Making the first investment is a significant leap of faith that you must take before you can launch your Airbnb company. Understandably, buying a house to rent out temporarily causes a lot of anxiety and generates a lot of concerns. Is this a wise investment? Which cities provide the highest returns? How can I locate a home that is worthwhile investing in?
We’ve written this in-depth post to address all of your concerns and help you decide whether to invest in Airbnb. We will discuss what an Airbnb investment is specifically, the benefits and drawbacks of investing in Airbnb rentals, and the top U.S. cities to purchase an Airbnb property. Let’s start now!
What does it mean to “invest in Airbnb”?
Simply put, buying a home to rent it out to short-term renters via Airbnb for a profit is known as an “Airbnb investment.” Short-term holiday rental units have grown to be an incredibly popular and lucrative type of passive income, with four million Airbnb hosts worldwide.
Many Airbnb hosts eventually acquire many homes that they manage full-time, even though most begin managing a property as part-time employment. There is a way to make Airbnb investment work for everyone, regardless of your professional or financial position.
The benefits and drawbacks of purchasing Airbnb homes
The advantages and downsides of investing in Airbnb rentals are similar to those of any investment, so it’s crucial to understand them before deciding. Here are a few advantages and disadvantages to consider before becoming an Airbnb host.
Pro: Some costs are deductible from taxes.
The fact that you run a short-term rental company out of your home allows you to write off a lot of costs against your taxes. Tax deductions may be available for costs like marketing, advertising, accountancy fees, insurance, and others.
Many Airbnb hosts are unaware of the tax deductions for costs that might significantly affect their revenue. This increases your earning potential and enables you to deduct certain overhead expenses. We advise speaking with a tax expert since state-specific rules differ.
Con: Managing Airbnb rentals might take a lot of time.
Taking care of an Airbnb rental is not simple. If you don’t have the tools to organize your workflow, they might consume a lot of your time. Your work as an Airbnb host will be as simple as possible if you use an Airbnb management tool like Lodgify. With the use of this program, you can efficiently handle all of your reservations, responsibilities, funds, and visitor communications from a single online location.
Additionally, the Airbnb channel manager links all of your listings on the leading online travel agencies (including Airbnb, Vrbo, and Expedia) so that your calendars immediately sync and duplicate reservations are prevented.
Pro: During peak season, revenues are higher.
You have a great deal of freedom in determining the rent you may charge when renting to short-term renters via Airbnb. As opposed to long-term renters, you do not need to commit to a single rate for an extended period. Instead, you may take advantage of the region’s peak travel times and modify your price to match them.
There is no reason you shouldn’t profit from the fact that your house is situated in a fantastic region with high demand! The main danger here is that, unlike with a long-term renter, your income is not assured. You must embrace the risk of instability even if you have a bigger income potential since there is no guarantee that your property will be booked.
Cons: Higher initial outlay
In comparison to a principal dwelling, a vacation rental property requires a much larger down payment. On vacation rental homes, the down payment is typically at least 10%, but it may be as much as 25% or more, depending on how strong your application is. In other words, you should be ready to put down a sizable initial investment for simply the down payment.
Then, you’ll need to spend money on high-quality furnishings and accessories, repairs, marketing, etc. Although the start-up fees for an Airbnb company are high, if you choose your house and location well, you can see a big return on your investment.
Pro: Passive income
The opportunity for passive income is undoubtedly the most apparent and alluring perk of purchasing an Airbnb home. A revenue source that doesn’t need your participation to generate a profit is referred to as passive income. A regular nine-to-five job does not qualify as passive income since your pay is directly correlated to the quantity of labor you put in. Even though renting out an Airbnb home does take some labor on your part, the amount of work you put in is not directly correlated with the amount of money you make.
A fantastic approach to supplement or even replace your usual income is via passive income. In reality, many individuals buy an Airbnb home intending to use it as a “side business” but find up using it full-time.
Cons: Exorbitant running expenses
An Airbnb property’s management has a price. You have to make payments for things like utilities, WiFi, furnishings, routine maintenance, cleanings, and even employing more employees. If you hadn’t gone the short-term holiday rental route, a long-term renter would be responsible for all of these expenses. We don’t say this to frighten you away; rather, it’s crucial to be financially prepared for these costs and to be aware of what to anticipate before starting your Airbnb company.
Airbnb vs. long-term letting
Renting to short-term renters via Airbnb and having long-term tenants have some significant distinctions (typically defined as six months or longer). Naturally, there are benefits and drawbacks to both solutions that should be taken into account.
Airbnb rentals need greater commitment daily.
There isn’t a lot of work for you to do regularly when you rent to long-term renters. Long-term rentals won’t need as much of your care, apart from basic maintenance and the rare emergency. Regular cleaning, providing and changing out linens, overseeing check-ins and check-outs, and educating visitors about the region while they are there are not your responsibilities. Long-term rentals have a lot more of a “set it and forget it” quality.
While with an Airbnb property, you would be regularly responsible for the aforementioned responsibilities (or the responsibility of someone you delegate it to). Does it imply that managing an Airbnb is more challenging than managing a long-term rental? No. Simply choose the best course of action that fits your lifestyle and availability.
Income fluctuation but more earning possibilities
Let’s address the issue that is being ignored. Naturally, with long-term rentals, you can count on a renter paying rent consistently each month (assuming they’re a decent tenant, that is!). Because you know you will always earn the same monthly amount, you don’t have to bother advertising the home or reserving visitors.
The drawback of regularity is that you must accept that your monthly income will remain constant. That implies that you might be losing out on much larger revenue during peak seasons. The cost of renting a condo in Aspen during the ski season will be much higher than the cost during the off-season.
