A Beginner’s Guide on Buying Airbnb Property
Even with the effect of the pandemic, the vacation rental business is prospering. When you visit Airbnb, you see lots of listings with dozens of positive reviews, meaning they are popular for bookings. Just like any other business, renting property has its downsides and benefits, as well as some unique aspects you should know about. Today, we will cover the most important sides of a real estate business, from the preparation stage to establishing a stable management system.
List of the most profitable Airbnb locations in Ontario here.
Pros and Cons of Entering the Market
As with any business idea, the first step is to decide whether it is worth it for you. The choice should be individual and reflect your personal attitude towards the downsides we are going to mention in this section. But let us start with the positives, which are:
- With real estate, you’re almost immune to inflation.
- It is a stable business that will bring you constant income for a long time.
- It is possible to significantly limit your personal involvement, turning it into a passive income.
- Once established, it does not require a lot of effort to manage.
- There are lots of software tools available to simplify your job.
The list of drawbacks related to the hosting business is quite large, but the benefits compensate for them for many owners. In a nutshell, it is quite hard to start but relatively easy to maintain. Nevertheless, here are the downsides of vacation rental ownership:
- A lot of research is required to start.
- The initial investment is relatively high.
- The competition is rather tough in this industry.
- The income is stable but relatively small.
- You will have to make your business very flexible in order to adjust to the constantly changing market conditions.
Where to Start?
In case the drawbacks we have just mentioned do not scare you, and you are still feeling enthusiastic about this investment, the next logical question is where to start. Since starting the business requires a lot of preparation, we will cover its main aspects in this section. This overview will give you a better idea regarding the amount of research required.
Location Choice
The first thing to do is to choose the location. There are lots of aspects you have to take into account, as this decision will set the course of your future business and will have a major impact on its results. It will be logical to have the property nearby so that you would be able to come over if necessary. However, it is important to analyse the market first. If there are too many offers in your area, it will make sense to check out the neighbouring locations.
Legislation Study
Knowing legislation is vital for establishing a business, and vacation rental is not an exception here. In different states, the laws covering this sphere may vary, and you should surely know them all before you start. This is probably the hardest part of your preparation process, as it is important to know all the related legislation, starting with fees and taxes and ending with the number of bookings allowed.
But there is some good news, too. Airbnb will provide you with basic tips as soon as you select the region on their website. Short term rental business is rather popular, so you will be able to find enough state-specific legislation guides. They will allow you to at least have all the information well-structured.
Type of Property Selection
This point is directly related to location choice. As a potential host, you have to choose the type of your future property. It might be a one-room apartment, a large family home or something in the middle. No matter which option you choose, you should take the location into account.
For example, if you have chosen a large city as your location, a better option would be to have a small flat. Locations inside the city usually attract businessmen or travellers that don’t intend to spend that much time at home. They will likely prefer a cheaper place with all the necessary conditions to stay for a few nights rather than a luxury apartment with a corresponding price.
Observing the Offers
Once you have the basic decisions made, you can proceed to find the actual offer. There are lots of platforms with property selling listings, which will allow you to find exactly what you need and compare the prices of different offers. Even with these benefits, finding a truly attractive offer may take a while. The industry is very competitive, so there are likely other enthusiasts looking for the same listings as you.
Thankfully, there is a solution to this problem. In case you don’t intend to spend hours monitoring the platforms and weeks or even months waiting for a good offer, you could ask professionals for help. There are companies that would be glad to find the property you need for a reasonable price. You will just need to specify what you’re looking for, and they will provide you with multiple corresponding options.
Some Math
Having everything pre-calculated is essential to any business. Performing a basic financial analysis will help you determine whether you will be able to make profits as well as project the estimated income you will receive. Don’t worry in case finance is not your profile, as we will elaborate on everything in detail here. To make it easier to understand, let us review the sources of income and the liabilities a vacation rental owner has.
Projecting Your Income
You won’t be surprised to know the only source of income of such a business is the rent itself. However, it is still crucially important to project it before starting to act. To get the approximate income, you should look at similar offers in your area. Note that you will likely have to set lower prices at first to make your listings more attractive.
At this stage, it is logical to do the calculations for monthly periods, as it will be more comfortable to compare them with the liabilities later. We would recommend taking the average prices of similar offers and lowering them by 10%. Then, it is necessary to take the occupancy rate into account, as your property won’t be booked every day, especially in the beginning.
