Real estate investors should always analyze the Airbnb return on investment of their rental properties to determine their profitability.
Are you thinking about investing in a short term rental property on Airbnb? If so, one important factor to think about is the return on investment (ROI). In simple terms, the Airbnb ROI is the profit you make from your property after subtracting all expenses. By analyzing this metric, you can determine whether investing in an Airbnb property is financially worthwhile.
Table of Contents
- Is Owning an Airbnb Still Profitable?
- 3 Key Metrics Used to Project Airbnb Returns
- The Easiest Way to Calculate Your Airbnb Returns
- What Is a Good Return on Airbnb Investment?
- Where Is Airbnb Most Profitable?
Investing in Airbnb rentals can be a lucrative move. In fact, short term rentals can generate up to three times more revenue than long term rentals. However, not everyone that becomes an Airbnb host generates a good return. If you want to get a good Airbnb ROI, you need to learn how to find rental properties for sale.
In this article, we will discuss whether it is a good idea to own an Airbnb. You will also be shown how to evaluate your future Airbnb returns. Finally, you will see how to ensure that your short term Airbnb investment is profitable from the start using Mashvisor’s Airbnb calculator.
Is Owning an Airbnb Still Profitable?
Yes! Owning an Airbnb is still profitable, and it is expected to remain so for the foreseeable future. Therefore, If you’re thinking about investing in an Airbnb, here are some things you need to consider:
Location
Location is everything if you want a healthy Airbnb return on investment. A rental property located in a tourist hotspot is more likely to be booked more often, and it means more revenue for you.
But with more and more travelers discovering Airbnb, there are still many lucrative opportunities to be found in emerging tourist destinations.
However, it is important to research the level of demand in your chosen location before investing. In such a way, you will know for sure whether the location you want to invest in is worth it or not.
Good Property
The quality of your property is another important factor to consider. An attractive, well-maintained Airbnb that is priced appropriately can make a significant difference in how many bookings you receive.
It is vital to keep the place clean and tidy and to respond quickly to any issues that guests may encounter. A good review from a satisfied guest can lead to more bookings and, consequently, a higher ROI.
Social proof is one of the major determinants of the success of any business, and real estate is not excluded. If you keep your property in good condition, renters will sing your praises. This will encourage other renters to want to do business with you.
Marketing and Promotion
Marketing your Airbnb is also crucial to its success. With proper marketing and promotion, you reach a wider audience of interested renters.
But there are other forms of marketing and promotion you can employ. For instance, you can list your property on other vacation rental sites and promote it on social media channels like Facebook.
“Build it and they will come” does not often work with real estate. If you do not actively advertise your rental property, the chances that your property will be profitable will be low.
Pricing
Your pricing strategy is another important factor to think about in order to have a healthy ROI for your short term rental property.
During peak tourist seasons, you can charge higher rates than during low-season periods.
Pricing your property competitively can help you secure more bookings, so you must research the pricing of similar properties in your area.
When you put the factors above into consideration, you can see that owning an Airbnb is still profitable. However, to make the most of such an opportunity, you must use the strategies above. By doing so, you can enjoy a robust ROI on your short term rental property.
Related: 10 Steps To Setting The Right Airbnb Pricing Strategy
3 Key Metrics Used to Project Airbnb Returns
Before buying an Airbnb property, you should determine how much you can make. Calculating Airbnb returns can help you analyze whether putting your money into an Airbnb rental for sale makes financial sense or not. With the right metrics, you can compare the profitability of several Airbnb investment properties for sale and make an informed investment decision.
Here are the key calculations you need to keep in mind when conducting your Airbnb investment analysis:
1. Airbnb Cash Flow
The first key metric that real estate investors use to estimate Airbnb returns is Airbnb cash flow. It is the difference between the rental income and the rental expenses of an investment property. By calculating the Airbnb cash flow, you’ll get a more accurate value of the short term rental’s profit margin.
It’s recommended that you only invest in Airbnb investment properties with positive cash flow, especially if you’re just starting as a real estate investor. With positive cash flow properties, you’ll be making money every month as your income will be higher than your expenses.
Access to a monthly stream of income can help you grow your portfolio faster. Apart from allowing you to save for a down payment, positive cash flow properties are also more attractive to lenders.
Here is a simple calculation for the cash flow of an Airbnb short term rental property.
Determine the Gross Income
The first step in calculating cash flow is to determine the short term rental property’s gross income. It includes the total revenue generated by the Airbnb rental, including nightly rates and any additional fees charged to guests.
For example, let’s say that your Airbnb rental generates $3,000 per month in gross income.
