Not that long ago, many people used services like Airbnb as “spare cash machines.” By making it easy for people to rent their house, condo or spare bedroom to value-conscious travelers, homeowners could earn some “mad money” as part-time hoteliers.
Today, Airbnb is a major player in the hospitality industry, and the profits from short-term vacation rentals are starting to attract serious real estate investment.
Since the site’s founding in 2008, 140 million guests have stayed at Airbnb properties, including nearly 80 million in 2016. The company’s revenue reportedly rose by more than 80% in 2016, and its cash flow is expected to reach $3.5 billion by 2020.
For 2015, the data and analytics firm AirDNA identified a total of 550,000 U.S. Airbnb listings.
No longer content with spare change, a growing number of people are buying vacation properties – from beach houses and condos to entire apartment buildings – as rentals for Airbnb guests.
Should you join them?
If so, which cities offer the best deals, and how can you be sure of turning a profit?
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A Magic Money-Making Formula
There are several reasons why Airbnb rental properties are becoming so popular:
- Outsized profits. In hot markets, investors can enjoy hefty profit margins. In Los Angeles, for example, an investor can earn more by renting an Airbnb unit for 83 nights than renting it to a long-term tenant for a year.
- Small investors rule the market. For now, individual investors have the Airbnb market all to themselves. In many localities, controversies over the regulations and laws governing short-term rentals have scared away the large institutional investors.
- High hotel prices and occupancy rates in prime tourist destinations. In some of America’s biggest tourist destinations, hotel prices and occupancy rates are sky high, making Airbnb units an alluring alternative.
In New York, for example, the average hotel room cost $331 in June 2017, and the average occupancy rate was over 86%. (By comparison, the national average for a hotel room was about $128, and the average occupancy rate was 70.7%.)
Taken together, room scarcity, steep hotel rates and the lack of corporate competition has been a magic money-making formula for Airbnb hosts in cities like New York, Chicago, Miami, Los Angeles and San Francisco.
Savvy property owners have priced their Airbnb rentals below local hotel rates, but far above what’s needed to turn a healthy profit.
Best and Worst Cities for Airbnb Investing
So … should you buy a house in Miami or L.A., and wait for the profits to come rolling in?
Probably not.
Ironically, some of the hottest Airbnb markets (like those mentioned above) are also the worst places for a new investor to buy a property, mostly due to the demand for housing.
In many of the most visited U.S. cities, the cost of real estate is so astronomical, and the Airbnb competition so fierce, that it’s hard to make a profit.
In Miami Beach and Venice, California, for example, home prices are so high that Airbnb rentals don’t always make enough income to cover expenses. In addition, the surplus of vacation rentals in these areas has been pushing down the Airbnb rates.
Some less-visited destinations – including Nashville, Tennessee and Lahaina, Hawaii are actually better places to search for deals, according to AirDNA.
The ideal location for a short-term rental investment is one with plenty of affordable real estate and just enough visitors to support a thriving Airbnb market.
Nashville, for example, is benefitting from a new influx of group travel. Airbnb investors who bought cheap properties in the “up-and-coming” neighborhoods near the city center are now reaping the rewards of the increased tourism.
Overall, the best cities for Airbnb rental properties are those that:
- Attract a sizeable number of tourists
- Have a shortage of affordable hotels and resorts
- Have affordable properties for sale
- Are not already saturated with Airbnb rentals
The trick, of course, is to identify these locations – and pounce – before everyone else does.
Outsourcing the Property Management
If you decide to become a full-time Airbnb host, especially if you buy multiple units, consider outsourcing some (or all) of the property management tasks. At a minimum, you may want to hire a cleaning service to pick up after guests.
As a part-timer, it may not have been a big hassle to stock the kitchen, clean rooms and personally check-in your guests. But becoming a full-time “hotelier” is a full-time job – one that’s best handled by hospitality industry experts.
Also, the days when a coffee maker and clean towels would meet the expectations of most Airbnb customers are fast disappearing. Increasingly, Airbnb guests expect almost as many amenities as hotel customers.
Unfortunately, traditional property management firms are struggling to keep up in this fast-changing industry. What’s more, their rates are sometimes jaw-dropping. (They range from 15% to 40% of revenues.)
Fortunately, a new breed of Airbnb property management companies (including Vacasa and Pillow) has recently sprung up. Their rates typically range from 10% to 20%.
If you believe a full-service property manager isn’t necessary, an online cleaning service such as Handy will keep your rentals tidy between visitors.
You may also want to look into Lockitron. With their app, you can remotely give guests access to their rentals for a limited time. (It also allows you to add and delete guests at will.)
Of course, purchasing these services will reduce your profit margins. So before you hire one of these firms, decide how much you’re willing to pay to lighten your hosting workload.
