Airbnb offers fantastic opportunities for people looking to invest in real estate. With over 150 million guests making trips to 65,000 cities around the world, investing in Airbnb rentals is quickly becoming a new asset class for savvy investors.
AirDNA has spent the last three years helping real estate investors understand what makes the market tick in their area and how to reap the highest return on their listing.
By collecting and analyzing the last three years’ worth of booking data, AirDNA can monitor how much hosts are earning from their properties listed on Airbnb. We’ve seen apartments, houses and condos making spectacular incomes of tens of thousands of dollars per year. We have thus compiled the premier resource for investing in Airbnb rental property.
Investors looking to buy a property to rent on Airbnb often think that purchasing a property close to home is the most sensible decision – you know the market, it’s easy to get to, you have friends that are making a little spare cash renting out their place. Yet on the contrary, we believe that purchasing a property far from where you live forces you to make your investment a passive one, and will give you significantly higher returns as you have the whole nation to pick from to get the best returns.
Using AirDNA’s Investment Explorer tool, we’ll analyze the investment opportunities in two zip codes: one in a highly touristic area and popular Airbnb destination, and the second, a residential area further away from the dominant Airbnb hubs. Here are three reasons why buying far away gives higher returns.
1. Finding the best market to invest in an Airbnb property
The most significant reason why people look out of their own backyard for real estate opportunities is obviously for the best returns. Let’s take a look at a couple of real examples of Airbnb investment options.
Venice, CA: High house prices, saturated market, low returns
Take Venice, CA, home of hippies, surfers and skaters, a multitude of street performers and the iconic Kinney Pier. Zip code 90291 is the chosen spot of beach for 16 million visitors every year. Yet despite being one of the first stops on the Los Angeles tourist trail, Venice is a terrible place to invest for Airbnb yields: real estate prices are too high to sustain cash-flow positive yields. A quick look at the AirDNA Investment Explorer tool proves precisely this point:
The AirDNA Investment Explorer tool (above) shows that over 979 ‘entire home’ properties were rented out on Airbnb for over 60 days in the last twelve months. Airbnb guests paid on average $237 per night and the properties were booked for just over 66% of their availability – both figures that appear attractive.
Yet data obtained from Zillow that the average price of a home in Venice is a staggering $1,583,000. A 30-year mortgage with a down payment of 20% at 4.5% interest would burden the owner with a hefty mortgage cost of $76,000 per year.
Even if you were to achieve among the highest revenues in the area (10% of Airbnb hosts) and make $86,094 per year through Airbnb, with additional running costs of insurance, bills and maintenance, you would almost certainly be cashflow negative every month.
Ann Arbor, MI: Low house prices, less competition, higher returns on investment
In comparison, take a look at zip code 48103, located in the university town of Ann Arbor, MI. Ann Arbor may not be a big tourist attraction for foreigners, but it is home to the University of Michigan, one of the USA’s most famous public universities which employ around 30,000 workers and attracts 45,000 students per year.
Michigan Stadium, nicknamed ‘The Big House’, is the second biggest in the world with 107,601 capacity and brings people from all over the county. Every game the Wolverines have played since 1975 has drawn a crowd in excess of 100,000 people, who, if don’t live close by, are often looking for a place to stay overnight.
When we open Ann Arbor in the AirDNA Investment Explorer tool, the numbers immediately look very different. For one, they are all cash flow positive.
In this zip code in Ann Arbor, only 66 properties have been rented out for more than 60 days in the last twelve months. The average daily rate and the average occupancy rate don’t differ too considerably to Venice, yet house prices are under a fifth of the cost at just $335,100.
A house listed in this zip code on Airbnb is set to see gross profits of at least $13,182 annually for a median performer, and with a well-managed property, gross earnings of $48,860 every year.
Take a look at the following properties currently listed on Airbnb:
A Premium Airbnb Listing
Take a look at a few listings on Airbnb. Airbnb host Tim charges an average daily rate of $530 per night for his 4-bedroom home, well above the average nightly rate of $201. Even with a relatively low occupancy rate of 44%, Tim is earning a substantial Airbnb revenue, estimated at $78,609 per year.
As a comparison, currently featured on Zillow is listed a 4-bedroom, 3 bathroom clapboard house in the same zip code for $369,000. A 30-year mortgage with a 20% down payment at 4.5% interest would cost just $17,949 per year. Tim’s pricing model (charging over double the average price in exchange for a lower percentage occupancy) could see gross profits of over $60,000 per year.