Deduct Expenses
The next step is to deduct expenses associated with the rental property. They include:
- Mortgage or rent payments
- Property taxes
- Insurance premiums
- Utilities
- Maintenance and repairs
- Cleaning fees
- Airbnb service fees
- Marketing expenses
Let’s say that the total monthly expenses for the Airbnb rental are $2,000.
Calculate the Net Income
Subtract the total expenses from the gross income to determine the net income.
Net Income = Gross Income – Total Expenses
That is:
Net Income = $3,000 – $2,000
Net Income = $1,000
Therefore, the net income of the Airbnb rental would be $1,000 per month.
Calculate Cash Flow
The final step is to calculate the cash flow of the Airbnb rental. To do it, you must consider any other costs associated with the property, like financing costs or capital expenditures. The cash flow formula is;
Cash Flow = Net Income – Other Costs
Assuming that there are no other significant costs, the cash flow for this Airbnb rental would be $1,000 per month.
2. Airbnb Cash on Cash Return
The cash on cash return is a metric used to forecast ROI when an Airbnb short term rental property is paid for using a mortgage. It is the ratio of the annual pre-tax cash flow of a vacation rental to the total cash invested. While the value of good cash on cash return tends to vary, a good Airbnb cash on cash return should be above 8%.
Here is the formula for calculating the cash on cash return for an Airbnb rental:
Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested in the Property
Follow the steps below to calculate the cash on cash return for an Airbnb rental:
Determine the Annual Pre-tax Cash Flow
To calculate the annual pre-tax cash flow for the Airbnb rental, start by adding up the gross income generated by the property for the year. It includes all income from bookings, minus any vacancy or rental income loss. Then, subtract all the expenses related to the property, including mortgage payments, property taxes, utilities, cleaning fees, and any other expenses.
Annual Pre-Tax Cash Flow = Gross Income – Expenses
For example, if the gross income generated by the Airbnb rental is $36,000 per year and the total expenses are $24,000 per year, the annual pre-tax cash flow would be $12,000.
Calculate the Total Cash Invested
To calculate the total cash invested in the Airbnb rental, add up the initial down payment and all the upfront costs associated with buying or setting up the rental property. It can include any renovation or refurbishment costs, furniture, or appliances purchased for the property.
For example, let’s say that the total cash invested in the Airbnb rental is $120,000.
Use the Formula to Calculate Cash on Cash Return
Once you‘ve determined the annual pre-tax cash flow and the total cash invested, you can use the formula above to calculate the cash on cash return.
In our example, the cash on cash return would be
Cash on Cash Return = $12,000 / $120,000 = 0.1 or 10%
Therefore, the cash on cash return for this Airbnb rental would be 10%.
3. Airbnb Cap Rate
Another key metric you should use in calculating your Airbnb returns is the Airbnb cap rate. It is an ROI metric that measures the net operating income of an Airbnb rental property relative to its fair market value or property price.
The cap rate metric is used to calculate Airbnb return on investment without taking into consideration the financing method of the investment property. Although the metric is not as complete as the Airbnb cash on cash return, real estate investors can use it to compare the profit potential of multiple Airbnb properties for sale quickly.
Below is the formula for calculating the cap rate for an Airbnb rental:
Cap Rate = Net Operating Income (NOI) / Current Market Value of the Property
Follow the steps below to calculate the cap rate for an Airbnb rental:
Determine the Net Operating Income (NOI)
To calculate the net operating income, start by adding up the gross income generated by the property for the year. It includes all income from bookings, minus any vacancy or rental income loss. Then, subtract all the operating expenses related to the property.
For example, if the gross income generated by the Airbnb rental is $50,000 per year and the total operating expenses amount to $20,000 per year, the net operating income would be $30,000.
Find Out the Current Market Value of the Property
There are many ways to determine the current market value of the Airbnb rental. For instance, you can either compare recent sales of similar properties in the area or get an appraisal. Also, you can use a separate valuation tool.
For example, let’s say that the current market value of the Airbnb rental is $400,000.
Use the Formula to Calculate Cap Rate
Once you’ve determined the net operating income and the current market value, you can use the formula above to calculate the cap rate.
In our example, the cap rate would be:
Cap Rate = $30,000 / $400,000 = 0.075 or 7.5%
Therefore, the cap rate for this Airbnb rental would be 7.5%.
The Easiest Way to Calculate Your Airbnb Returns
So, how good will your Airbnb return on investment be? Calculating future Airbnb returns is easier said than done. One main reason for this is that it’s not easy to get accurate data on rental income and rental expenses. Collecting Airbnb data manually and using Airbnb investment analysis spreadsheets to project future Airbnb returns can take several months.
