Estimating Airbnb Earnings Before Buying an Investment Property

The Airbnb estimate can gauge a property’s profitability. Before investing in short term rentals, determine the Airbnb earnings estimate first.

One of the most lucrative ways to make a profit in real estate is through investing in short term rentals. As the tourism industry is now back in business after almost two years in lockdown, travelers from all over the world are now prepared to go on vacation. As a result, we expect to receive high demand for vacation rentals starting this year and beyond. 

Table of Contents

1. Why Invest in Airbnb Rentals 
2. How to Estimate Your Airbnb Earnings 
3. What’s the Best Tool for Estimating Airbnb Earnings? 
4. Top 5 Markets for Airbnb Earnings

Many short term rental owners are earning a good deal of money from investing in Airbnb. However, it doesn’t necessarily mean that all real estate markets are optimal for the said investment strategy. To be successful in short term rentals, you should know what to expect in terms of Airbnb earnings and how to analyze an Airbnb property to determine its profitability.

Before buying any investment property, it’s important to learn the ins and outs of short term rentals and Airbnb earnings. Learning how to calculate them to find the perfect property to invest in will truly come in handy. To analyze an investment property conveniently, it’s best to use a real estate analytics platform like Mashvisor.

Mashvsior provides all the necessary information to help you decide which investment property to buy based on its potential returns, expected expenses, occupancy, and other factors. With Mashvisor, you can also determine whether a particular property is best for use as a short term or long term rental.

Why Invest in Airbnb Rentals

Airbnb rentals rose to fame due to their high potential for generating more monthly rental income than a long term rental. With the high demand for vacation rentals, home-sharing platforms such as Airbnb are one of the most successful forms of real estate investment. 

Since we are now slowly getting back to normal after the onset of the pandemic, the short term rental market is also back in business. In fact, it is one of the first industries to quickly get back on its feet after the travel restrictions were lifted. As a result, new investors are now eyeing investing in short term rentals to take advantage of the increased demand from travelers.

Reasons Why Airbnb Is a Good Investment

Here are a few reasons why you should also consider investing in Airbnb:

High Demand From Travelers

As mentioned, travelers from around the world are eager to go on vacation after staying at home for almost two years. A report from the US Travel Association shows that as of September 2022, people spent 6% more on travel compared to the total travel spending in 2019. It means we can anticipate more eager travelers in the months to come.

Potentially Higher Returns

If you invest in the right location, an Airbnb investment can potentially earn higher returns than long term rentals. It’s because Airbnb owners can charge more on a per-night basis. It is especially true if the short term rental market you’re investing in welcomes an influx of visitors all year round. The higher the demand for vacation rentals, the higher you can charge nightly. 

Fewer Repairs Needed

While vacation rentals need to be maintained constantly, especially in between turnovers, they are usually just minor maintenance. When compared to investing in long term rentals, short term rentals don’t typically encounter major repair issues. It is because your guests seldom stay at the property. In fact, most of them are only there for a place to sleep in for the night. 

Your Own Vacation Home

If you plan to buy a short term rental property that is located in a different state or city, the property can also serve as your own vacation home. Even if you buy a property where you are currently staying, you can use your Airbnb home to accommodate your relatives if they visit you.

One Major Risk of Running an Airbnb

Airbnb rentals are also riskier and harder to manage because you’re not guaranteed to achieve a high enough occupancy rate on your property. Since most Airbnb guests are there for a vacation, such an investment strategy is typically seasonal. For a short term rental property to generate a significant amount of money, owners need to ensure a high Airbnb occupancy rate.

What Is Occupancy Rate?

Occupancy rate refers to the percentage of time during a year when your property is occupied by a guest or tenant in relation to the total period it is available for rent. 

Suppose the host makes their property available for booking for 365 days. A short term rental that is occupied for 182 days per year, for example, would give an occupancy rate of 50%. We got the figure by dividing the number of days the property is available for booking by the number of days it is occupied (in this case, 365 divided by 182).

Combine that with the fact that short term rentals see a much higher turnover rate since your guests will only be staying at the property for a couple of days. For such reasons, Airbnb income properties require a lot of management. If you’re not ready to take on that responsibility, you may consider hiring a property management service—but it may come at a steep cost.