A cheaper alternative for Airbnb Investing in Ann Arbor
For those on a lower budget, take a look at this bungalow currently listed on Airbnb:
Airbnb hosts Mike and Kelly charge an average daily rate of $171 per night for their 2-bedroom bungalow, below the average nightly rate for zip code 48103. Yet their occupancy rate is higher than Tim’s, at 63%, making their estimated annual revenue $39,360.
This bungalow in the same zip code has 4 bedrooms and is priced at $249,000. A 30-year mortgage with a 20% down payment at 4.5% interest would cost $12,112 per year. Using Mike and Kelly’s average daily rate and occupancy as a comparison, gross profits from purchasing this property could be around $30,000 per year.
2. Investing in places with fewer regulations increases ROI
The second reason why Airbnb Investing further away from the tourist hubs is regulations. Many major cities, including San Francisco, New Orleans, Austin and Houston have enforced partial or total bans on using Airbnb as a home-sharing platform. Depending on the area, listing a property on Airbnb can be highly regulated, involving higher taxes, licensing costs, inspections, large fines and even court sentences in some cases.
Our first case study, Venice, is under the jurisdiction of Los Angeles metropolitan area and has a ‘tightly regulated short-term rental market,’ according to Roomscore. So-called ‘non-hosted’ stays are illegal: hosts are not allowed to rent out their ‘entire place’ on Airbnb, only a room in their home. ‘Hosted’ stays are only permitted in specific zoning districts.
The length of time guests are allowed to stay in your home is also restricted. Up until June 2016, listing a property on Airbnb for less than 30 days per year was illegal. Under new proposed rules, Los Angeles residents can rent out their primary residence for short stays for up to 180 days annually, or their second home for 15 days per year or less.
Airbnb runs into regulation in popular areas, like Venice. In non-traditional areas, city officials are largely passive or even welcoming to visitors in the area. By comparison, city officials across Michigan have been largely silent on the issue. Typical of the generally tolerant attitude in non-touristic areas, the city of Detroit has ‘taken a permissive approach to Airbnb,’ states Roomscore, ‘though it has remained officially silent as to their legality.’
This means that currently, renting a home on Airbnb in Ann Arbor, MI remains legal, and hosts are unlikely to face restriction, taxation, licensing problems or fines. Airbnb Investing makes much more sense in a benign regulatory environment.
3. Property managers take the stress out of Airbnb rentals
Purchasing a property for Airbnb that is far away from where you live has the additional advantage of making your investment a passive one. Typically, hosts who rent properties on Airbnb close to where they live spend a considerable amount of time managing their listing: liaising with guests, cleaning and preparing the property before each stay, dealing with the check in/check out, as well as dealing with any issues or problems. Having a property far away from where you work or live forces you to employ a property or vacation rental manager, who will handle all of this on your behalf. Distance forces you to automate all the components of your investment.
A property manager will also take responsibility for actions that will increase the visibility of your listing on the Airbnb website. Online, a fast response rate, updating the listing and calendar regularly are both imperative to achieving a high ranking in the Airbnb search results, guaranteeing an increased number of bookings.
Offline, adding personal touches to the property – leaving out breakfast or a bottle of wine, lighting candles or writing a hand-written welcome note, for example – are appreciated by guests. A property with a higher number of positive reviews will appear higher in the Airbnb search results for a given area, further increasing occupancy rate.
How to Find a Property Manager
Reasonably priced property and vacation rental managers can be found on Rented, a marketplace where managers bid to look after second homes, resorts and multifamily residences. For a fee of 10-30%, a property or vacation rental manager takes the stress out of managing a well-performing Airbnb rental, as well as increase the number of bookings and positive reviews.
When choosing a property for Airbnb Investing far away from your home, the price of a property manager needs to be factored into the equation. But in the two cases of Ann Arbor, for example, a property that is managed externally still provides a very good return on investment, but at no personal expense, input or inconvenience. Even with the property management fee of 20%, a property earning gross profits of $30,000 on Airbnb would still bring home $24,000 per year, and a property making gross profits of $60,000. The 4-bedroom house above, for example, would still represent a return of $48,000 per year.
See our list of the best property management services in the US and worldwide here.