It sounds too good to be true: You buy a vacation home in your favorite spot to relax, then rent that property out whenever you’re not using it to pay the mortgage and bring in a tidy profit.
It’s actually a pretty tried-and-true process, and real estate investors have been doing it for years to pay for beach homes, condos in Vegas, and retreats in tropical paradises. However, now that Airbnb is in the mix, more people are getting in on this strategy and, not surprisingly, more people are making mistakes. Be sure to watch your back – and your wallet – if you are hoping to make a mint on vacation properties on Airbnb.
Inman News recently headlined: “Depending on the city, most investors can recoup their money faster with [Airbnb] vacation rentals.”
According to Inman contributor Deidre Woollard, “Airbnb can dramatically reduce the amount of time it takes to make money back on a rental.” As a point of comparison, she cited a Nested report that evaluated time-to-recoup value using traditional methods vs. Airbnb in six U.S. cities.
In Washington D.C., it would take just over five years to recoup your value if you used Airbnb strategies, compared to more than 18 years using traditional methods. Similarly shorter timelines also appeared in Los Angeles, Chicago, Miami, New York City, and San Francisco.
If you want to buy in a really hot, expensive market, then Airbnb could be the way to go, but is it really that simple? Of course not. This is where things get tricky. Sure, Airbnb is a great way to generate money from a vacation property while still getting to use it when you want, but there are a lot of regulations (and more everyday) governing how you use your Airbnb property.
For example, in San Francisco, you will be limited in terms of how much time your vacation property can be occupied by people other than yourself. You can only rent your Airbnb unit out for a total of 90 days a year! That single regulation could end up adding years to your timeline for breaking even.
Woollard went on to say that in tight markets like San Francisco and the others on the Nested list, Airbnb is a “disrupting influence” because it may be more profitable for people to create income using Airbnb rather than by renting their properties out long-term or selling.
For a real estate investor looking to generate cash-flow, monthly income, and long-term ROI using Airbnb, are the Nested markets somewhere to invest? Not necessarily, although those factors I mentioned that lead people to use Airbnb in those markets are certainly potential draws to those areas. If you are looking to buy a property specifically as an investment instead of for personal use, however, then it will pay off for you to take a few steps back and look outside the hottest U.S. markets out there.
According to AirDNA, a data analytics firm that focuses on Airbnb rentals (that’s right, it’s big enough there is a data firm dedicated to this topic), when it comes to Airbnb investing, “the more expensive the house, the lower the return on investment.” This means that while those hot markets might be good locations for you to leverage Airbnb strategies in properties you already own, if you’re buying specifically in order to Airbnb, then you probably ought to look somewhere more affordable.
AirDNA cites Joshua Tree, California; Savannah, Georgia, and Nashville, Tennessee as cities where hosts are enjoying high gross profits and low mortgage costs. “A property in one of these three cities could earn hosts between $25,000 and $27,500 per year if their Airbnb is performing at the 75th percentile,” the analysts said.
Airbnb success hinges on good selection on a very local level. One neighborhood in a city could be a huge money pit either because it is not nice enough or, alternatively, it is far too exclusive to afford you good returns. You need a desirable area that is also affordable. Speaking of affordable but desirable, Las Vegas has 43 million visitors each year, but still offers relatively inexpensive housing. Plus, there’s no real off season.
The Las Vegas Airbnb market is particularly interesting because there are neighborhoods dedicated almost entirely to Airbnb rentals. In fact, according to Mashvisor, four neighborhoods in addition to the Las Vegas Strip have more than 50% Airbnb occupancy at any given time, and those properties are renting for between $2,800 and $4,500 a month.
Las Vegas has some rules for real estate investors, including that you have to get a business license to be an Airbnb host, pay annual fees to the city, and get written permission from the local homeowners association (HOA) if there is one.
Priceonomics data analysts recently noted that Airbnb is, at present, something of a unique opportunity because it offers very high returns for real estate investors but does not have a lot of big, professional players active in the space. Most hosts on Airbnb are individual investors who may have more than one Airbnb investment but are not scaled the same way that a lot of traditional rental investment companies are scaled, spending hundreds of millions buying and managing thousands of rental properties in multiple areas.
Airbnb works hard to keep the image up that its properties are real homes rented out by real people. However, as with any investment that is paying the kind of dividends a lot of Airbnb rentals are, more and more people are getting into the space. A rising population of investors means more competition and, like it or not, more regulations that could hurt your ability to generate the returns you are looking for.
Airbnb investing requires the same due diligence and careful market observation that any other type of investing would require. Do that due diligence, and you should be able to leverage the power of this exciting, relatively new investment venue for yourself.