Mashvisor; by Eman Hamed; Published July 16, 2019
If you traveled recently, there’s a good chance that you stayed in an Airbnb rental. If you had a positive experience, you’re probably interested in becoming an Airbnb host yourself. In fact, short term rentals have made it to the top of many real estate investor’s wish lists and for good reason. According to Priceonomics, Airbnb hosts make an average of $924 a month – that’s nearly three times as much as other service providers in the sharing economy! For many, this is enough reason to invest their money in vacation rentals. If you wish to start making money from renting out on Airbnb, here’s a guide that breaks down the entire process.
Part 1) Buying a Short Term Rental
Step 1: Get Your Finances in Order
While investing in real estate is an attractive way of making money for many, you should not even consider getting into the industry if you don’t have your finances in order. You must have an idea of whether you can afford to buy a property and how you’ll pay for it before you commit. This applies to whether you’re planning to invest in a traditional or vacation rental. So, before you start this endeavor, save yourself time and headache by figuring out the financials first.
Of course, you can pay cash for your investment property, but most real estate investors choose to finance it using a loan. If this is the case for you, you need to determine what type of loan is best. Short term rentals are usually financed with a conforming loan, a portfolio loan, a multifamily loan or, in some cases, a short-term loan like a hard money loan or a bridge loan. Different investment property financing methods have certain requirements regarding down payment, interest rate, credit score, and repayment schedule.
In addition, if you already have a mortgage on your primary residence, lenders will check your debt-to-income (DTI) ratio. This is to guarantee you have adequate income to cover both loan payments. According to NerdWallet, a good DTI for buying a vacation rental property is 36% – the lower the better. Figuring out your finances allows you to ensure that investing in short term vacation rentals is even feasible for your current situation. Make sure to do your due diligence and to confirm how much money you can borrow before starting your property search.
Step 2: Find the Investment Location
Investing in rental property successfully is always dependent on location. Where your vacation home rental is located will determine its profitability. This is why you should prioritize your location over anything else – even the property itself! Remember, you can change the house in any way you see fit, but the location is permanent. However, your property doesn’t have to be on a far off Caribbean island or in a ski resort in order for this real estate investment strategy to work. Short term rentals are successful in many locations across the country depending on a number of factors.
It should go without saying that demand is the most important factor for profitable Airbnb locations – this is the one thing Airbnb hosts can’t afford to invest without! Therefore, you must invest in a location that is desirable both to you and prospective guests. These locations receive a large number of tourists and, hence, have a strong demand for vacation rentals. Other important factors to keep in mind for finding the best locations to invest in Airbnb include affordability, walkability, nearby recreational activities, and amenities like public transportation, shops, and restaurants. All of these factors will affect the number of bookings that your investment property receives (i.e. your Airbnb occupancy rate) and expected return on investment (ROI).
Step 3: Understand Airbnb Regulations
Before renting out on Airbnb, another important aspect related to the location to consider is the laws and regulations surrounding short term rentals in your city of choice. Just because there is money-making potential from investing in Airbnb, doesn’t mean that you can invest just anywhere. A number of major cities in the US ban real estate investors from buying properties for the purpose of converting them into Airbnb rentals. Investing in Airbnb in such places is illegal! Other cities have legal restrictions on Airbnb hosts in order to regulate vacation rentals like what type of property they are allowed to list on Airbnb. A lot of vacation home rentals are in residential neighborhoods and are zoned as single-family homes. As a result, some communities have laws stating you can’t rent out for less than 30 days or that you must be present during the stay.
In addition, you might be required to obtain a permit or business license in order to run an Airbnb rental business. Hosts also have different tax policies depending on the city they invest in, meaning you need to get acquainted with your local laws to understand what you’ll need to collect or pay in order to host.
In short, real estate investors must make sure that Airbnb is legal in the investment location, check with city officials about zoning requirements, and review Airbnb laws and regulations. You don’t want to turn your investment property into a vacation rental and secure bookings only to be shut down by the government. What’s more, violating city laws can result in pretty hefty fines. Therefore, it is best to make sure you’re investing in Airbnb-friendly cities where regulations are unlikely to affect your ROI.
Step 4: Search for a Vacation Rental Property
Once you’re confident that short term rentals are both profitable and legal in your investment location, you can now start searching for properties for sale. Vacation rentals come in different shapes and sizes from single-family detached homes to condos and apartment units to more creative options like RVs and tiny houses. When conducting a property search, having investment criteria will help you identify the best property for you quickly. For example, if you want to rent out near a beach, you’d assume that the best property type is a beach house. However, depending on your budget, you may only be able to afford a small studio or condo.
Step 5: Analyze the Property & Run the Numbers
Success in real estate investing depends on the numbers behind the deal. As an investor, you want to buy a vacation rental that makes financial sense and there are a few numbers that ensure that. First, you need to account for all costs and expenses associated with owning short term rentals. For example, Airbnb charges hosts a 3% service fee for each booking. Other costs that you’ll be responsible for include utilities, mortgage payments, insurance, property tax, occupancy tax, and rental income tax. If these expenses add up, they can quickly eat into your profits. You can avoid that by estimating these costs before buying the investment property to get a feel of how much it’ll cost you to run an Airbnb rental.
After calculating the expenses, you’ll want to estimate how much profit you can expect to earn. The real estate metrics or numbers you’ll need to run are the rental income, cash flow, cap rate, cash on cash return, and Airbnb occupancy rate. Together, these metrics give you the big picture of your overall return on investment. By doing this investment property analysis, investors ensure that they’re making wise decisions and that the vacation rental will be profitable during both high and low seasons. To learn how to calculate these metrics, read this guide.
