See how AirDNA’s tools can help deliver incredible returns on Airbnb investing, with our top-to-bottom guide to picking out 39% IRR / 31% cash-on-cash return investments.
Airbnb investing is delivering great returns across the world. A whole new asset class is emerging that is delivering stable long-term cash flows whilst building equity in real estate. Returns of 40+% are common. AirDNA’s Investment Explorer provides the data on locating the most lucrative short-term rental markets, but knowing the best markets is only half of the battle.
In the following post, we’ll walk you through a real-world example of how we analyze potential real estate investments.
The 6 Steps of Airbnb Investing in Vacation Rentals
- Finding a location
- Working out the regulations
- Zero-ing in on an individual property
- Accounting for all of the costs
- Factoring in house price appreciation
- Understanding exact expected returns on your investment
1. Finding a Location
Every investor is different – we published an Airbnb Investing Case Study from one of our clients previously which showed one approach. This post will look at investing specifically for those who are willing to sacrifice returns in exchange for a lower risk profile – buying an Airbnb where it is 100% legal to run and operate.
Our Investment Explorer tool shows expected revenues for every zip code in America, as well as drilling down to every property that has been rented for more than 90 days in the last year. But we are going to make a straight line for Galveston, TX. Galveston is worthy of note because of its clear and straightforward regulations on vacation home renting. There are more handsome returns elsewhere, but Galveston isn’t so bad as you will see…
Galveston – An Airbnb Jewel
Galveston has a long-standing vacation home industry. It is a short drive from Houston, TX and has a beachfront that overlooks the Gulf of Mexico. Promoters of Galveston claim it is Disneyland for Adults and its fine weather, miles of beaches and plethora of golf courses make it a fine place for a getaway.
Using our tool, we can isolate the zip codes in Galveston with the best potential. By playing around with the zip codes and the returns displayed, we can see a 2 bed in zip code 77550 visually looks the best area for our investment.
Hovering over the zip code 77550 reveals a strong expected annual revenue of $29,000 versus a median purchase price of $139,700 according to the Zillow Home Value Index. Factoring in mortgage costs for a 30-year loan the of $8,000 per year that leaves over $21,000 in gross profit before other operating expenses.
These returns are phenomenal and what people who are investing in Airbnb as an asset class are seeing across the world. Galveston is far from being the best place (we have heard from people achieving cap rates higher than 50% in other parts of the country), but the regulations in Galveston could not be more straightforward.
2. Working Out The Regulations
Galveston has some of the friendliest regulations in the country for short-term lets. RoomScore rates Galveston as A+ for Airbnb friendliness, but like good prospective investors, we took a deep-dive into the practicalities of getting legitimately set up. We can see from this form here that registering a short-term rental in Galveston costs a very wallet-friendly $50. Even better, all you must do to secure this is provide a brochure of your property and appropriate contact details. You will be held to account for the behavior of your tenants, but this is similar to everywhere and can largely be managed. The downside to Galveston is operators need to pay a fairly steep ‘Hotel Occupancy Tax’ of 15%. This makes the returns in Galveston less spectacular than elsewhere. However, there are clear advantages to entering a legalized system. As cities change their views on short-term rentals, ebbing and flowing with political machinations, one thing always remains: once you are legal; they don’t take it away.
3. Zero-ing in on the Perfect Property
The real beauty of AirDNA’s tool is getting right into the particulars of each property. We can compare what actual properties are making and then cross-reference to see what is available on the market. A good first step in your Airbnb investing journey is to look at the bottom of our tool to see what the top earners in the area are making, and then look to see how much that kind of property might cost.
The top earner here is a great example of why Airbnb investing requires going beyond crude averages. You can see the ‘Canals Toys Fish Beach Close Fish Light golf..’ listing here. We can see the details of this property by hovering over it on the map in our tool. We get the following information:
This property has an earning potential of $47k a year, but we can see by examining the listing (which you can click through to on our tool), that this is not a typical spot:
Right on the waterfront looks an amazing place for a vacation, but also likely to be far more expensive than the average property in the area and atypical for a 2 bedroom listing. Great if we see something like that for sale, but these places are not easy to find and may charge a premium beyond what the additional Airbnb income might look like.
Getting a feel for what will make a good investment is an iterative process from here. Looking at high performing properties, then seeing what is on the market and trying to see if that place is a like-for-like comparable. Often you can see a prospective purchase is slightly inferior or superior to an Airbnb comparable, but this gives a great feel for how much your prospective purchase could make. We particularly like this property as a prospective Airbnb that is on the market at the time of writing:
Though it may not be the finest property in Galveston, and is a few blocks from the beach, but it is wonderfully split into two separate apartments. One 2 bed apartment and one 1 bed apartment – so you can get two Airbnb rentals for the price of one. Looking around comparable properties, we think the 2 bed could fetch around $28k a year and the 1 bed could pick up $16k. With the purchase price of $150,000 and an estimated $35,000 for fixing up the junior apartment, this looks a solid investment.
4. Accounting for All the Costs
Our tool shows headline revenue, but to make astute investments, we need to take into consideration all the potential costs, from furnishing right down to an internet connection. The spreadsheet I put together for making sure I am counting everything can be downloaded here, and is displayed further down. Running a fully-furnished vacation home is more expensive than a long-term rental and this must go into your calculations.’
5. Factoring in House Price Appreciation
When purchasing any kind of real estate, the trajectory of prices is always a material consideration. Of course, this is extremely hard to forecast over the medium term, but our Investor Explorer tool shows house price appreciation over the last 5 years so you can use some information for this decision. We can see in our tool that home prices rose 9.2% in the last year and 1.4% in the last 5 years in this zip code. Presumably, this area had a bad time with the low oil prices affecting the Houston area economy, but a long-term price rise of 5% per year is likely reasonable.
6. Understanding Exact Expected Returns on Your Investment
Now you have all the input numbers from your research, you can see what returns you can expect if your assumptions are accurate. We put together a spreadsheet that can be used to assess Airbnb investments, deriving common real estate investment metrics. You can download this here.
We can see on the column on the right, that if our assumptions hold true, investing in this property with a 20% deposit, and selling 5 years later, we see a cap rate of 12.7% and returns to the investor of 39% per annum, with a yearly positive cash flow of $15.5k.
Galveston Delivers
We can see that in Galveston, amazing returns are available. Some of our clients worry that if too many people go into an area, the returns will go down. When we speak to funds looking at this space, that thought excites them. Extra demand coming to the real estate market? Well, that will make the value of the place they have bought go up. Success breeds success in this industry. We also speak to many investors who get excited about what Cap Rates in the teens do to the value of the investment. Suddenly a business that has a track record of a high cap rate can work to increase the value of the investment on the secondary market when it is time to exit.
Please get in touch with us if you have any feedback on our methodology on Airbnb investing at [email protected] or to book a demo of our Investor Explorer tool, click here and set up a time.
Download our free Airbnb Investing Spreadsheet now to help guide your investments.