According to data shared by Airbnb, there are over 4 million Airbnb hosts worldwide. Airbnb listings are available in 100,000 cities globally, and the company has over 150 million users who’ve booked over 1 billion stays. The average cost for an Airbnb in North America is $163 per night.
Given those numbers, it’s easy to see why starting an Airbnb business might sound like an excellent idea. In this article, we’ll talk about how to decide whether an Airbnb is the right property investment vehicle for you and how to buy a profitable Airbnb rental property that will make you money for years to come.
How do Airbnb rentals work?
An Airbnb rental is a property rented out on Airbnb as a short-term vacation rental, meaning that multiple guests book and stay in the property throughout the year. In addition to Airbnb, properties can be listed on other vacation rental websites, such as Vrbo, HomeToGo, Homestay.com, and FlipKey.
What makes a vacation rental investment such as an Airbnb property a good investment is the popularity of Airbnb itself. Listing a property on the platform is considered one of the most profitable strategies for real estate investors because of the high demand for vacation homes and the higher nightly rents that popular travel destinations can command. While most Airbnb hosts start by renting out a room in a house or using the income from a vacation rental business as a side hustle, many can grow both their portfolio and their income, especially if they purchase in desirable vacation spots.
Like many travel businesses, Airbnb bookings took a nosedive in the early days of the pandemic in 2020. However, customers quickly returned to the platform as travel opened up and started booking rural holidays away from the crowds. This trend towards remote accommodations has continued, and the platform has seen high bookings in both rural and metropolitan areas.
Airbnb rentals vs. conventional properties
The difference between an Airbnb and a conventional rental property ultimately comes down to short-term rentals vs. long-term tenants. While an Airbnb can be more profitable in specific markets because of the higher daily rates, conventional rental properties offer more reliability, stable cash flow, and a higher occupancy rate. There are benefits and trade-offs in both cases, but whether you decide to rent out your property as an Airbnb rental or with a conventional long-term lease will come down to a few factors:
- The target market: Who is more likely to want to live in this property? Your decision may come down to the area and the proximity to facilities. A home on the beach in a tourist town is more likely to attract short-term visitors. In contrast, a home in a safe neighborhood close to schools and transport networks is more likely to be sought after by families looking for long-term rentals.
- Your involvement: An Airbnb property will require more day-to-day involvement from you simply because of the number of renters coming through the doors. You will have to check bookings, ensure the property is inspected and cleaned each time someone leaves, and keep marketing the property online to ensure consistent rental income.
- Your financial goals: An Airbnb will offer higher but inconsistent income. At the same time, a conventional property is likely to offer a lower but more stable cash flow. Suppose you’re looking to maximize your profit and don’t mind being involved with the property’s day-to-day operations. In that case, an Airbnb is likely your best bet since it can allow you to dramatically increase your profit margin during busy seasons.
The pros and cons of owning an Airbnb rental property
While there are several advantages of owning a vacation rental, the Airbnb investment property can also come with a few downsides. Here’s what to keep in mind when considering purchasing an Airbnb rental property:
- Cash flow: For a well-furnished property in a desirable location, the cash flow and passive income from an Airbnb can be far higher than the monthly rent you’d get from a long-term tenant, sometimes as much as two to three times more.
- Lower upkeep costs: With an Airbnb, you will be cleaning the property regularly—two to three times a week, depending on how frequently your guests check out. However, an additional charge of $75-$200 can be added to an Airbnb’s nightly rate as a cleaning fee, which means you can get your tenants to pay the cost. You’re also protected by up to $1 million in damage coverage for hosts.
- Flexibility: When you sign a long-term lease with a tenant, you’re tied into the contract for at least six months, sometimes much longer. An Airbnb, on the other hand, affords you more flexibility, which means that you can rent out your property on Airbnb for as long as you like, use it at your convenience, or take it off the market if you change your mind or if the profits aren’t what you’d hoped for.
