The short answer is, yes, it does make financial sense to invest in a property for AirBnB listing Income, and the long answer will follow in this post.
Be advised that this post is not about how to maximize profit or optimize your AirBnB listing. There are many authors who blog about this, and I would recommend Jasper Ribbers' blog and book for this.
In this post we will explore if does it make financial sense to invest in a property for AirBnB listing Income, and how to analyze it.
As you know, AirBnB is an online marketplace for vacation rentals that connects users with property owners looking to rent the space. Users are categorized as Hosts and Guests; both of which must register with Airbnb.
If you are looking to buy a new property to be exclusively used for renting on AirBnB, you need to analyze it properly.
Location: The most important thing is location; any major city with lot of tourists and business travelers - inflow can be an ideal location.
You can find a lot of places where house prices are still cheap, and it is certainly possible to find a nice apartment in a major city for less than $50,000.
After shortlisting the property we need to analyze if it makes sense to buy this property for AirBnB use.
Cost and Funding: You need to check how much equity you need to put and what are the bank terms for the balance amount.
Refurbishing: You may be required to spend roughly $10,000-$15,000 on making the apartment look nice. This includes all furniture, TV, flooring and paint etc. and some supplies like towels and bed sheets.
Projecting Occupancy: Projecting occupancy will be a difficult task but we can do some approximation here. If you go to AirBnB, you will notice that each listing on AirBnB has a publicly visible calendar that shows which nights are booked and which nights are available. Using this tool it's very easy to work out the occupancy. However, this is monthly occupancy and doesn't include seasonality. For our analysis we will use this monthly occupancy throughout the year.
Projecting Average Room Rate: If you notice each listing gives detail rates, daily, weekly and monthly. On the calendar if you move the cursor to the available dates, it will show the rate for that particular date.
Check the daily rate, weekly rate and monthly rate for few properties in the area you are planning to buy your property.
Make sure that your property is comparable to the other you are researching.
Operating Cost: Next step will be estimating your operating cost; I have estimated them to be in the following range based on what people are saying on the internet.
How to use the attached spreadsheet?
Attached Excel workbook has three tabs, the first one is called 'Summary', and you need to enter all your inputs here. All the inputs you need to feed are in red font in the Summary tab. It also gives the final output of financial KPIs on the right side.
It also has two other tabs called 'Cash Flow' and 'Profit & Loss'. All the calculations happen in these sheets, and they give you the net cash flow position and profit & loss statement.
I have not considered any tax in the model, but you can add per local regulation in your city.
Also note that the workbook is unprotected and if you are not very familiarly with Excel formulas, avoid playing with them unnecessarily.
There is no perfect corporate structure for investing in a property for AirBnB use. As a matter of fact, in most of the zones where AirBnB operates, it does so in a legal gray area.
There is an interesting legal case which happened in 2013. In January 2013, Airbnb user Nigel Warren faced the prospect of paying fines to New York City for renting his room on Airbnb. The case was made that certain language in New York's administrative code allowed temporary renters to lawfully stay for periods under 30 days. On 20 May 2013 a New York City administrative law judge, Clive Morrick, disagreed with this interpretation citing Mr. Warren a $2,400 fine. This new ruling does not make using the service "illegal", as long as stays are for more than 29 days. If not, users do stand the chance of facing fines per New York City. [Link]
Most municipalities have strict zoning laws prohibiting the conversion of a residential use into a hotel, hostel, single-room-occupancy (SRO) or other transient residence. So, you should check local regulations if you are planning to invest in a property for AirBnB listing to avoid any legal trouble.
If you are looking for a real life case study I would recommend Jon Wheatley's post on how he managed to do it profitably.
Hope you enjoyed this post and will be able to find a perfect property for your AirBnB listing business. If you have any question, use the comment section below.
You can download the spreadsheet for analyzing a property for AirBnB listing for FREE.