While your occupancy rate is a major factor that affects your Airbnb earnings, analyzing your rental property and predicting its return on investment requires a lot more than just knowing what your occupancy rate is going to be. To find the perfect short term rental property, you must also consider other important factors. 

In the following section, we will discuss how to calculate the right Airbnb earnings estimate to help you find the right vacation investment home.

How to Estimate Your Airbnb Earnings

When talking about your Airbnb or short term rental earnings, we’re talking about two things: 

1. The amount of money that your property is generating each month; and 
2. The amount of long term return on investment that your property will generate in the future.

So, in order to accurately predict your short term rental profits, you will need to factor in all the different things that can affect your short term and long term profits. It means that you will need to get as much information about the market you want to invest in, as well as the property that you will end up buying.

Unlike other types of investments that rely on buying and selling for a direct profit, calculating the return on investment for rental properties involves more things. 

To calculate your returns from a rental investment, you need to factor in the following:

• All income streams that your rental property is generating
• All one-time costs that you pay upon purchasing the property
• All recurring monthly or yearly expenses that incur from owning and operating the property.

So, how exactly do you calculate your Airbnb earnings estimate based on all of this information? And how do you know what’s good and what’s bad when it comes to the different metrics that you will use to measure your return on investment?

Let’s go through the process of analyzing a short term rental for its investment opportunity and estimating the future earnings of an Airbnb property, one step at a time!

Real Estate Market Analysis

When you first make the decision that you want to buy and operate an Airbnb rental property, the first thing you will want to do is a real estate market analysis. A real estate market analysis is a type of Airbnb investment analysis that lets you see the bigger picture of the real estate market to help you decide where you want to invest. 

It is an important step in the process of real estate investing because it helps you determine an investment property’s profitability. Failure to conduct a real estate analysis means that you may risk choosing the wrong real estate market to invest in or buying the wrong investment property.

Basically, what you need at this point is to identify all the markets that you can afford. By accessing online sources like Mashvisor, you should be able to get data on the median property prices and average monthly rents in each state and city. It will ultimately help you narrow down your choices by eliminating markets that don’t match your search criteria.

Once you’ve identified the markets that you’re interested in, make sure to do some research on the laws and regulations concerning operating an Airbnb rental property in that city or state. Some states have laws that can directly affect your Airbnb earnings. It’s important to be aware of such laws if they exist and to consult your real estate agent or a legal advisor on the matter.

Once you’ve decided on the market that you will be investing in, it’s time to move on to the next step of your predictive Airbnb earnings analysis.

Ready to find a profitable Airbnb property in your area of choice? Start a 7-day free trial with Mashvisor now.

Investment Property Analysis

When it comes to rental properties in general, analyzing the potential returns of the property depends on many different factors that can change over time. Since rental properties are long term investments, many things can happen at any time that will significantly affect your overall earnings.

For example, unlike other types of real estate investments, you will need to factor in maintenance costs and utilities, as they can add up over long periods of time. Moreover, they will typically make up a considerable portion of your expenses.

So, let’s talk about Airbnb rentals in detail and see how you can use Airbnb earnings calculations to help you decide on the best property to invest your money in.

Airbnb Earnings Calculations

Let’s say you’ve decided on a market to invest in, and now you’re looking at numerous lists of properties for sale. If you’re finding it difficult trying to decide which one you’re going to spend your hard-earned money on, you need to learn how to calculate the property’s possible Airbnb earnings estimate.

If your goal is to buy a property that will bring in the most Airbnb earning potential, there are a couple of metrics that you will want to compare in order to see the best pick for you. They are the capitalization rate (known as cap rate) and cash on cash return.

However, in order to calculate both metrics, there are a few other figures that you’ll need to find out, and they are the income and the costs related to the property.

