8 Tips On How To Start Investing In Airbnb Rentals

Real estate has always been one of the best investment strategies as it provides even beginners with the opportunity to make money both in the short term and in the long run. However, the world of real estate investing was completely revolutionized with the rise of Airbnb.com in 2008 and a multitude of similar home-sharing platforms thereafter. Within a few short years, short-term rentals via firms such as Airbnb eemerged as the optimal rental property investing strategy. This is because they offer a higher return on investment than traditional, long-term rental properties in addition to the option to use an investment property as a vacation home during holidays.

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Airbnb Rentals: Outline

Nevertheless, many potential investors have refrained from buying an Airbnb rental property and have missed the opportunity to make thousands of dollars per year because they have no idea where to start. This article aims to help just about anyone – regardless of his/her background, education, and experience – start investing in Airbnb rentals. Here are the 8 steps to making profitable short-term rental investment decisions.

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Step 1: Find The Top Airbnb Rentals

Real estate experts say that location location location are the three most important factors which determine return on investment. Even if this sounds like a cliché, it is the truth as the location of a rental property affects its sale price, rental rate, running expenses, occupancy rate or vacancy rate, cash flow, and ultimately return, whether in the form of cap rate or cash on cash return. In general, the best places for investing in Airbnb rentals include top tourist destinations and business hubs which welcome millions of visitors per year. However, new investors should not underestimate the potential of smaller, less popular destinations which offer the benefits of lower real estate property prices and less competition from other Airbnb hosts.

The most recent data from Mashvisor, a real estate data analytics company based in the Bay Area, confirms that relatively small markets promise the highest return on short-term rentals, also called vacation rentals, in 2020. Huntington, VT heads the list of the most profitable locations for buying Airbnb rental properties with an average cash on cash return of 8.3%, the highest in the US housing market. Next in ranking are Tuscaloosa, AL and Sevierville, TN with a CoC return of 7.7%, followed by Buffalo, NY (7.6%), Gatlinburg, TN (7.5%), and Memphis, TN 7.3%).

Step 2: Research the Local Short-Term Rentals Legislation

In response to the influx of real estate investors and short-term visitors after the rise of the home-sharing industry over the past decade, many cities and counties throughout the US started imposing strict regulations and even prohibitions on Airbnb rentals. One of the most prominent examples is New York City, where currently only owner-occupied short-term rentals are legal.

The situation is similar in San Francisco, Chicago, Los Angeles, Boston, and other major cities which used to be the top locations for this real estate investing strategy a few years ago. What this means for future investors is that they have to study carefully and diligently the short-term rentals laws and rules at the state, county, and city level for the market which they have selected. Government and local authority websites are usually the best source for this kind of information. Talking to local Airbnb hosts can also be of great help to beginners.

Step 3: Search for Properties for Sale

Once an investor knows where he/she wants to buy an Airbnb rental and has established that this strategy is legal in the chosen location, it is time to move to one of the most exciting – yet tiring – parts of the process: namely, the property search. It is recommended that first-time real estate investors have a look at different sources including local newspapers, listings websites, “For Sale” signs in the neighborhood, agents, and their own network. Each one of these sources will give them access to different types of deals. As real estate websites are growing in popularity among property buyers, it is worth mentioning some of the most prominent ones: Zillow, Trulia, and Realtor.com. When it comes to buying investment properties – rather than homes – Mashvisor offers the advantage of providing readily available rental property analysis on top of the basic property information.

Meanwhile, investors should also consider buying a foreclosed home as these sell for a fraction of the fair market value. Auction.com is a good source to turn to for this particular property type. At the same time, working with a real estate agent gives investors access to the MLS which is limited to brokerages only.

Step 4: Analyze a Few Airbnb Rentals

After investors have identified a few properties for sale within their budget, it is time to conduct detailed analysis of the investment potential of each one of them. The rental property analysis should focus on one-time startup costs (down payment, closing costa, repairs, and furniture), recurring expenses (property tax, insurance, property management, HOA fees, maintenance, etc.), estimated rental rate, and expected occupancy rate. Calculating all these numbers will allow investors to estimate the cash flow (and make sure that it is positive) as well as the return on investment.

Analyzing multiple investment properties at this level of detail will take a lot of time. This means that savvy investors need to use online software tools to facilitate and speed up their rental property analysis to gain a competitive advantage in the local market.

Step 5: Hire a Real Estate Agent

If investors have managed on their own up to this point, now is the time to hire an agent. Buying a real estate property is very challenging for beginners. Working with an agent, on the other hand, simplifies the process from the investor’s perspective as the agent takes care of the negotiations and all the legal matters. Indeed, agents are able to make much better deals than regular people as they are master negotiators. Moreover, investors do not have to worry about an additional cost as agent’s fees are covered by the property seller and not the property buyer.

Step 6: Explore Different Home-Sharing Platforms

Once an investor has purchased a property, he/she has to decide where to list it for renting. While short-term rentals are commonly called Airbnb rentals, Airbnb.com is not the only option. Other top short-term rental websites include VRBO, HomeAway, and Booking.com. It is important to research a number of platforms as each one of them offers different conditions and options in terms of listing, marketing, and fees. Generally speaking, investors should lean towards websites which ask for fees based on bookings rather than listings.

Step 7: Set Up the Optimal Rental Rate

Asking the right price for a vacation home is a must for making profitable Airbnb rentals investments. The daily rate which a host sets should not exceed the prevailing rates in the neighborhood in order to optimize the occupancy rate. Meanwhile, setting a relatively low price means missing on potential income. Thus, it is best to start with a rate comparable to similar properties in the area and slowly adjust up or down based on the number of bookings. Actually, some home-sharing platforms provide tools for hosts to determine the optimal rate for their listing, and new investors should definitely make use of them. Importantly, investors in short-term rental properties should set different pricing for the weekends and major holidays when demand increases.

Step 8: Consider Hiring a Property Manager

Last but not least, new real estate investors might not realize how much work goes into becoming an Airbnb host. Due to the high turnover and the relative carelessness of guests as opposed to tenants, hosts need to be much more involved than regular landlords. This also makes investing in a remote market impossible. Thus, investors in Airbnb rentals need to think about working with a professional property management company. This will turn short-term rentals into a source of passive income which is the dream of every investor.

These are the 8 steps which anyone can take in order to start investing in Airbnb rentals and make money from real estate.