Getting access to vacation rental data and doing a proper vacation rental analysis are important aspects investors should not forget.
Table of Contents
- What Are Vacation Rental Analytics?
- Why You Need to Use Vacation Rental Analytics Tools
- Steps in Conducting Vacation Rental Market Analysis
- Other Things to Consider When Doing Vacation Rental Analysis
- What Is a Good Rate of Return on a Vacation Rental Property?
Buying vacation rental properties has become a popular investment strategy in recent years as their demand continues to grow. Many travelers prefer to stay in vacation rentals than in hotels as the former tend to provide a more comfortable and homey space at a more affordable price.
When done with proper vacation rental analytics, investing in vacation rental property usually brings more rental income than traditional rentals.
However, the vacation rental industry is a little more complicated, and returns are never guaranteed. So, how do you ensure you find a good vacation rental investment? This is where vacation rental analysis comes in.
In real estate investing, location is the most crucial factor to consider, and it can either make or break your investment. It is because location influences most aspects of income property investing. They include the listing price, expenses, rental income, occupancy rate, the optimal rental strategy, and ultimately the return on investment.
Therefore, the best way to find a profitable vacation rental investment is to conduct thorough Airbnb market research. In this blog, we walk you through the process of conducting an easy and fast rental analysis with Mashvisor and how to use vacation rental analytics for investing.
What Are Vacation Rental Analytics?
Vacation rental analytics are a collection of short-term rental data and insights from various home-sharing platforms like Airbnb, HomeAway, and VRBO.
Moreover, the vacation rental data presented in the vacation rental analysis show the trends of the short-term rental market based on concrete figures such as occupancy rates and average rental income. The vacation rental market data is crucial in helping prospective investors make informed decisions.
Why Are Vacation Rental Analytics Important?
Analytics in the vacation rental market is important as it can help determine if a particular investment property is worth your time and money.
If you’re an investor searching for a vacation rental property to invest in, being able to access the vacation rental data and analytics is important. It can help you decide which short-term rental property can provide the most profits.
There are many reasons why investors need to do real estate market research and analysis before buying any investment property, such as the following:
- Make the right investment decisions: If you are planning to invest in Airbnb rentals, it’s essential to research the property’s short-term rental analytics so you can properly strategize your investment and earn more revenue.
- Become competitive: With proper vacation rental analytics, you will be able to understand the market well and know your competitors more. It can help you gauge your property amid the competition.
- Maximize earnings: Utilizing the vacation rental data and analysis will help you get a general overview of the potential cash return of an investment property. It can help you maximize your potential income by correctly setting your pricing based on the seasonality of the business.
Why You Need to Use Vacation Rental Analytics Tools
Doing your own real estate market research and analysis can be daunting and tedious. However, it is doable as long as you are willing to spend more time gathering all the necessary information.
Keep in mind, though, that manually collecting real estate data and insights is prone to unnecessary errors. Such errors can result in making the wrong investment decision. It is the primary reason why it’s essential to use the right vacation rental analytics tool to help you find key real estate information.
Here are other reasons you should conduct vacation rental analytics using real estate analytics tools like Mashvisor.
Accuracy
Using the right short-term rental analytics software can provide accurate and up-to-date real estate market data based on in-depth research and analysis. You don’t need to gather such important information manually because all the data will be automatically provided.
The information includes the occupancy rate, rental income, expected expenses, cash on cash return, cap rate, neighborhood comps, and more.
For example, Mashvisor’s design revolves around rental property analysis. The feature provides its users with the most effective and accurate rental property research in order to assist them in making investment decisions based on comparative facts and analytics.
Before it can work wonders, the tool requires the investor to enter some basic figures and information about the property. The tool may present you with crucial data about the property and whether it is time to buy it or not—in just a few minutes.
Furthermore, the rental data in Mashvisor’s database is sourced from reputable real estate data sources, such as Airbnb, MLS, and Zillow. By incorporating comprehensive real estate data and filtering it, Mashvisor gives you realistic and precise results when it comes to market analysis.
