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Vacation Home Investing: What’s the Big Deal?
Our data models show Airbnb rentals makeup to 3x more than traditional long-term rentals, yet, using vacation rentals as an avenue for investment still isn’t mainstream. But, buying a short-term vacation rental homes is fast becoming a whole new real-estate asset class, allowing normal folks to afford – and significantly profit from – a second home.
There’s still the challenge of choosing the right place to buy a vacation rental property. House prices, short-term rental restrictions, and profit margins vary wildly from city to city and even street to street.
Every day we get emails from customers asking: What are the new trends for Airbnb investing in 2018? What cities have the highest profit margins? And crucially… how do I get started?
This article answers those inquiries with our most important insights into the best places to buy vacation homes to rent on Airbnb.
How to read the graphs
The dashboards display all cities in the United States that have at least 100 entire home rental booked for at least 60 days in the last twelve months.
Hover your mouse over a circle for more details. The circle size represents the number of Airbnb properties in each city. The color sweeping from red to green indicates an increase in the median annual occupancy rate.
Where to Buy A Vacation Rental Property
Press articles indicate that the most profitable Airbnb’s are located in larger cities that are popular with tourists. Our analysis reveals this approach to be totally wrong.
The graph above shows a strong correlation between housing cost and profitability: the more expensive the house, the lower the return on investment.
In fact, average revenue drops so significantly with rising annual mortgage costs in popular cities for Airbnb – such as New York, Los Angeles, and San Francisco – that on average, you’re likely to lose money (as much as $10,000 per year). Even cities such as San Diego, CA, Washington, DC and Seattle, WA are offering low returns, which is risky with such high upfront costs.
By comparison, unsuspecting cities boasting low mortgage costs and high gross profits on Airbnb include Joshua Tree, CA, Savannah, GA, and Nashville, TN. If a property is performing at the 75th percentile, an Airbnb host in one of these three cities could earn between $25,000 – $27,500 per year.
In the cluster just below the graph’s trend line are notable cities with mortgage costs between $9,000 – $13,000 per year. Cities included are Saint Louis, MO, Cincinnati, OH and Pittsburgh, PA. This sweet spot seems to be composed of homes in cities with a Zillow mid-tier home value index under $300,000.
It’s crucial to remember that these numbers are an average. Gross profit on Airbnb fluctuates majorly according to the neighborhood your property is located. An apartment in Chinatown, Los Angeles, will give far higher returns than a luxury villa in the eye-wateringly expensive neighborhood of Bel Air, which will likely to put you in the red.
For this reason, it’s important to narrow your search to a zip code level. This separates the neighborhoods that are going to make for healthy resources, from those that are going to drain your resources. Using the AirDNA Investment Explorer, users can compare areas to find the exact neighborhoods that will provide the highest returns for Airbnb investment property.
Subleasing Investment Opportunities
Our second dashboard analyzes the profitability of renting and subleasing property on Airbnb. Comparing the average rental cost of a 2 bedroom apartment with average gross profit on Airbnb, the numbers tell us that property investors who want to rent units should take an entirely different approach.
What immediately stands out is the change in the trend line. In sharp contrast to purchasing property, subletting rentals in cities with higher rental costs will give, on average, higher returns. The differences are so stark that Santa Barbara, CA appears as one of the top 5 places for rent-to-rent on Airbnb in the entire U.S., but as one of the worst 5 for buy-to-rent.
Santa Fe, NM, and Portland, ME jump out as unexpected Airbnb investment jewels, offering $28,500 – $30,500 in Airbnb profit on properties, with low upfront costs. Even with its relatively low percentage occupancy rate, mountain town Mammoth Lakes, CA, offers phenomenal returns of $33,000 per year thanks to average rent for a 2 bedroom property being priced at just over $9,000 per annum.
Notable mentions are the Hawaiian islands of Kihei and Lahaina. Which, despite their small size, look like savvy investment opportunities, with high occupancy rates and relatively low rental costs compared to their Airbnb earning potential.