Part 2 - Preparing & Listing the Property
Step 1: Renovate and Furnish the Rental
After finding a profitable vacation home rental and completing the purchase, don’t list it on Airbnb just yet. People choose Airbnb rentals not only because they’re cheaper than hotels, but also because they have a homey feel. So, in order to attract guests to stay at your place, you need to make the investment property traveler-friendly. If you’ve bought an old house, you should consider renovations to bring the property up to a level of quality that is suitable for Airbnb guests. You should also make sure to provide basic essentials a traveler would need like pots and pans, towels, Wi-Fi, and little things that make guests feel at home.
Moreover, the biggest difference between traditional and short term rentals is how they’re furnished. While you want your vacation rental to feel homey, you should also make it attractive to your prospective guests. Selecting the right furniture will have a positive impact on your Airbnb occupancy rate and reviews, which is a big deal for hosts. This will also give you the ability to get guests to come back once they realize that you offer something that other hosts don’t. However, don’t go overboard in this step and, instead, invest in reasonably priced renovations and furniture.
Step 2: Set Your Airbnb Price/Nightly Rate
One of the challenges that beginner Airbnb hosts face is deciding how much to charge for rent. You want your rental rate to bring in a high rental income and positive cash flow, but you don’t want to push away prospective guests. To find the right balance, you need to look at vacation rentals in the market that are similar to yours – also known as comparables or Airbnb rental comps. These properties will give you an inside look as to how the real estate market is performing and how much other hosts are charging. You can then set a competitive rental rate accordingly.
Pro tip: Keep in mind that the demand for vacation rentals is seasonal, so your rental price should be dynamic according to the season. You can have a higher nightly rate when demand is strong during the hot season, but adjust your price during the low season to attract prospective guests.
Step 3: Listing the Vacation Rental Property
Once your vacation rental property is ready, you can move on to the next step and list it on Airbnb. A crucial thing to remember here is that presentation is everything when it comes to Airbnb listings. In order to get maximum bookings and increase your occupancy rate, your listing needs to stand out. Here’s what your listing should include and how to make it appealing to prospective guests:
Title: Think of the title as your first impression. Make it engaging and unique enough to capture attention and accurately represent your place.
Summary: This should cover the major features of your listing. People like a bit of personality, so let yours shine through while explaining what makes your Airbnb rental unique. Too much writing looks daunting, so only focus on what will attract renters to your property.
Images: Your images are the driving factor for people to view your listing. So, use high-quality pictures to show off your vacation home, amenities, or other features unique to your rental property.
Amenities: This section has a lengthy list of features that range from common or extra rooms to home safety measures. Make sure to highlight every appropriate feature as some guests can be persuaded by certain extras or uninterested due to a lack thereof.
Listing Information: This includes basic information like the number of bedrooms and bathrooms, home type, room type, accommodations, and specific dates that the property is available for rent.
Location: Just input the location of your short term rental and voilà, you’ve completed the listing process. Soon enough, you’ll get bookings from guests who are looking for exactly what you have to offer.
Part 3) Managing Your Short Term Rental
Step 1: Keep Repairs and Maintenance in Check
Having guests checking in and out of a rental property naturally leads to the need for repairs and maintenance. As a real estate investor, it’s important to keep your vacation home rental well-maintained to increase its investment value. Not only that, but this will also ensure guests’ satisfaction and positive reviews. The type of maintenance for short term rentals depends on age, location, type, and frequency of use. However, a few general maintenance needs include:
Cleaning the investment property before each guest arrives and after they leave
Checking and cleaning your furnace/air conditioner and changing the filters at least once a month
Cleaning out sinks and drains regularly
Washing all blankets and comforters
Don’t wait until you receive multiple inquiries from guests before resolving any problem. Successful Airbnb hosts stay in touch with reliable maintenance and service providers to do this work on their behalf, on time, and in good quality. So, it’s a good idea to have house cleaners, plumbers, and electricians among others to help you ensure that your investment property is in good condition.
Step 2: Have a Guest Management Strategy
As you start renting out your place, an important skill you need to have is customer service. You need this skill because you have to manage people who enter and leave your rental property. With great customer service skills, you’ll develop a guest management strategy that ensures meeting guests’ requests and responding to them in a timely and polite manner. Airbnb guests will appreciate this and express their appreciation by leaving positive reviews. As mentioned, this is important for Airbnb hosts as it’ll help in getting more exposure, a higher Airbnb occupancy rate, and increasing positive cash flow.
Step 3: Get Property Management Tools
While you might be tempted to enlist the help of a professional property manager, you’ll have to add their fees (which could range anywhere from 25 – 50% of the rental income) to your expenses. Generally, it’s best for new Airbnb hosts with only one rental property to manage their short term rentals themselves. Instead of paying someone to do the work, invest that money in property management tools that allow you to automate and stay organized!
Vacation rental owners today rely on these tools to efficiently manage their properties. There are tools designed to help you manage bookings as well as check-ins and check-outs. If you have multiple listings, you can find vacation rental software that synchronizes your calendars to manage all of your listings in one place. There are even more high-tech tools and programs that help you manage your pricing, invoicing, guest screening, and communications. With programs like this, owners of vacation rentals can easily manage all of this work without a professional manager.
The Bottom Line
Investing in short term rentals has become synonymous with today’s best way of making money in real estate. However, it’s not as simple as buying an investment property and listing it on Airbnb. Beginner investors need to mind due diligence and know what they’re getting into before taking the leap. Make sure you understand each step of the process and do your research before investing your time and money in vacation home rentals. If you’re prepared, there’s no reason an Airbnb rental can’t result in profits for years to come.