The lure of investing in luxury properties is enticing—right? Well, the real question is: Do luxury properties perform as well as other price tiers, and can the revenue they generate justify their higher purchase value? In this analysis, we consult the data to find answers.

Luxury Airbnbs: How Do They Perform & Are They Smart Investments? | AirDNA

The lure of investing in luxury properties is enticing. It can mean more revenue for a similar amount of effort, less wear and tear on your property, and the opportunity to impress friends with a classy home—right?  

Well, the real question is: Do luxury properties perform as well as other price tiers, and can the revenue they generate justify their higher purchase value?

In this analysis, we’ll look at the benefits of investing in luxury properties and their relative performance compared to other price tiers.

Here at AirDNA, we have five defined price tiers: budget, economy, midscale, upscale, and luxury. For each bedroom count within a market, properties are categorized into five different price tiers based on their average daily rate (ADR) performance over the last 12 months.

If there were 100 one-bedroom properties in Denver, Colorado with evenly distributed ADRs ranging from $100 to $1100, below is how the price tiers for listings would be defined.

The bottom 20 listings with the lowest ADRs, ranging from $100 to $300, would be considered budget.

Twenty listings with ADRs ranging from $300 to $500 would be considered economy.

Twenty listings with ADRs ranging from $500 to $700 would be considered midscale.

Twenty listings with ADRs ranging from $700 to $900 would be considered upscale.

And the top 20 listings with ADRs ranging from $900 to $1,100 would be considered luxury.

Each price tier represents 20% of properties within a market. As additional properties are added, they are categorized into price tiers based on their bedroom count and ADR performance. The ADR ranges for tiers are recalculated once a year.

What are typical ADRs for luxury properties, and how do they vary by bedroom count? 

Luxury properties certainly benefit from high ADRs. The average ADR over the last 12 months for luxury properties in the United States is $575. That’s more than three times the average ADR of budget properties ($171) and 2.5 times the average ADR of midscale properties ($227).

As bedroom count increases, the gap between luxury and lower price tier ADRs increases even more. For 1- to 3-bedroom properties, guests may pay nearly three times as much for a luxury property versus a budget property. But for properties with 5 or more bedrooms, they can expect to pay four times more.

Average ADRs for luxury properties can also vary greatly depending on the market. In destination markets such as Aspen, Colorado, or Park City, Utah, the average ADR for a luxury property is over $1,500, while in small rural cities such as Boise, Idaho, or Spokane, Washington, the average ADR for a luxury property is around $300.  

The gap is stark when looking at average ADRs for luxury properties in the 10 markets with the lowest ADRs versus the 10 markets with the highest ADRs. For the bottom 10, the average luxury ADR is $295, while for the top 10 it's $1,473—five times more.  

It’s worth noting: Luxury properties have the lowest occupancy rate across price tiers but have also experienced the strongest occupancy growth over the last couple of years.  

In 2019, luxury properties had an occupancy rate of 49.1% while upscale, midscale, budget, and economy properties had occupancy rates of 52.8%, 55.2%, 57.5%, and 59.9%, respectively. 

And in the last year, luxury properties had an occupancy rate of 55.9%, while upscale, midscale, budget, and economy properties had occupancy rates of 57.8%, 58.9%, 59.9%, and 60.6%. 

Luxury properties also take the lead when looking at ADR growth across price tiers since 2019. That year, the average ADR for luxury properties was $422. In just the last year, the average ADR for luxury properties was $573, an increase of 35.8% in four years. By comparison, lower tier budget and economy properties have only experienced 25.4% and 22.1% growth in average ADR in that same time span.

While supply surplus in the last year has led to year-over-year declines in occupancy across the U.S., higher price tier properties have experienced the smallest decline in occupancy comparatively. 

Versus last year, occupancy dipped 4.3% for luxury properties and 4.6% for upscale properties, but declined 5.3%, 6.3%, and 6.9% for midscale, economy, and budget properties.

Looking at ADRs compared to last year, growth was 6.3% for luxury properties, nearly twice as much growth as upscale, midscale, or economy price tiers and one-and-a-half times the growth seen among budget properties.  

The bottom line: Across all price tiers, luxury properties have seen the strongest growth in occupancy since 2019 and the smallest dip in occupancy in the last year. Luxury properties have also outperformed all other price tiers in terms of ADR growth over the last four years. 

How does the performance of luxury properties change across location types? 

Prior to the pandemic, luxury occupancy was strongest in large urban cities and coastal destinations (around 53% for both location types). Small rural cities had the lowest luxury occupancy with occupancy rates around 40%.  

One of the big STR stories surrounding the pandemic was that demand shifted to areas outside of urban cities. Luxury occupancy in small rural cities has increased an impressive 29.6% since 2019, and mountain and coastal destinations have also seen significant growth, 21.1% and 17.6% respectively. However, occupancy in large urban cities is still 0.4% below 2019 levels.  

Coastal and mountain destination markets have had the strongest luxury occupancy in the last year but have also experienced the biggest YOY declines in occupancy as the return of international travel has moved demand from domestic to international destinations.

Some destination markets that have seen the biggest dips in luxury occupancy since last year include Fort Lauderdale, Florida (-44.5%); Long Island, New York (-31.6%); Miami (-30.65%); and West Palm Beach, Florida (-25.7%). YOY decline in luxury occupancy is smallest in urban cities (-0.7%)—where demand has been slowly returning—and in small rural cities (-2.5%) where demand growth has persisted since the pandemic.

Does the revenue potential of luxury homes justify the higher cost to purchase them?  

Luxury homes may have higher revenue potential, but they're obviously a lot more expensive, too. In the last year, the average revenue potential for a luxury property was $93,360, compared to $28,844 for budget properties or $39,935 for economy properties. But the average home value for a luxury property was $645,601 versus $479,410 for budget properties and $512,564 for economy properties.  

Dividing average revenue potential by home value is a helpful way to calculate the rate of return for investment properties. While luxury properties are the most expensive to purchase, their revenue premiums enable a rate of return of 14.5%, the highest among all the price tiers. Upscale, midscale, economy, and budget properties have significantly lower rates of return of 10.5%, 9%, 7.8%, and 6%, respectively. 

For those looking to maximize their return on investment, investing in locations that yield higher rates of return could be wise—but every investor will, of course, face different goals and circumstances.

In small rural cities—where home values are low and occupancy has grown significantly over the last few years—the rate of return on luxury properties is highest, averaging 20.7% over the last five years. Coastal and mountain destination markets have slightly lower average rates of return of 17% and 16.6%, respectively. Urban and suburban cities suffer from revenue potential that can’t quite keep up with higher home values and have the smallest rate of return for luxury properties, averaging 8.4% and 11.6%, respectively, over the last five years. 

So, are luxury properties a good short-term rental investment?  

Luxury properties have seen the strongest ADR and occupancy growth across price tiers in the last four years as well as the greatest rate of return. While there is a bigger initial investment when purchasing the home and higher standards to meet when ensuring quality of stay, luxury property owners reap the benefits of higher revenue premiums while performing similar operations as lower price tier properties.  

Luxury Airbnbs: How Do They Perform & Are They Smart Investments? | AirDNA

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