Again, this analysis does not differentiate between high and low performing neighborhoods within each city. In reality, many cities that look like great investment opportunities are made up of some not-so-desirable neighborhoods. Equally, some cities that look like financial sinkholes have their share of cheaper, up-and-coming rental markets.
To conduct a deeper dive into each market we recommend subscribing to the Investment Explorer. With the ability to view the performance of over 100,000 individual rental properties along with postal code summaries and historical trends, the tool helps users to identify the standout neighborhoods that will ensure the best possible ROI for your budget and preferences.
Covering Your Rent Listing A Spare Bedroom on Airbnb
Is it possible to cover the rent by renting out your spare bedroom on Airbnb?
Crunching the numbers for the 2015 post, we found that the returns on renting out a spare bedroom on Airbnb for covering rental costs are uninspiring. It looks like things have brightened up a bit for private room rentals in the last two years. With more travelers feeling comfortable sharing spaces on the cheap and regulation forcing many people into this option, this category of Airbnb rentals is on the rise.
Take a look at the dashboard below comparing the average cost of rent for a 2 bedroom house with Airbnb income from renting out a private room.
Renting in Sedona, AZ, Louisville, KY and Detroit, MI, will more than cover your rent, making you between $2,500 and $7,800 in profit every year. The highest returns are to be found in Savannah, GA, making Airbnb many private room hosts over $9,039 per year.
Larger and more popular cities such as Venice, CA, and San Francisco, CA continue topping the worst places for an Airbnb investment list. Renting your spare bedroom in these California towns will certainly soften the blow of your monthly outgoings, but won’t turn a profit.
Short-Term Rental Regulation Impacts
More people used Airbnb than ever before in 2016. But, the platform also found itself in a few sticky spots with a number of municipalities. Yet the effects of regulation, conditions, penalties, and impact of Airbnb regulatory enforcement vary greatly from city to city.
One trend in the data continues to become clearer over time. Where there are more restrictions, there is increased financial opportunity.
This is expected in a marketplace in which rental supply is restricted by regulation. While travel demand surges, prices, and profitability of Airbnb units in highly regulated markets rise as well. We see this, especially in the rent-to-rent strategy, because there are less initial capital expenditures to get an Airbnb rental up and running. It seems that many entrepreneurs still are willing to accept legislative risk for the outsized returns.
We would not recommend entering into any new investment without fully understanding the local regulatory environment and current enforcement of those regulations. To start off, you can check current restrictions at Roomscore, which makes it easy to compare cities over the U.S. To dive a bit deeper in individual restrictions refer to Airbnb, where they are offering improving host compliance assistance.
It’s interesting to see in the analysis that many smaller cities provide a low a risk environment and stellar returns. For example, Savannah, GA, and Indianapolis, IN, are favorable towards Airbnb and show in our analysis as being great places in invest. Cities such as those, represent fantastic, low risk, investment opportunities with their undersupplied rental units and lenient regulation.
Variation between cities is repeated on a more local level between neighborhoods within the same city. Identifying the best-performing neighborhoods within these cities is necessary because they might not be where you think. You can directly compare how thousands of cities and zip codes over the U.S. are performing using the Investment Explorer. Investing in vacation rental real-estate is large, long-term investment so feeling confident in the market and type of property purchased is monumental.
Start Researching Your City Now!
AirDNA collects and analyzes the data for every rental property listed on Airbnb worldwide. Visit our data methodology page for more details on how we aggregate and model this information.
We utilized the free data provided by Zillow Research for average home values and long-term rental rates. Holes and minor inconsistencies in the Zillow data were supplemented with information purchased from ATTOM data.
A major enhancement to this analysis versus our report in 2015, is our ability to predict the full year revenue of properties that were not, in fact, available for rent the entire year. By creating a model that looks at the daily RevPAR (revenue per available rental) of comparable properties we were able to normalize the data set and compare ‘apples to apples’ part-time and full-time Airbnb rental properties.
Each property included in the analysis had to be rented at least 60 days in the last 12 months to maximize the number of properties analyzed while ensuring a high level of accuracy for our forecasting model. So you can rest assured that you are truly finding the best place to buy a vacation rental property.