Unlike traditional long-term rentals, Airbnb properties allow hosts to rent out their space on a short-term basis, often commanding higher nightly rates. This can result in a higher return on investment compared to traditional rentals, especially in high-demand tourist areas or popular travel destinations.
Investing in an Airbnb property can be a rewarding opportunity for those willing to put in the effort to maximize their returns and provide a memorable experience for guests. But, what to know before buying an Airbnb property? Read on to find out!
11 Factors to Consider Before Investing in an Airbnb Property
Airbnb investment property can seem like endless positive cash flow, but there are a significant number of restrictions and unexpected expenses. Here’s what you need to know.
1. Airbnb’s Rules and Policies
Familiarize yourself with Airbnb’s rules and policies, including cancellation policies, guest screening options and liability coverage. Without a strong understanding of how Airbnb works, you could lose money on last-minute cancellations or damage not covered by standard liability.
2. Operating Costs
In addition to the purchase price, consider closing costs, property taxes, insurance, renovations or furnishing expenses, ongoing maintenance costs, property management fees and Airbnb service fees. Also consider cleaning expenses, hiring a cleaning service and unexpected expenses like last-minute repairs. You can safely assume that operating costs will take a significant percentage of your profit. Calculate the net income after deducting these expenses from the rental income.
3. Potential Profitability
Factors such as location, demand, competition, property type, housing market trends and expenses can make or break an Airbnb’s positive cash flow. Use a profit calculator or calculate profitability by deducting total expenses from potential profits.
Consider market saturation and vacancy rates in a local area to optimize returns. Ideally, choose a property in an area with low vacancy rates and low competition, where expenses won’t be higher than income-generating potential.
4. Property Location
Location can make or break cash flow in the vacation rental business. A charming rural property with beautiful decor can still lose profits if it’s not near a major tourist hub or city. Look for areas that attract a steady stream of tourists or business travelers. Consider proximity to popular attractions, public transportation and amenities.
The safety of the area is also important, especially in major cities. A charming apartment in a dangerous neighborhood won’t perform as well as one located in a safer area.
5. Local Laws and Regulations
Many cities and countries now have restrictions or licensing requirements that may affect your ability to operate an Airbnb property. Before buying an Airbnb property, it is crucial to thoroughly research and understand the laws and regulations regarding short-term rentals in a specific location. Check local laws, zoning regulations and homeowner association rules to ensure short-term rentals are allowed in the area.
6. Occupancy Rates and Seasonality
Research the area’s historical occupancy rates and seasonality patterns to understand the demand for short-term rentals. Seasonality itself shouldn’t restrict Airbnb income as long as you maximize peak seasons. Learn whether there are peak seasons when you can charge higher rates and low seasons when the demand might decrease.
In some cases, you can aim for 60% to 70% occupancy during the peak four months of the year and create a positive annual cash flow for the property, allowing you to use it during the other months.
7. Property Management Options
Running an Airbnb property can be time-consuming, especially if you manage it yourself. Decide whether you want to manage the property yourself or hire a professional property management company. Ask yourself whether you have the time and resources to handle guest inquiries, bookings, cleaning and other responsibilities.
If you choose to hire a property management company, weigh how that will affect the bottom line of Airbnb rentals. Property management companies can often optimize Airbnb listings to improve booking rates, covering its fees through increased occupancy rates.
8. Financing Options
You can finance an Airbnb with a second mortgage, a personal loan, an investment property loan, a home equity line of credit (HELOC) or pay cash. Choose the financing that works best for you, and consider the implications of financing on the profitability of the Airbnb rental property.
For example, if you purchase a property with a mortgage, and the monthly mortgage payment is $1,500 per month, you’ll need to earn more than $2,000 per month to have positive cash flow after taking into account utilities, maintenance, mortgage repayment, Airbnb fees and other expenses. If you hire a property management company, that number could be even higher.
If the property only rents for $75 per night, and you expect a 60% occupancy rate year-round, you’ll have negative cash flow. But if the property rents for $250 per night under the same conditions, it could be a good investment. Check out some of the best Airbnb mortgage lenders here.
9. Insurance Options
Make sure to obtain appropriate insurance coverage for your Airbnb property. Generally, you’ll want to get both building insurance that covers the physical property and contents insurance that covers your belongings inside the property. With these two coverage options, you should be covered against damage from natural disasters or fire and theft or damage from guests. Be sure to read the fine print and double-check what is covered.
10. Reliable Support Network
Building a reliable support network can ensure that even when you’re traveling, your Airbnb runs smoothly. Establish relationships with reliable local service providers such as cleaners, maintenance professionals and handymen to ensure smooth operations. Pay these professionals generously, and be sure to recommend their services to others to build a strong working relationship.
11. Time Commitment
Most importantly, owning and managing an Airbnb property requires time and effort. Even if you hire a property management company, owning an Airbnb isn’t a passive investment. Consider whether you have the time to deal with maintenance or other issues as they arise and whether you’re ready to be an Airbnb host. If the time involved doesn’t seem practical, other passive real estate investing options, like REITs or crowdfunded real estate, could provide better opportunities. Learn how to invest $10,000 in real estate here.
Choosing a Vacation Rental Property
Property investors look to Airbnb to offer short- and long-term returns on a real estate investment property. Whether you’re a first-time Airbnb homebuyer or already have an Airbnb portfolio as part of your investment strategy, market analysis and research on potential profitability are essential. With thorough research and realistic expense projections, an Airbnb property investment can create positive cash flow with long-term appreciation.
Frequently Asked Questions
Is it a good idea to buy an Airbnb property?
What is the downside of owning an Airbnb?
How much deposit is required for Airbnb?
The deposit amount set by Airbnb hosts varies and can range anywhere from a few hundred to several thousand dollars.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.