with Nectar CEO Derrick Barker.
Seek advice from an Airbnb business consultant
Whether you're new to the world of Airbnb investing or you already own a few properties, speaking to a professional is always beneficial. If you're scratching your head about occupancy rates or your local tourist hotspot is already saturated, they can help provide valuable tips and identify any areas you might have missed.
In fact, some of the most profitable locations near you might have been way off your radar. Using the latest tools and techniques – like Mashvisor's Airbnb Heatmap Analysis Tool – industry experts can find a property or neighborhood that meets your precise requirements, and they can advise on how much a property is worth and how to maximize your revenue.
Also, by subscribing to our weekly podcast, you will keep abreast of all industry news and tips. We interview industry experts and professionals, analyze the data, and clear up the confusion swamping the industry.
How to maximize your Airbnb investment property
Once you've acquired property, you want to ensure you've maximized your revenue potential. Even within each market, sub-markets still compete for a particular type of customer, e.g., young festival goers vs. retired tourists.
Here are a few tips to consider when maximizing Airbnb as an investment:
1. Create a business plan. Business plans aren't necessary for all Airbnb investments. For some, Airbnb investing is a way to make a little extra money on the side from their property. Others, however, want to turn it into their primary business. If so, you'll need to create a strategy for expanding your business, seeking financial support, and analyzing the current market. Your business plan should also include a marketing strategy, competitor research, business goals, target guest profile, and more.
2. Hire 3rd party vendors. Managing an Airbnb investment property can be a full-time job. Cleaning, organizing bookings, and optimizing your listing can all devour your days – a challenging prospect if you've got another job. That's why outsourcing your routine operations is essential. Hiring a cleaner and assistant to handle all onsite problems will radically increase the time available to focus on expanding your business.
3. Manage your marketing. Customers won't come to your property by default; you need to market. Marketing strategies should be online and offline. Asking local tourist boards to include your flyers and brochures is helpful. You can also share your business card with local restaurants, shops, and other tourist attractions. For your online presence, you'll want to optimize your Airbnb listing: include photos and a well-written description, and use keywords to get found on Google. You can also create social media profiles on Instagram and Facebook for your property or harness your past guests by starting a monthly email newsletter about events and attractions in your area.
4. Use the latest software. Vacation software is a lot like outsourcing cleaning and maintenance: a massive time-saver. Relying on a vacation software platform will save several hours a week: automating many daily tasks (e.g., sending review reminders to guests) and helping to remind you of your responsibilities. Remember to synchronize reservations across platforms to prevent the risk of double booking.
Pros and Cons of Airbnb investing
Like all markets, Airbnb investing is not without its challenges. Some investors prefer to go the tried-and-tested route of traditional real estate investing. But, with Airbnb seeing substantial year-on-year growth, Airbnb investment opportunities are growing.
Here's a list of benefits and drawbacks of short-term rental investing compared to the traditional real estate model:
Pros of Airbnb investing
1. Higher daily incomes. Traditional real estate rentals provide a secure, routine source of income. Yet, you can generate more profit from an Airbnb investment. According to FortuneBuilders, Airbnb properties can generate 2-to-3 times the revenue of an unfurnished, long-term rental. You may even receive more money than traditional avenues, espite an occupancy rate half that of a long-term rental
2. Flexibility. Long-term rentals are always unavailable, no matter the season. With an Airbnb investment property, you can block certain weeks for yourself or friends and family. Or, if your rental is part of your property, you may wish for greater privacy at certain times.
3. Passive income. After purchasing a property and outsourcing its running, you earn a regular and reliable income without any further expenditure. While there are a few additional expenses and utilities, the extra money more than covers the bill. You're also not reliant on a single tenant paying their rent. Collecting income from numerous tenants reduces your reliance on any one renter.
4. Build a portfolio. With more money coming in, you're free to continue expanding your portfolio. After proving your first Airbnb was a success, securing future loans is much simpler. As you learn more about the industry, you can be more selective about the guests you want to target. That's not typically possible under the traditional letting model.
Cons of Airbnb investing
1. Furnishings and decorations. Airbnb customers expect properties to be adequately furnished and decorated. The more unique the experience, the greater the revenue. For some, there's a lot of fun in renovating properties for the Airbnb market; others find it a chore and a costly expense. That's without buying the dishes, cutlery, and cooking utensils needed.
2. Additional expenses. Routine cleaning, laundry, and maintenance drive up the costs of running an Airbnb (plus, you need to factor in water, heating, Wi-Fi, etc.). Paying for these utilities on top of the mortgage can seem daunting – and increases the pressure to get new tenants booked in. Under the traditional model, almost all the household expenses are shouldered by the tenant.
3. Competitive market. Finding new guests is always a constant task, increasing your daily workload. Though the revenue can be greater, it takes more effort than long-term rentals. It can involve social media postings, continually revising your listings, and using the latest marketing tactics to attract new and recurring bookings.
Airbnb is one of the safest investment opportunities available
That's everything you need to know about how to invest in Airbnb! While the global investment markets continue to fluctuate wildly, Airbnb is something of a safe bet. With evermore customers booking STRs and a proven track record of host earnings, Airbnb is an incredible investment opportunity compared to traditional long-term rentals.
Find out more about Airbnb investing by subscribing to our podcast, signing up for our newsletter, or reading our other educational blog posts. We're here to ensure you Get Paid for Your Pad!