Ease of Use
The best software for vacation rental analytics can help make your research a lot easier. You don’t need to spend a lot of time finding the necessary data and calculating your potential returns because the required figures will be provided.
In addition, you can also customize the information based on your personal preferences. For example, Mashvisor provides an Airbnb calculator that allows you to input additional expenses and financing information to get an overview of your potential cash flow.
The best part is that Mashvisor is simple to use. You just need to put in any city of interest to obtain an overview of the investment prospects in the area. You may use interactive filters to select the ideal investment property for you based on data sourced from trustworthy sources.
The software itself is pretty intuitive, and all the steps can be done in a few clicks. If you want more options or if you’re going to explore its features—simply click on the drop menu. You can then easily navigate your way through it. There is no learning curve, so even novice investors can easily use it.
Organized
If you don’t want to create your own spreadsheet where you input all the crucial figures, you will benefit from using a vacation rental analytics tool.
The best real estate market analysis software presents an investment property’s insights in an organized and easy-to-understand manner. In such a way, you don’t need to dig deeper to see the data that you require.
Basically, the key advantages of Mashvisor include faster and more accurate search results, a more profound background on the neighborhood, organized results, and a potentially higher return on investment once consumers make a choice to invest in a property.
You will be presented with data that is in easy-to-follow reports—so even if you’ve never tried such a platform, you will still be able to use it with ease. The best thing is that you will have all the data in one place and can even download it.
Steps in Conducting Vacation Rental Market Analysis
Once you find the right vacation rental analytics software, it will be easy to conduct a vacation rental market analysis. You can follow the simple steps below to help guide you with the process:
1. Find a Good City for Airbnb Investment
The first step in vacation rental analysis is finding a good city for Airbnb investment. The best cities for Airbnb investment are usually those with popular tourist destinations, a relatively low supply of hotels, and a strong economy.
In such a market, Airbnb prices tend to rise over time. In housing markets where there is a large number of hotels, real estate investors are forced to keep their rates low to attract more guests.
You should also study the Airbnb trends in the market. In cities where tourism is seasonal, there may be a high vacancy rate due to long off-peak seasons. It can negatively influence your return on investment. The best places for buying a vacation home rental are the ones with a steady inflow of tourists.
Steady growth in the tourism sector also implies that the demand for Airbnb rentals in the city is on the rise. Also, search for property markets with affordable Airbnb homes for sale. It will help lower your mortgage payments.
The best way to research real estate markets is to look at vacation rental data for cities. You can check vacation rental market statistics for major cities in the US housing market on Mashvisor’s blog.
You will be able to get short-term rental data like Airbnb occupancy rate, average Airbnb rental income, average Airbnb cap rates, and average Airbnb cash on cash returns. With the said information, you will have completed the first step in your vacation rental market analysis. By now, you should have one or a few top-performing cities in mind.
Related: 40 Best Cities for Airbnb Income in 2022
2. Check the Short-Term Rental Regulations in the City
Finding a potentially profitable city for Airbnb investment is not the end of your market analysis. You still need to study the short term rental regulations, which usually vary from city to city. Therefore, when looking for where to buy a vacation rental, it’s crucial to check whether the Airbnb regulations in your target city are favorable.
It will also help you avoid getting into legal trouble in the future. For instance, Airbnb investing may be illegal or subject to specific restrictions in some cities. The goal is to find a top-performing city with favorable short-term rental regulations in the market.
3. Find the Best Neighborhood for Airbnb Investment in the City
After finding a good city for Airbnb investment in terms of performance and favorable Airbnb regulations, the next step in vacation rental market analysis is to find the best neighborhood.
Even though the city may be generally suitable for Airbnb investment, not all neighborhoods may be good. Therefore, you need to locate the top-performing neighborhood in the market for Airbnb investment. It should be the one that appeals to tourists the most and offers the highest ROI potential.
