Look for these “green lights” when considering a short-term rental investment.
Airbnb has permanently changed the way we travel and, perhaps even more significantly, the way we think about real estate investing. In 2013, best estimates indicated about 3 percent (7 million Americans) considered themselves active real estate investors of any type. Just two years later, market data indicated there were more than half a million Airbnb hosts in the United States alone. The short-term rental market has changed permanently and opened up real estate to a new population of investors in the process.
There is no question Airbnb investments can be profitable. With any relatively new industry phenomenon, however, it is imperative investors understand what makes a market conducive (or otherwise) to a given type of investment. Daniela Andreevska, content marketing director for real estate data analysis firm Mashvisor, cited three “green flags” for Airbnb rental markets:
Green Flag #1: Cap Rates Above 5-6 Percent
“Airbnb investors, like all investors, are in this business to make money. Profitability must be the first factor you consider when deciding whether to invest in an Airbnb property in a given market,” Andreevska said.
- Will my projected returns cover my mortgage payments?
- What are the other expenses associated with this property?
- Will I generate positive cash flow?
Tools of the trade:
- Rental Property Calculator
- Cap Rate Calculator
- Data Source for Key Metrics
Green Flag #2: Specific, Identifiable Attractions
“Choose a location for your Airbnb investment that is not only a popular destination throughout the year, but also has some special times when it gets extremely busy,” said Andreevska. For example, a location with a ski season, a popular national conference, or a recurring sporting event.
“San Diego is generally an excellent Airbnb property location because of the many attractions which the city has to offer, but nothing tops the one week in July when the annual Comic-Con International is held,” she noted. “As an Airbnb investor, you can double or even triple your rates in these few days of exhibition and make enough money to cover your rental income for an entire month or two.”
- Is the location generally attractive?
- Are there predictable special occasions that consistently “boost” this market’s popularity?
Tools of the trade:
- Local Events Calendars
- Economic Data
Local events calendars are usually available online, or you can get a good idea of what attracts tourists to an area using travel sites like TripAdvisor.com. Source your economic data from multiple venues in order to get a full picture of the local economy.
Green Flag #3: The Option to “Flip” Your Rental Strategy
“One of the best indications you will have a successful experience with your rental investment is giving yourself options,” said Andreevska. “This means buying an investment property which could potentially work as a traditional rental and an Airbnb rental in terms of the location and the actual property.” She noted Airbnb regulations and legislation are changing quickly and constantly, with some cities welcoming Airbnb investors and others “cracking down” on what they believe to be dangerous innovators in the short-term rental industry.
“The situation with laws governing short-term rentals is very dynamic. What is a conducive market today might become prohibitive tomorrow. It’s best to know you can rent out a property traditionally if things go bad for Airbnb in a given market for a few years.”
Andreevska cited San Francisco as a prime example of a market in which this strategy would have benefited Airbnb investors recently: “San Francisco used to be a great Airbnb market with all the tourists and business travelers. However, all Airbnb hosts are now required to pay a registration fee of $250 to have their properties registered as short-term rental property or face fines of as much as $1,000 per day. There was a long battle between short-term rental platforms and the city, but in the end the final deadline for registration was mid-January this year. The immediate effect was a drop of nearly 50 percent in Airbnb listings in that city! Many of those owners will now look into their options for renting in a more traditional way.”
- Is there a strong hotel lobby in the area?
- How is the traditional rental demand in the location?
- What is the overall economic performance?
Tools of the trade:
- Local Legislation Resources
- Investment Property Calculator (shows ROI, CAP rate, etc.)
- Heatmap Analyses (indicates concentrations of various buyer/renter/investor behaviors)
Track local legislative trends and if/how the local hotel lobby is working against Airbnb investors by reading local news. Investment property calculators and heatmaps are available on a variety of data and analytics sides.