Knowing the costs related to acquiring and owning the property is essential to be able to estimate Airbnb income. The following are the common costs that you should include in your calculations:

One-Time Costs

One-time costs are the cost that you pay upon acquiring the property, such as:

• Closing fees: The costs of legally owning the property, such as mortgage application, official recording, and more. They are usually within the range of 2% to 5% of the property’s price.
• Renovation costs: These are the costs involved if you’re buying a distressed property that you need to repair or decide to renovate or redesign the property.
• Appraisal fees: When applying for a mortgage, the lender might ask you to get an appraisal on the property as proof of value to set the amount of the loan. The appraisal costs around $300 for single family homes and $600 for multifamily homes, but it may vary depending on location.
• Home inspection: Ideally, buyers should perform a home inspection before buying a property to make sure it’s in good condition. The inspection costs anywhere between $200 and $500.

Recurring Expenses

Recurring expenses are those that you need to pay on a monthly or annual basis, including:

• Mortgage payments: If you’re borrowing money from a lender to pay for the property, then mortgage payments will probably be your biggest recurring expense until your mortgage is fully paid off.
• Rental income tax: Just like any kind of income, there will be taxes on Airbnb earnings. Luckily, however, you will get tax deductions for all other expenses on this list.
• Property maintenance: Even if short term rentals don’t usually need major repair issues that arise from wear and tear, regular maintenance is needed to ensure that the property remains in top condition.
• Cleaning fees: If you want your property to perform well, you will want it to be sparklingly clean every time a guest leaves and when a new guest checks in. It means a lot of cleaning, and you’ll probably opt for using a cleaning service.
• Permits: Depending on the state or city you’re in, you might need to pay for a business license or other fees to be able to run a short term rental.
• Utilities: Unlike long term rentals, your guests won’t be paying the property’s bills. It means that utilities such as water and electricity will be deducted from your own income.
• Airbnb insurance: Insurance is a requirement by most lenders, and it protects you from legal hazards with your guests.

Other Expenses

The following expenses may not be applicable to all types of properties, and some are optional:

• HOA fees: If you’re buying a property in a residential community where the homeowners association is active, you need to pay the HOA fees (which will cover some other expenses on this list, such as property maintenance). However, keep in mind that Airbnb rentals and the homeowners association don’t usually work together very well.
• Condominium dues: These are recurring fees that you need to pay if your short term rental unit is in a condominium.
• Airbnb property management: As mentioned earlier, Airbnb rentals require a lot of effort in property management if you want them to perform well. If you think it’s too much to handle, you can hire property management, which costs around 8%-12% of the property’s monthly rent.
• Emergency budget: This isn’t a required fee like others on the list, but it is highly recommended that you put a portion of your Airbnb rental income on the side as an emergency budget. You may need it sometime in the future.

Occupancy/Vacancy

The vacancy rate of a short term rental property should be factored in when determining your potential Airbnb earnings estimate. However, vacancy rates are often unique each month, and the figure constantly changes due to how volatile this type of investment is.

Some Airbnb rentals can charge a very high rental rate. But if their vacancy rate is also very high, they might not be able to generate enough annual income to cover their expenses. And while it’s hard to predict an Airbnb rental’s vacancy rate, you can get an idea of the property’s past performance and use it to predict its future Airbnb earnings estimate.

In this regard, Airbnb provides historical data for properties that are listed on its platform. It allows you to calculate the vacancy rate for each property by simply looking at the days that it was occupied versus the days the property was vacant during previous years.

If that seems too much work, you should consider working with Mashvisor because all this information is readily available. Mashvisor provides you with the percentage for each property based on actual Airbnb data.

Many Airbnb rentals experience varying vacancy and occupancy rates based on seasonality, location, demographics, and other dynamic factors. However, keep in mind that managing the property correctly can drastically improve its occupancy rate.

It means that you might find Airbnb rentals with high vacancy rates, and upon further investigation, you found out it was due to bad property management. So, if you believe you can manage the property in a better way, you may significantly increase its occupancy rate, and eventually, maximize your Airbnb profits.

Cash Flow

One of the simplest Airbnb metrics that is used to compare different Airbnb rentals is cash flow. The cash flow of a rental property is the amount of monthly income it generates less than its monthly expenses.

For example, a property generates a rental income of $1,500 per month. You spend around $1,000 per month to pay the mortgage, bills, maintenance, and other expenses. Based on the given figures, the property’s cash flow is $500 per month.

