How To Buy an Airbnb Property & Is It a Good Investment
In 2019, Boston city council passed a set of laws that restricted investors and tenants from renting out property by the night. In the past two years, there has been legislation to temper the explosion of short-term rentals and Airbnb rental properties in particular. On the one hand, some people believe it is leading to a drop in inventory in many markets. On the other hand, there are complaints of noisy neighbors, unauthorized parking and excessive messiness.
However, Airbnb is going nowhere. It keeps growing, with the average Airbnb host making $13,800 per year. As an investor, if you would like to add a couple of short term rental properties to your portfolio, this article will give you a basic understanding of how to purchase and manage AirbnB properties.
Article Quick Links
Is Airbnb profitable for hosts & landlords
If you’re an investor looking for a second (potentially passive) source of income, then Airbnb might be one option to consider. In fact, you won’t be the only one considering renting out your property through a service like Airbnb. 54% of people who own their own home say they’d consider short term renting through platforms like Airbnb and VRBO. This is from a survey of 1000 people conducted by Clever real estate.
Hosts make, on average, about $924 per month, according to research from Earnest. You can definitely make more than that per month depending on your location, your marketing strategy, and the quality of your home. You can also scale your Airbnb venture to include more properties over time.
If you’re in a state like Florida that welcomes millions of tourists every year, you’ll definitely make more money than the average Airbnb host. According to Airbnb’s data, Airbnb Florida hosts generated $1.2 billion in supplemental income in 2019, hosting 6.6 million guests. So, are Airbnb and other vacation rentals profitable for hosts and landlords? Definitely.
How to buy an Airbnb property
You can make a lot of money being a host on Airbnb. Who knows, in a couple of years, you might even become a super host, getting lots of inquiries. But just like any other venture – real estate or otherwise – success isn’t guaranteed.
However, if you treat your Airbnb venture as a business, provide excellent experience for guests, and buy property in a favorable location, your Airbnb property will deliver a steady stream of income. You can even use Airbnb income to expand your real estate portfolio.
The first step though is making an assessment of your current financial standing. How much can you afford to spend on an investment property? Airbnb requires more than just budgeting for the property price and closing costs; you have to factor in the cost of furnishing the property and making it attractive to guests as well.
1. Secure your financing
Before we talk about alternative financing options for investors looking to venture into Airbnb hosting, there are a number of financing options to know about. Qualifying will depend on your credit score. You can opt for conforming loans, portfolio loans, multifamily loans or short term loans. Some Airbnb investors take multiple loans. A primary loan to finance the property and another one to furnish it and cover emergencies.
The downside of conventional financing for investors is that they require a larger down payment. You’ll need to prepare at least a 15% down payment. In addition, bank rates are usually higher for short term rental investors since the banks consider these types of properties higher risk.
You should create an LLC if you want to transition from being a hobbyist Airbnb host to a business. This will allow your business and personal finances to be kept separate.
2. Assess Location
Two factors are critical to your ROI on Airbnb investing: The occupancy rate and the average daily rate in your neighborhood. These two metrics will show you how profitable a particular location is for short term renting.
So if the location isn’t heavily affected by seasonality and your property doesn’t stay vacant for too many days in a month, you’ll make more money from your Airbnb rental.
You’ll need to assess both metrics at both city level and neighborhood level to get a clear picture of your potential ROI.
How do you choose the best place to buy Airbnb property?
Travel destinations are the best places to look when buying a home to rent on Airbnb. These include places like Florida, Nevada and Texas. There are neighborhood heat map tools online on websites like Mashvisor and AirDNA to help you locate the most popular travel destinations right now.
If you don’t want to hire a property manager, you will also want to choose a location that’s not too far from where you live. This will allow you to stay up-to-date with maintenance and other hosting duties.
3. Check local Airbnb rules and regulations
This is one of the first things you should do when considering buying an Airbnb property. As we mentioned before, new regulations come up in cities and locations restricting and sometimes even prohibiting Airbnb rentals in some places. This is not just exclusive to the US. It’s global.
It’s your job as a real estate investor to stay abreast of the facts as it pertains to your desired neighborhood.
You should know:
- Whether or not it’s legal to host in your desired city
- The requirements you’ll need to meet as host (including paperwork you need to fill)
- The taxes and fees
- The number of bookings allowed
The city of Los Angeles, for example, requires short-term rentals to be registered with the city, and they can only operate for 120 days a year. You’ll need an extended-stay registration if you rent your unit longer than that. There is a summary of the legal requirements for around 100 cities and counties on the Airbnb website, along with links for more information.
4. Choose the right property type
There is no “right” property type for Airbnb rental investing. You should keep your ears to the ground and get to know the type of people who demand short term rentals in that neighborhood. In a place like a city center, you’d probably want to invest in a condo or small apartment. That’s because in this case, your Airbnb rental would likely attract business travelers. Also, you’ll be paying more for a single family home in that kind of location.
In a resort location, you might want a property type that offers more privacy such as a single family home. That’s because this location will probably attract young couples and small families or groups. Since this type of investment would require more out of pocket costs, you need to calculate your potential ROI so you’re not biting off more than you can chew.
What kind of property is best for Airbnb?
Here’s the straightforward answer: The best type of property to buy and rent out on Airbnb is the one that makes you the most money. To a large extent, your ROI from your Airbnb properties will depend on your chosen location. Odds are that you already have a specific type of customer in mind. If you do, place yourself in their shoes and think about the property type they’d most fancy. What amenities would appeal to them? In what type of neighborhood would they like to stay? Walkability is one key thing to consider especially when you’re trying to attract millennials. You should check the neighborhood’s walk score.
