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.