If the property’s cash flow is positive, it means that the property generates more money after you cover all the expenses. However, if the cash flow is negative, it means that it costs more money than the income it generates.

It’s worth noting here that the cash flow is different from the net operating income (which is the more accurate representation of the monthly Airbnb earnings report). The net operating income usually accounts for the property’s vacancy/occupancy rate; however, the cash flow doesn’t.

Cash flow is a good metric to use when comparing properties if you’re confident in your ability to maintain a high occupancy rate. It is because the cash flow will be pretty close to what you will actually be making if the occupancy rate is high enough.

Capitalization Rate

The cap rate is one of the most important metrics when it comes to analyzing short term rental properties and knowing your potential Airbnb earnings estimate.

The formula for calculating the cap rate is as follows:

Cap Rate = Net Operating Income / Property Price

Cap rate tells you how much of your property’s price you are making in profit each month.

For example, if your net operating income is $1,800, and the price of your property is $360,000, this is what the calculation would look like: 

$1,800 / $360,000 = 0.005 or 5%

Based on our example, 5% of the property’s price is generated as income by your rental property each month.

Cap rate is an excellent indicator of a rental property’s rate of return, and it is the closest thing you get to an ROI metric when calculating Airbnb earnings estimate.

Cash on Cash Return

The cash on cash return is another metric most investors use when calculating their Airbnb earnings estimate. It is very similar to the cap rate. The only difference is, unlike the cap rate, the CoC’s calculation is based on the amount of cash that you’ve invested in the property, not its market value or price.

The formula for cash on cash return is as follows:

Cash on Cash Return = Net Operating Income / Cash Invested

To elaborate, let’s get back to our previous example and assume that we’re getting a mortgage to cover 80% of the property’s price, so we’re only paying 20% in cash.

So, out of the $360,000 property price, we’re only paying $72,000 in cash. Consequently, the calculation would be as follows: 

$1,800 / $72,000 = 0.025 or 2.5%

As you can see, the cash on cash return comes out as a much higher percentage than the cap rate, and naturally, it will always be the case if you’re taking a mortgage on the property.

Comparative Market Analysis

We’ve learned how to analyze each rental property and see what the vacation rental property’s earnings estimate look like. Now, it’s time to use that knowledge to finally determine the property that you want to invest in.

To do it, you will need to conduct a comparative market analysis (CMA).

A CMA requires you to do the above calculations for each candidate property that interests you. To narrow down your search, you can use the cash flow of the properties to reduce the number of properties that you will be comparing on a deeper level.

Once you’ve identified the final handful of candidates, you will want to compare them based on their cap rate and cash on cash returns.

Based on the comparison, you can finally choose one to three properties you want to buy and extend an offer to the sellers. Make sure to try and negotiate a lower price to boost your long term Airbnb earnings estimate further.

Keep in mind that while your end goal is to maximize your profit, you shouldn’t make your decision solely on the potential earnings of each property. Make sure to pick a property you’re comfortable with and that you’re certain you will be able to manage properly.

What’s the Best Tool for Estimating Airbnb Earnings?

The great thing about investing in today’s real estate market is that there is an abundance of online tools and sources that you can use to make the entire process much easier.

When it comes to investing in Airbnb rental properties, you can find different Airbnb research tools for your every need. Everything you need is at your fingertips, from searching for a property to analyzing and calculating different metrics to comparing large numbers of listings.

If you’re looking for the best online tools for real estate investors, Mashvisor has got you covered. When you use Mashvisor, you’ll get access to essential Airbnb tools and real estate data to help you make an informed investment decision, such as follows:

Property Finder

Mashvisor’s Property Finder helps you locate investment properties for sale across the US with the help of flexible filters and an easy-to-use interface. You can easily search for a property based on the city or neighborhood of your choice. You can also use the custom filters, such as budget and property type, to narrow down your results.

Moreover, the tool includes a heatmap feature that helps you find markets based on their long term and Airbnb rental income, long term and Airbnb cash on cash return, long term and Airbnb occupancy rate, average prices, and so much more.

Investment Property Calculator

The investment property calculator and Airbnb profit calculator let you do an Airbnb analysis with ease by modifying fields related to the property’s income, costs, and recurring expenses. You can see the potential Airbnb earnings estimate based on the accurate figures already provided by Mashvisor.