- You don’t need to rent the entire home: Unlike with long-term tenants, you can use a portion of your primary residence to make some quick cash. You can choose to Airbnb just a single bedroom or a portion of the house separate from your living quarters.
- It’s easier to find renters: While this will vary according to location, it’s typically easier to find guests for your short-term rental business, especially since Airbnb’s platform is the easiest and cheapest way to market your property.
- Higher upfront costs: To book out an Airbnb consistently, it needs to be clean, well-furnished, and a place where someone would want to spend their holiday. This means that, unlike a long-term rental that can be kitted out cheaply and rented unfurnished, you’ll need to spend some time, money, and effort on making sure your Airbnb looks welcoming and is competitive with other options on the market. Vacation rental properties can also require higher down payments when purchasing.
- Time-consuming: Managing an Airbnb property can be a time-consuming endeavor. For first-time investors, it’s a second job. You need good organizational and managerial skills to run a profitable Airbnb. Once you have a few properties, you can invest in tools and software like Lodgify to help manage your books and maintain your finances.
- Higher risk: Statistically speaking, the more guests that come to stay on your property, the more chance there is for damage and accidents. While you’d be vetting tenants who live in your home long-term, applying those same checks to short-term guests is impossible.
Steps to buying an Airbnb rental property
How profitable your Airbnb real estate investment is likely to be will depend on a few key factors—most of which have nothing to do with the condition of the actual property in question. These include location, annual visitors to the town or city, and real estate market data from the city or town you’re looking at. Let’s take a closer look at the steps involved in buying an Airbnb rental property.
Decide on a budget and type of property
The first step of this process will be determining what kind of budget you’re playing with, that is, how much you will be able to borrow and at what interest rates. You’ll want to consider inspection fees, closing fees, repair and remodeling costs, and management expenses in addition to your monthly mortgage payments—especially if you’re paying a property management company to manage your hosting.
Pick a location
One of the most important decisions you’ll make is where you’ll buy Airbnb properties. According to AirDNA’s data, the best places to invest in vacation rentals include:
- Nashville, Tennessee
- Lahaina, Hawaii
- Koloa, Hawaii
- Kihei, Hawaii
- Charleston, South Carolina
There are also cities in the US that have either passed laws limiting Airbnb rentals or banning them altogether. These include:
- Calabasas, California
- New York City, New York
- San Francisco, California
- Honolulu, Hawaii
- New Orleans, Louisiana
- Las Vegas, Nevada
You’ll also want to look at specific HOA (homeowner association) rules and how they impact property investors and owners.
Analyze the market:
Understanding the vacation rental real estate market is essential before you purchase a property. While that is true for every real estate purchase, it’s especially so for an Airbnb business, where the seasonal rental market can determine whether or not you turn an annual profit. It’ll be necessary at this stage to choose the right property type—in a city, you’re more likely to purchase a small apartment or condo than if you were buying in a resort location, where multifamily or single-family homes tend to do better. You may also want to consider who is likely to stay on your property–are you targeting people on family holidays or business travelers?
Make sure to do a comparative market analysis or work with a real estate agent to understand your property’s potential return on investment. You’ll want to determine the Cap Rate and cash-on-cash return for target properties. Tools such as Mashvisor can help with this.
List your property
While no one rate will be right for your property, it’s essential to look at comparative properties and change your pricing seasonally. The rate you set will fluctuate based on the day of the week, the season (and how busy it is at various times of the year), and the overall demand and supply in your market.
The bottom line
Investing in Airbnb properties can be an excellent way to build assets that give you a recurring source of income. The right purchase can ensure regular cash flow and an asset that grows in value for years to come.
However, if you’re not yet ready to purchase a property, don’t fret! At Arrived, our mission is to give everyone—regardless of their background and income levels—the chance to get on the property ladder. Through our platform, you can purchase shares of rental homes for as little as $100 and start building a portfolio—and a rental income—today. Please browse through our available properties here.