You may significantly boost your profit margin by varying the rent according to the season while using Airbnbs. The negative? It’s quite uncommon (or impractical) for your home to be booked every night of every month, and there is no assurance that it will. After all, you’ll need to set certain days for cleaning and upkeep. However, great risks often result in big profits. You must decide which you value more: reliability or potential for bigger profit margins.
Transportation and tourism attractions are nearby
An Airbnb home may not be suitable in an area with a high probability of long-term rentals. Long-term renters often opt for accommodations that are close to their places of employment, conveniently located, and equipped with facilities appropriate for extended stays.
On the other hand, travelers want to enjoy themselves. They want proximity to dining establishments, airports, and other tourist attractions. Before investing in an Airbnb home, all of these factors should be taken into account.
How can I locate the greatest homes for Airbnb investments?
Given the investment size, you should make sure you choose a home that will provide a high return on your money without requiring too much labor. But how do you go about locating worthwhile homes? Finding the best match for your budget and company objectives sometimes requires extensive study and property visits. Here are a few pointers to get you going:
Utilize technologies for online investment analytics
A few distinct factors may be used to forecast an Airbnb property’s future performance. You may use the amazing tool provided by AirDNA to determine the average daily fee, occupancy rate, and anticipated income of an Airbnb property in a certain zip code. You may use it to get a sense of how well-performing homes in that ZIP code are doing business on Airbnb.
Mashvisor is another fantastic resource to use if you’re considering buying an Airbnb home. They may assist you in computing metrics for residences in your given ZIP code, such as cash-on-cash return and capitalization rate. These kinds of tools may significantly cut down on time you spend looking for potential locations and increase your trust in your Airbnb investment.
Visit Airbnb
Have you already thought of a few prospective places? Check out what is already being provided in the region by hopping on Airbnb. Ask yourself the following questions while you peruse the listings:
- How much do these places cost per night? And how does it compare to the neighborhood’s median home price?
- What number of reviews do they have (this indicates how many reservations they are receiving)?
Although browsing Airbnb shouldn’t be your only source of information when making an investment choice, it may be a useful place to start.
Pick your realtor carefully.
Working with a realtor who knows the short-term rental property market is recommended. They will look out for your best interests and be better equipped to assist you in locating a home with possibilities for short-term holiday rentals. They are better knowledgeable about the factors that make a property suitable for holiday rentals, enabling you to choose the greatest home in the best area for your Airbnb company.
Best American cities for investing in Airbnb in 2022
Worldwide, there are 5.6 million listings on Airbnb. Since it has been around since 2007, certainly, it won’t go any time soon. Despite this, several American jurisdictions have passed tight regulations governing Airbnb hosts, while others have outright outlawed the service. This is why it’s so important to conduct your homework and choose a property and area that will provide you with a high return on your investment.
It’s alluring (and typical) to buy a home in a place that has special importance to you. It might be your hometown, a favorite vacation area, or the site of a fun event. But it doesn’t guarantee that your Airbnb company will succeed simply because you believe it’s a fantastic location.
Avoidable cities
You should bear in mind that there are certain places where Airbnb is severely limited when you begin your location research process. The following cities have either severely restricted or outright banned Airbnb rentals:
- California’s Calabasas
- New York, New York City
- California’s San Francisco
- Hawaii’s Honolulu
- Los Angeles, California
- Nevada’s Las Vegas.
If you were considering moving to one of these places, take some time to research the local Airbnb regulations beforehand. They could make it more difficult for you to run your Airbnb short-term rental company.
Cities to Invest in
However, some locations have proved to be excellent Airbnb investments. Based on AirDNA’s best locations to invest in research, we’ve identified some of the greatest cities for Airbnb investment in 2022 below.
The top five American big cities for investment in 2022 are:
- With 6,123 current short-term rental listings and a potential income of $126,331, Nashville, Tennessee
- With 5,053 current short-term rental listings and a potential income of $78,273, Lahaina, Hawaii
- With 1,674 current short-term rental listings and a potential income of $66,518 Koloa, Hawaii
- With 4,669 current short-term rental listings and a potential income of $65,500, Kihei, Hawaii
- With 2,107 current short-term rental listings and a potential income of $60,182, Charleston, South Carolina
The finest U.S. medium-sized cities to invest in are the following five:
- With 391 current short-term rental listings and a potential income of $130,346 Yosemite National Park, California
- With 811 current short-term rental ads and a potential income of $95,030, St. John, U.S. Virgin Islands
- With 124 current short-term rental ads and a potential income of $71,131, Saco, Maine
- With 106 current short-term rental listings and a $38,806 income potential, Slidell, Louisiana
- With 582 current short-term rental ads and a $34,710 potential income, Waco, Texas
Finally, these five cities represent excellent investments for tiny U.S. cities:
- Hana, Hawaii has 93 current short-term rental listings with an estimated $88,869 in potential earnings.
- With 14 current short-term rental ads and a potential income of $85,418 in Indian Hills, Colorado
- With 16 current short-term rental ads and a potential income of $83,126, Elizaville, New York
- With 30 current short-term rental ads and a potential income of $71,785, Kekaha, Hawaii
- With 10 current short-term rental ads and a potential income of $69,426 in Catawba, North Carolina
Should you invest in Airbnb homes?
Investing in Airbnb rentals is a fantastic approach to creating a passive income stream that you can depend on for the foreseeable future. There is a strong likelihood of a fantastic return on investment, even if certain dangers and a sizable upfront expenditure are required to launch an Airbnb company. The most crucial lesson to learn is to conduct your homework to ensure that you are buying a home and a location that will be profitable on Airbnb.