While you want a place that’s close to amenities and shopping centers, if we take into account the costs of buying a house in a central location, paying for mortgages, and paying taxes, then it might not always be worth it. In these kinds of places, buying an Airbnb apartment would offer better returns.
5. Analyze the property and its potential ROI
You ought to understand that analyzing Airbnb property can be a bit tricky. That’s because rates are usually adjusted based on seasonality, special events and travel trends. This means you might get more returns in one month than the others as opposed to long term rentals that deliver relatively fixed cash flow.
Here are some important steps for analyzing your Airbnb rental property investment:
- Do a comparative market analysis. If you employ a real estate agent while searching for properties, they should help with this. The CMA compares the property’s listed value to similar properties in close proximity which were recently sold. You can use this to negotiate the price down.
- Make a list of expenses and startup costs. Include both one-time and ongoing expenses. Aside from mortgage payments, you should prepare to spend money on taxes, furniture and utilities, cleaning services, insurance, and ongoing maintenance. You’ll also need to factor in the cost of hiring a property manager if you decide to take that route. Understand that if these expenses become greater than your monthly cash flow, it might not be a worthwhile investment.
- Figure out your expected rental income. Check out the current daily rate and the occupancy rate in your market using Airbnb analytics software.
6. Create your Airbnb listing
Creating a listing on Airbnb is free. Although hosts get charged 3% of the booking subtotal in the U.S, while guests are charged up to 14.2%, depending on several factors. To list your home on Airbnb is pretty easy and you decide on house rules and what type of guests you want.
Create a listing which includes photos of your home, and the rooms guests would be staying in. Then craft a description of the home and the area in which it is located. Mention the amenities available and choose the dates you would like to make the house available for. Set your own price and house rules.
Note that you’ll be competing with other Airbnb properties in your neighborhood. So keep the average daily rate in mind when setting your price. You can, however, increase the price in certain situations – usually when there is an influx of visitors into the neighborhood.
7. Plan how you’ll handle bookings and guests
Managing an Airbnb is considered passive but there is some work involved. Also, you’ll be dealing with a lot of people. So if you have social phobia or discriminatory beliefs and don’t want to share your space, you probably shouldn’t manage short term rentals.
If you plan to manage up to three or more Airbnb rentals, you definitely need help. Here are some things you’ll need to set up to make your work easier:
- A short term rental management tool. Tools like iGMS will help you save time managing multiple Airbnb listings. It helps you manage communications with guests, bookings and your team all in one place.
- Create a house manual. This is basically a FAQ for your house, but with all of the stuff that guests need to know in order to get the most out of their stay. It’s also a great way for you to communicate with them about things like noise levels, pets, and basic cleanliness.
- Outsource tasks. When you’re running a vacation home, the last thing you want to do is spend your precious time cleaning up after guests. For this reason, we recommend outsourcing some (or all) of the property management tasks. At a minimum, you want to hire a cleaning service to clean up after guests. You could also hire someone to check people in and out.
How to buy airbnb property with no money
There are a lot of reasons to buy a property, live in one part of it, and rent out the rest. You can make some extra money, have an investment that can increase in value over time, and even make your home feel like a more welcoming place for guests.
But the cool thing about house hacking is that it’s easy to get started with just a spare room in your home! All you need is a spare bedroom—or even just an extra closet—and some motivation.
The competition on Airbnb is tough, though. If you want to succeed as a house hacker on Airbnb, then make sure your listing will appeal to renters: keep the space tidy and clean; provide comfortable amenities like towels and toiletries; use professional photos that highlight any special features (like an awesome view); and make sure you add enough information about the area.
Home equity loan
A home equity loan or second mortgage is a loan secured by your home. It will give you a lump sum or line of credit based on the amount of equity in your home. However, you must repay it or there could be serious consequences. You can use that money for anything you want, and it’s pretty much just like getting an advance on your paycheck.
The second mortgage holds your primary home as collateral, so if you don’t pay back the loan, they can take away (foreclose) or sell off your house to get their money back.
You should also know that Airbnb has collaborated with Fannie Mae, Citizens Bank, Better Mortgage, and Quicken Loans to help hosts refinance current mortgages. Hosts can use rental income as part of the qualification criteria for refinancing their mortgage.
Seller financing is a viable option for buyers who have bad credit scores. It’s when the seller finances the deal instead of a bank, so you can buy a house without having to wade through the hassle of getting pre-approved for a loan.
Sellers often ask for a higher purchase price or charge higher interest rates because of the risk involved, but this is still an option worth considering if you’re looking to buy a house and have poor credit.
Private money loans from family and friends
If you’re looking for a private money loan, your best bet is to go through a friend or relative who can provide the funds. The good news is that there are no credit checks for these types of loans. Therefore, if you have people in your circle who might be interested in assisting you to fund the deal, then go for it.
The interest rate, time frame and down payment depends on the lender. But there is a bit more flexibility when it comes to these types of loans than with traditional banks.
Property investors can earn a good side income from Airbnb investing, but only if they conduct solid research on the local market, local rules and regulations and the most effective ways to spruce up their listings.
When looking to invest in Airbnb rental properties, look for a place with plenty of affordable real estate plus enough visitors. For example, Nashville benefits from an influx of group travelers who are drawn to the city’s music industry and its rich cultural history. Here are some other things you need to know when choosing a market to invest in.
The post How To Buy an Airbnb Property & Is It a Good Investment appeared first on RealWealth.