Look for a neighborhood close to tourist attractions like game parks, beaches, historical sites, city centers, etc. The neighborhood should also have good infrastructure, public transportation, a low crime rate, and amenities like restaurants, gyms, and shopping centers.
The best way to find a profitable neighborhood for vacation rental investment is to conduct a neighborhood analysis using Mashvisor’s heatmap tool. The heatmap tool uses Airbnb analytics to evaluate neighborhoods in your city of choice. The map will then provide a visual representation of the Airbnb data using different colors to show different ranges.
Mashvisor’s neighborhood Airbnb data includes:
- Listing price
- Airbnb rental income
- Airbnb cash on cash return
- Airbnb occupancy rate
Related: Airbnb Rentals: Finding Income Properties Using a Heatmap
4. Conduct Comparative Market Analysis
Now that you have a lucrative neighborhood in mind, it’s time to find a profitable Airbnb property. When searching for a profitable vacation rental property in the market, you first need to narrow down the Airbnb properties in the neighborhood to those that fit your budget and criteria.
With our Property Finder tool, you can search for Airbnb properties in your target neighborhood that match your budget and criteria.
To avoid overpaying, you need to know the value of Airbnb properties for sale in relation to other comparable properties in the area (real estate comps). By comparing similar Airbnb properties in the neighborhood, you will be able to know which one is the best deal.
You can compare the prices of Airbnb properties in your target neighborhood that are similar in terms of property size, the number of bathrooms/bedrooms, age, etc. Mashvisor allows you to easily access real estate comps for Airbnb properties in the US housing market.
Related: Comparative Market Analysis: The Fastest Way to Get It Done
Other Things to Consider When Doing Vacation Rental Analysis
To ensure that you’re making the right investment decision, you must know how to interpret the vacation rental data and insights from your vacation rental analysis. Knowing the numbers is not enough if you don’t understand how they can affect your investment’s profitability.
When analyzing a short-term rental, consider the following important factors:
1. Occupancy Rates
The property’s occupancy rate is a crucial factor that can determine whether or not an income property can generate enough cash flow from renters. Vacation rentals are a seasonal business, so you can expect that the property will not be occupied 100% in a year.
Knowing what occupancy rates are acceptable in your preferred market location is essential. It can also help you price your vacation rental correctly so it can generate enough cash flow to cover those times that the property is vacant.
2. Expenses
If you’re using Mashvisor as your vacation rental analytics tool, you will be provided with the necessary expenses associated with the property. Knowing such expenses is important so you can strategize on the best way to improve your income. You can also plan which costs to cut to maximize your returns.
3. Revenue
The success of your vacation rental investment can be measured by the average daily rate you can charge for the property and the average monthly rental income generated by the property.
Seeing the income and expenses side by side is a great way to determine whether the investment property can provide sufficient positive cash flow to sustain the business.
What Is a Good Rate of Return on a Vacation Rental Property?
Usually, a good return on investment is often 15% or more. When it comes to the cap rate and the cash on cash calculation, a good rate of return is 8%-12%. Some investors will not even consider a property it offers a potential return rate of at least 20% (but that is sometimes unrealistic).
What Is Rate of Return?
A rate of return (RoR) is the net loss or gain of an asset over a certain time period represented as a percentage of the initial price of the investment. When you calculate the rate of return, you are computing the percentage difference from the beginning to the conclusion of the period.
Any investment instrument, from real estate to funds, equities, and fine art, may be given a rate of return (RoR). The RoR can be applied to any asset as long as it is acquired at one point in time and generates cash flow at some moment in the future.
Investments are evaluated in part based on historical rates of return, which may be compared to properties of the same type to decide which assets are the most appealing. Before making an investment decision, many investors like to set a necessary rate of return.
What Are the Different Metrics to Measure Rate of Return?
While each metric plays a distinct role, none should be considered in isolation. Metrics from each sector, taken together, may give insight into a property’s overall success on both a small and big scale.
Some of the “Return Calculations” include ROI, annualized ROI, NPV (Net Present Value), IRR (Internal Rate of Return), and more.