To get the answer to this important question quickly and efficiently, you need the best real estate investment tool—Mashvisor’s Airbnb calculator.
Mashvisor’s Airbnb Calculator
Until now, projecting the potential returns of an Airbnb rental property has been a guessing game. Fortunately, Mashvisor’s Airbnb calculator now makes it possible for any investor to accurately determine how profitable a vacation rental is. It is a special type of investment property calculator that conducts investment property analysis for short term rentals in the US housing market.
Mashvisor’s calculator is the go-to tool for figuring out future Airbnb return on investment.
The Airbnb calculator uses the most up-to-date Airbnb data from the home-sharing site itself and machine-learning algorithms to quickly and accurately calculate key Airbnb metrics.
Mashvisor’s Airbnb calculator will estimate Airbnb income based on the performance of comparable Airbnb listings in the area. It is a product of the daily rate and the Airbnb occupancy rate of the rental comps. The Airbnb calculator also provides estimates of rental expenses. Being an interactive tool, investors can add and adjust rental expenses to get accurate projections of future Airbnb cash flow.
Apart from Airbnb cash flow, the Airbnb calculator also provides you with pre-calculated data on Airbnb cap rate and Airbnb cash on cash return. Calculating the two ROI metrics is complicated, and that’s why Mashvisor’s Airbnb calculator is essential.
Related: Rental Comps: What Are They and Where Can I Find Them?
How to Use Mashvisor’s Airbnb Calculator
To use Mashvisor’s Airbnb calculator, real estate investors can enter basic information about the property they are interested in. These include the location, property type, and number of bedrooms. Then, the tool will generate an estimate of the potential rental income, occupancy rate, and other key metrics.
The tool also provides insights into the local rental market, such as average rental rates, seasonal demand, and other factors that can impact the performance of an Airbnb rental.
The Airbnb calculator can help real estate investors save time and money by providing real-time data and analysis that would otherwise take hours of research and analysis to obtain.
The tool can also help investors identify potential risks and challenges associated with Airbnb rentals. Some of them are local regulations, competition, and other factors that can impact the profitability of a rental property.
Start a 7-day free trial with Mashvisor today to calculate the Airbnb return on investment on your short term rental property accurately.
What Is a Good Return on Airbnb Investment?
A good Airbnb return on investment varies depending on factors like location, the size and quality of the property, the seasonality of the local rental market, and competition in the area.
In general, a good return on an Airbnb investment covers all of the property expenses and generates a profit on top of it. A common metric used to measure the return on an Airbnb investment is the cash on cash return, as mentioned above.
Good cash on cash return for an Airbnb investment can vary depending on the market, but a commonly used benchmark is a return of 8% or higher. However, it’s important to keep in mind that it is just a general guideline. A good return on an Airbnb investment will depend on a variety of factors unique to the specific property and location.
It’s also important to consider other factors beyond financial returns, such as the time and effort required to manage the property and the potential risks and challenges associated with short term rentals.
Where Is Airbnb Most Profitable?
One of Mashvisor’s lists provides the best cities with Airbnb rental income of $5,000 and higher. Three California cities – Anaheim, Rancho Mission Viejo, and Chula Vista – were on the list due to the high demand for short term rentals in the state.
Remember that several factors affect a good Airbnb return on investment, as already mentioned above. Therefore, it’s important to carefully evaluate each potential Airbnb investment opportunity on its own merits to determine its potential profitability.
The Bottom Line
Investing in Airbnb can be a highly lucrative opportunity for those who are willing to put in the effort and resources to create a quality rental space, attract guests, and manage the property effectively. As we’ve seen, there are various metrics that investors can use to evaluate the potential ROI.
However, it’s important to keep in mind that the short term rental market can be highly competitive and volatile. It is because factors like local regulations, economic conditions, and changes in traveler preferences can impact the profitability of an Airbnb rental.
Therefore, it’s essential to conduct thorough research and due diligence, as well as seek professional advice, before making any investment decisions.
When done right, the Airbnb investment strategy can be a lucrative one. The good thing is that making money with Airbnb rentals is not as hard as it used to be in the past. It boils down to how well you can project your Airbnb returns before making a purchase.
The easiest and most accurate way to do it is to use Mashvisor’s Airbnb calculator to estimate key Airbnb metrics like cash flow, cash on cash return, and cap rate. It is the best calculator to use to accurately estimate your Airbnb return on investment.
Schedule a demo with Mashvisor now to ensure your Airbnb return on investment is strong.