How Much Money Do You Need To Start Investing in Airbnb Rentals?
The average cost to start an Airbnb sits between $3,000-$6,000. This cost will significantly vary depending on the following items:
- Property purchase price
- Home Loan Down Payment
- Property Insurance
- Property Taxes
- Business Origination Fees
- Monthly Utilities
- Furnishing/Amenities Costs
Some of these costs, such as purchase price and downpayment, may not be applicable if you already have a home available to Airbnb.
What is Airbnb Arbitrage?
Simply put, Airbnb Arbitrage is a business model that involves signing a lease for a monthly rental property and then subletting that same property as an Airbnb. This strategy is popular because it is the best way to begin using AirBnB with very little money down – the only costs involved are the initial security deposit, monthly utilities, and any other minor expenses associated with renting a property. To successfully run this type of business model, you will need to check your local laws to ensure there is nothing barring the use of short-term rentals and obtain explicit written permission from your landlord.
How To Invest in Airbnb Rentals
- Pick a Great Market
- Research Local Laws
- Choose Your Target Audience
- Narrow Down Your Criteria
- Crunch the Numbers
- Open a Legal Entity
- Set Your Price
- Create Your Airbnb Property Listing
- Provide Excellent Customer Service
- Automate the System
1. Pick a Great Market
The first step to investing in Airbnb property is to decide on the market. Some markets are more AirBnB-friendly than others. The best locations will have at least one of the following:
- Tourist Attractions
- Seasonal Entertainment
- Vibrant Nightlife
- Business Opportunities
- Medical Centers
Additionally, all of the best markets will have a high Airbnb occupancy rate. This crucial figure will help you estimate the amount of vacancy your potential property will experience. The higher the occupancy rate, the lower your potential vacancy (and vice versa).
2. Research Local Laws
Local laws can also significantly impact an Airbnb rental property's success. Every city, county, and state has different regulations regarding short-term rentals, so be sure to check with your local municipality for instructions.
3. Choose Your Target Audience
Your target audience is the lifeblood of your business. If you don’t understand them – their interests, needs, and unique idiosyncrasies – then your AirBnB will have more vacancies than necessary. To pick a target audience, consider your ideal customer. What are they like? Use tools like demographics and psychographics to help you. Then, once you have a good handle on who you are marketing to, think about what your rental will need in order to stand out to this group of individuals.
4. Narrow Down Your Criteria
The information you’ve gathered about your target audience will guide your buying criteria for your new rental property. This criteria will include the type of structure (single-family residence, apartment, etc.), number of bedrooms/bathrooms, square footage, architectural style, and so on. Remember that each market will also have a preferred property type, and it’s important to purchase within that preference. The best way to identify the most popular type of property in an area is to check the local AirBnB market.
5. Crunch the Numbers
The best Airbnb property is one that makes financial sense. There are other costs to consider outside of your monthly mortgage, including:
- Furnishings/Amenities (furniture, kitchen utensils, security system, hot tub, etc.)
- Utilities (power, water, trash, etc.)
- Routine Maintenance (cleaning, lawn care, pest control, etc.)
- Capital Expenditures (roof, hot water heater, HVAC, septic, etc.)
- HOA Fees
- Property Taxes
- Property Insurance
Be sure to include these costs when calculating how much an AirBnB will make monthly/annually to avoid costly surprises.
6. Open a Legal Entity
Instead of placing a property in their names, many homeowners will open an LLC or other legal entity and purchase their Airbnb through it. While this step isn’t mandatory, it is often advisable to significantly reduce the amount of taxes owed on earned income at the end of the year. It’s best to discuss this step with a Certified Public Accountant (CPA) before initiating the purchase of your Airbnb property.
7. Set Your Price
To price your AirBnB correctly, compare your home to other similar ones on the market. These comparables should be in similar condition to yours and have similar amenities. This is the best way to ensure that you are not overpricing or underpricing your property – either of which could be detrimental to the overall success of your Airbnb.
8. Create Your Airbnb Property Listing
Don’t just list your home on the Airbnb website – sell it. Be sure to write catchy descriptions that stand out and grab the attention of your target audience.
9. Provide Excellent Customer Service
Remember, your Airbnb is a business, and businesses require customer service. You'll need to provide great service to maximize your profits. It will most certainly impact your business if your guests find you unresponsive, inconsiderate, or just plain rude. The best hosts have quick response times, answer any questions, and make their guests feel welcome at all times.
10. Automate the System
Once you have successfully started making money from your Airbnb, it’s time to automate. This can include installing a keyless entry, utilizing automated messaging systems, hiring a concierge service, and more. Essentially, anything that can be automated should be. This will give you more free time and your guests a better vacation experience.
Airbnb Investing Pros and Cons
Airbnb Investing Pros
1. Higher Profits
It’s no secret that Airbnb maximizes a rental property’s profit capacity. Being able to collect a nightly income that is double, or sometimes even triple what you could make on a traditional monthly renter is this investment’s greatest strength.
Airbnb rentals provide owners with more flexibility than traditional rentals. If you want to make your property unavailable some days, you can do that! Everything is under your control when there is no long-term tenant to consider.
3. Low-Cost Advertising
All the advertising for an Airbnb rental is done through the service’s online website; they handle everything so no additional marketing is needed.
Airbnb Investing Cons
1. Less Passive
Turnover on an AirBnB is fairly high, which means more daily tasks such as cleaning and guest communications. If managed poorly, these tasks can eat into the homeowner's free time, making it feel more like a second job than a passive income stream.
2. Slow seasons
Airbnb investment properties rely heavily on travel and tourism – each of which has busy and slow seasons. Busy seasons mean higher nightly prices and little vacancy, but slow seasons can leave homes vacant for days, weeks, or even months at a time.
3. Higher Initial Cost
Landlords of traditional rentals don’t typically furnish the home. Nor do they have to provide top-tier amenities to outdo the competition. These items can make the initial cost of an Airbnb more expensive than that of a traditional rental.
Are Airbnb Properties Good Investments?
Absolutely! As we’ve already seen, Airbnb properties provide owners with the opportunity to maximize their profits, making more money than could ever be possible with a traditional rental. If you do the research, purchase the right property, and provide the best customer service, Airbnb is a lucrative way to put more money in your wallet.
Airbnb Investment Bottom Line
With an Airbnb investment property, the key to success is knowledge. Understanding your rental market, target audience, and how to automate the process will directly impact your monthly Airbnb rental income. Keep these three items in mind, and you’ll make money in no time!