In addition, it also acts as a mortgage calculator, which is directly linked to the property or Airbnb profit calculator. You can factor in your mortgage expenses in your computation to get the most accurate results.

Neighborhood Analytics

Another helpful tool Mashvisor offers is neighborhood analytics. The tool allows you to compare any number of properties with one another based on their cap rates, cash on cash returns, occupancy rates, and more. 

They are rental comps that share almost similar features as your candidates. The purpose of neighborhood analytics is to help you find the best-performing properties in each neighborhood so you can easily choose which one to invest in.

Top 5 Markets for Airbnb Earnings

Investing in the right short term rental market is important if you want to maximize your Airbnb earnings. When choosing the location for your vacation rental investment, make sure to take into account the factors that we mentioned. They include the cap rate, cash on cash return, occupancy rate, and the property’s median price. 

In preparing our list of markets that provide the highest Airbnb earnings estimate,  we considered locations that meet the following criteria:

• Median property prices are below $1 million
• Cities have at least 100 Airbnb listings
• Active Airbnb listings have an average Airbnb occupancy rate of 50% or higher
• Active Airbnb listings have an average cash on cash return of at least 2%

Here are the best Airbnb locations that offer lucrative Airbnb earnings estimates, arranged from the highest to the lowest, according to Mashvisor’s data as of end-October 2022:

1. New Paltz, NY

• Median Property Price: $807,244
• Average Price per Square Foot: $370
• Days on Market: 103
• Number of Airbnb Listings: 153
• Monthly Airbnb Rental Income: $6,544
• Airbnb Cash on Cash Return: 5.33%
• Airbnb Cap Rate: 5.40%
• Airbnb Daily Rate: $286
• Airbnb Occupancy Rate: 53%
• Walk Score: 74

Start searching for profitable Airbnb properties in New Paltz, NY.

2. Escondido, CA

• Median Property Price: $881,536
• Average Price per Square Foot: $469
• Days on Market: 60
• Number of Airbnb Listings: 131
• Monthly Airbnb Rental Income: $6,264
• Airbnb Cash on Cash Return: 4.63%
• Airbnb Cap Rate: 4.68%
• Airbnb Daily Rate: $344
• Airbnb Occupancy Rate: 51%
• Walk Score: 42

3. Groton, CT

• Median Property Price: $841,968
• Average Price per Square Foot: $465
• Days on Market: 291
• Number of Airbnb Listings: 124
• Monthly Airbnb Rental Income: $6,178
• Airbnb Cash on Cash Return: 5.79%
• Airbnb Cap Rate: 5.88%
• Airbnb Daily Rate: $287
• Airbnb Occupancy Rate: 58%
• Walk Score: 57

4. Little Silver, NJ

• Median Property Price: $896,300
• Average Price per Square Foot: $369
• Days on Market: 40
• Number of Airbnb Listings: 159
• Monthly Airbnb Rental Income: $6,041
• Airbnb Cash on Cash Return: 3.60%
• Airbnb Cap Rate: 3.64%
• Airbnb Daily Rate: $383
• Airbnb Occupancy Rate: 47%
• Walk Score: 59

5. Oceanside, NY

• Median Property Price: $703,523
• Average Price per Square Foot: $427
• Days on Market: 59
• Number of Airbnb Listings: 237
• Monthly Airbnb Rental Income: $6,025
• Airbnb Cash on Cash Return: 4.43%
• Airbnb Cap Rate: 4.46%
• Airbnb Daily Rate: $231
• Airbnb Occupancy Rate: 50%
• Walk Score: 76

Click here to start searching for high-income Airbnb properties using Mashvisor. 

Investing in Airbnb Is a Good Idea

Investing in Airbnb rentals is a great idea to make good profits in the long term, as long as you’re willing to spend time and effort in running an Airbnb property.

It’s important to estimate the potential Airbnb earnings a property can generate before buying any investment property. To obtain accurate Airbnb earnings estimate, you need to do proper Airbnb market research and analyze the market thoroughly. Choosing the right real estate market to invest in is crucial to your success as a real estate investor.

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