After the establishment of Airbnb.com in 2008, the home sharing industry grew at unbelievable rates. Within a few short years, savvy real estate investors started buying entire properties for the sole purpose of renting them out on Airbnb and other similar platforms. Short-term rentals soon became a preferred real estate investment strategy as they frequently offer a higher return on investment than traditional, long-term rentals.
However, just as with any other real estate strategy, the key to success with Airbnb rentals is buying a top performing property in one of the best locations. Then, of course, you have to make sure that you run your property in the most efficient manner in order to maximize your profit. To help out investors who are new to the Airbnb rental business, here are some practical tips on how to buy and manage a profitable Airbnb property.
Tip #1: Choose a Top Location
Location is (nearly) everything in the real estate industry, and this holds true for Airbnb rental properties as well. To have a successful short-term rental, you have to select a place which enjoys a high number of visitors, whether tourists or business travelers. This means that locations with multiple tourist attractions, no offseason, a strong economy, and numerous business headquarters are ideal for buying an Airbnb property. Moreover, you should look for cities and towns with major annual events such as film and music festivals, business conferences, and other special celebrations. Such housing markets will experience a sharp increase in demand for Airbnb rentals around the time of these events, which means that you can charge significantly higher rates and make thousands of dollars over a few days. That’s one of the most important advantages of short-term rentals over long-term ones – that you can vary and adjust your pricing policy depending on high and low season. This allows you to maximize your rental income, increase your occupancy rate, and optimize your return.
Tip #2: Check Out the Local Airbnb Laws and Regulations
As you can imagine, the sudden rise of the Airbnb industry was not welcomed by everyone. Hotel owners, as well as local residents in top tourist destinations, met the skyrocketing number of vacation rentals with opposition, even if for different reasons. Hoteliers felt threatened by the competition imposed by Airbnb rentals which charge significantly lower rates than traditional hotels in addition to offering a homey, authentic experience which is particularly important for visitors coming from afar. Residents, on the other hand, opposed the increased level of noise and turnover associated with tourists staying in neighboring properties. The end result was strong lobbying against short-term rentals in many major real estate markets, which led to numerous restrictions on the way in which Airbnb properties can operate legally in some of these locations.
Thus, if you are considering buying a property to rent out on Airbnb as an investor, you have to study carefully the local legislation and regulations in this regard. Some cities do not allow non-owner occupied short-term rentals at all, while others permit them for only a few days a year. For instance, Las Vegas would be one of the first places which come to the mind of real estate investors looking for high Airbnb demand and nightly rates. Nevertheless, a few months ago investment properties being operated as Airbnb were altogether prohibited in Sin City, which means that only primary residencies can now be legally rented out on a short-term basis.
Furthermore, the registration requirements and the taxes and fees you will have to pay as Airbnb hosts vary significantly from one place to another.
So, in order to buy and run a successful, money-making short-term rental without getting in trouble with the local authorities, you should research the city, county, and state regulations pertaining to the matter.
Tip #3: Set a Budget and Stick to It
Before you start looking at actual properties for sale, it is crucially important to know how much you can afford to spend on an investment property. You should factor in your savings, your income, and your recurrent expenses. Once you know your maximum budget, you should make a list of all the expenses associated with buying and owning a rental property including appraisal, home inspection, closing fees, fixes and repairs, property tax, insurance, maintenance, and others. Remember to calculate both startup, one-time costs as well as ongoing expenses. After estimating all costs, you will be able to determine the maximum price you can pay for a property without risking a foreclosure. The last thing you want as an Airbnb host is losing your rental to the bank or another financing institution. Careful and meticulous financial planning is key to having a profitable Airbnb business.
Tip #4: Conduct Thorough Property Search
Once you have selected a market and set your budget, it is time to get to the most exciting part – searching for real estate properties for sale. Use various sources such as listing websites, newspapers, “For Sale” signs, agents, and acquaintances. In addition, try to get access to some off-market properties by checking out banks’ listings, visiting online auction websites, and talking to agents specializing in foreclosures. These houses usually sell at below market value, which means that your return will be higher. The cap rate and cash on cash return which your Airbnb rental will bring you are inversely related to the price you will pay for the property.
Tip #5: Perform Investment Property Analysis
The only way to make sure that you will have a top performing Airbnb rental property is to analyze it carefully before making an offer. You should use real estate investment tools such as a rental property calculator which will help you estimate exactly how much return you can expect from a specific property. The calculator will calculate the costs as well as provide you with a forecast of the rental income and the occupancy rate based on rental comps, thus calculating the expected cash flow, cap rate, and cash on cash return.
Tip #6: Work with an Agent
Especially if you are a first-time real estate investor, it is highly recommended to hire an agent. They will help you throughout the process of buying a profitable Airbnb rental property. However, as an investor, you should not work with just any real estate agent but with one who specializes in investment properties (rather than homes). Your agent will help you with the property search, with making an offer, with negotiating the best possible price, and with closing the deal. You don’t have to worry about paying the agent fees as those are usually covered by the seller.
Tip #7: Use Professional Property Management
Congratulations! If you’ve followed all the steps above, you should now be the proud owner of an Airbnb property and be ready to rent it out to guests. Let’s face it though – being an Airbnb host is a very requiring, time-consuming, and exhausting endeavor, particularly if you work another full-time job. That’s why more and more hosts choose to work with vacation rental management companies which will take care of all aspects of owning and renting out a short-term rental such as setting up rental rates, listing and marketing, communicating with prospective guests, letting them in and signing them out, maintaining and repairing the property, and getting positive guest reviews.
While it is true that you will have to pay a monthly fee to the property manager, it is also true that your return will go up. The reason is that a company can optimize your Airbnb occupancy rate and rental income while minimizing the cost of fixes and repairs. In addition, you will enjoy a stress-free experience and make passive income as a real estate investor with an Airbnb property.
The reality of the real estate investing business is that Airbnb rentals are the optimal rental strategy as long as you buy a good property in a top location and manage it correctly. In this way, you can easily achieve a double-digit return on investment which is becoming harder and harder with long-term rentals. Stick to the 7 tips above to be a successful Airbnb host.
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Daniela Andreevska is Marketing Director at Mashvisor. She has been writing about real estate investing for a number of years. Previously, she worked in economic policy research and fundraising. Daniela holds a Masters Degree in the Middle East and Mediterranean Studies from King’s College London.