How Do You Determine ROI?
While the word is frequently used informally to represent both the qualitative and quantitative advantages of investment, there is an approved ROI formula:
ROI = (Net Profit / Cost of Investment) x 100
A positive ROI suggests a profitable investment. Therefore, it logically follows—the greater the value, the better. Many of the advantages of the ROI calculation stem from its simplicity. Even among non-finance experts, the basic formula is well-known, consistent, simple to compute, and easily understood.
Its clarity, however, is also its vulnerability. ROI does not take into account investment risk or the money time value, both of which are important factors in establishing the value of an investment. You can alleviate the time constraint by employing an annualized ROI formula:
Annualized ROI = [(1+ROI)1/n−1] × 100
The annualized ROI is more of an investor measure; just keep in mind that it tends to look at an investment over a long period or in perpetuity.
What Is NPV?
Because it considers the time worth of money, net present value (NPV) is a common tool for evaluating a possible investment. It computes the discounted present value of expected cash flows.
Since money is worth more nowadays than it will be in the future, owing to inflation and gains from an investment alternative, it’s critical to understand the influence of time on a possible investment.
Simply defined, NPV estimates the expected return on investment and converts it into today’s money to answer the question: Is the pipeline of future cash flows worth more than the current investment? It considers the rate of return and risk, two things that traditional ROI computations do not.
The NPV formula is as follows:
NPV = TVECF − TVIC
Where:
- TVECF: The present value of the predicted cash flows
- TVIC: The present value of cash invested
The abovementioned discount rate compensates for the time worth of money and accommodates the risk of an investment opportunity by bringing future cash flows back to their current value. The larger the discount rate, the greater the risk.
What Is IRR?
Though it incorporates separate variables, the internal rate of return (IRR) is used in combination with NPV. It computes the percentage rate of return at which the predicted cash flows—which we evaluated using NPV—lead to a zero net present value.
Unlike NPV, which considers the monetary amounts a particular project will generate, IRR considers the investment’s breakeven cash flow. The quicker you reach breakeven status, the greater the investment is.
The formula for IRR is:
$0 = Σ CFt ÷ (1 + IRR)t
One aspect of the formula may be puzzling to you: why is IRR part of the calculation if we are solving for IRR? In a sense, IRR is estimated by “error and trial.” You’ll input figures into the IRR field using internet calculators, Excel, or software until the NPV equals zero.
The bigger the IRR, the stronger the investment. Or, the bigger the IRR on an investment and the amount by which it surpasses the cost of capital, the greater the net cash flow.
Is IRR the Same as ROI?
Even though IRR is frequently referred to casually as an investment’s “return on investment,” it is not the same as most people use it.
When people talk about ROI, they usually mean the percentage return on an investment in a specific year or over a period of time. However, because such a type of ROI does not represent the same details as IRR, IRR is often used by investment experts.
An additional advantage of IRR is that it comes with a mathematically defined meaning. On the other hand, ROI might signify multiple things based on the context or the person.
The Bottom Line
If you ask the correct questions, use sophisticated tools to extract answers about the market’s present situation, and utilize machine learning approaches to forecast the future, data can reveal practically anything to you. The amount and quality of accessible information both influence the accuracy of the insights.
Thus, location is the most important factor to consider when buying vacation rental property.
Therefore, learning how to conduct vacation rental analysis is crucial for every real estate investor. With proper vacation rental data analysis, you will be able to find the best places for buying an Airbnb rental. This will ultimately empower you to find and buy a profitable Airbnb rental property.
Moreover, Mashvisor makes vacation rental market analysis easier for you. Make sure to use our tools to find accurate vacation rental data and make informed investment decisions.
Regardless of the other alternatives, Mashvisor is the finest rental analysis website in 2022. You can even check it out for free to see if it suits your needs.
To learn more about Mashvisor’s real estate investment tools, sign up for a 7-day free trial today, followed by 15% off for life.