We would suggest performing several calculations for different scenarios so that you will be more informed about the risks. For the first income projection, take the realistic values of the occupancy rate. Let the second one be the best-case scenario, in which your listing gets popular fast, and the occupancy rates are high. Last but not least, create a worst-case scenario version of your projections.
Estimating Your Liabilities
The list of liabilities you have to take into account is pretty large. First of all, there is the fee charged by Airbnb for using their platform. The fee is from 3% to 5% of your rental income. Secondly, there are taxes that vary depending on your state. In most cases, you will need to pay property taxes, income taxes and occupancy taxes.
Then, there are property insurance fees that will also take a small portion of your income. For some properties, you will also be charged with HOA fees. And, of course, there are the utilities. You will have to pay the bills on water, electricity and refill the supplies for every guest. In case you’re planning to use cleaning services, don’t forget to take them into account as well. Include all the other management services you’re going to use, too.
Last but not least, there might be some financing costs. In case you have bought the property with a mortgage or a loan, you also have to account for the payments as your liabilities.
Results
As you can see, the rental income has to cover a lot of stuff. And don’t forget that your offer should look attractive compared to other listings in your area. The pricing should be well-balanced in these terms. To finish your calculations, you just have to deduct the liabilities from your rental income. The resulting sum will be your monthly profit.
If you have performed three estimates of your income, you can compare them and analyse the risks. The resulting sum will also allow you to estimate the time your business makes its first profits. To do so, just divide the sum of your initial investment by the profit we’ve just calculated.
The vacation rental business usually takes a while to reach profitability, but it is more stable than most other types of entrepreneurship. Even if your rental profits are just enough to cover the loan payments, it might be considered a good investment. You won’t be earning anything until you pay the loan, but once you do it, you will start generating decent and stable profits.
Finding a Finance Source
If you don’t have savings that would be enough to buy Airbnb property right away, you will need to look for a financing source. There are many options to take a loan for such purposes. Depending on your credit score, you will be able to choose from:
- conforming loans;
- portfolio loans;
- multifamily loans;
- short-term loans.
Choosing one of these financial tools requires some calculations as well. You can even take multiple loans if necessary. For instance, a short-term loan may be a great option to cover urgent needs, while one of the long-term loan options will be used to pay for the property itself. Analyse these offers in your area and try entering the values into the calculations we made in the previous sections. Compare the results to make a more informed choice.
Re-Thinking Things
As you can see, there are lots of aspects affecting your income and your liabilities. Even a slight change to one of the features we’ve elaborated on may have a great effect on your final results. Therefore, you should be ready to adjust your plan while working it through. Try different combinations until you find the optimal solution.
Thinking things through becomes even harder when you realise that most of these parameters are linked with each other. Re-considering the property purchase will change your loan conditions, the income you will be able to receive and the liabilities on taxes.
Moreover, the risks will vary depending on your decisions. Do not forget to take them into account, too. For your first property, it would be reasonable to prefer low-risk options with lesser profits and leave the experiments for the future.
Managing Your Business
Once everything is set up, and you’re ready to welcome your first guests, the management begins. The term includes all the daily tasks you will need to perform as a property owner and a host. It includes creating the listings, managing the booking calendar, confirming the bookings, meeting your guests, cleaning the place before the next guests’ check-in, restocking the supplies and lots of other things.
It is hard for an individual to cope with such a ton of responsibilities, so there are several ways to help you out. First of all, there are management companies (like MasterHost) that would be glad to take most or even all the responsibilities. Their fees will depend on how much you want them to do, so don’t forget to perform the calculations and ensure you will remain profitable if you use these services.
Secondly, there are several options of automation software to choose from. These programs are used to eliminate the necessity to perform many routine tasks. For instance, you can configure them to automatically adjust prices depending on the specified conditions. Or, you are able to automatically send a message to the cleaner when the guests check out. They even allow you to automatically leave 5-star reviews to your guests, saving you a lot of time and effort. The programs require some time to get used to and to set them up, but it is definitely a worthy investment of time.
What Can Go Wrong?
No matter how hard you work on planning things through, the reality will never be an exact match to your plan. The What Can Go Wrong analysis will be a helpful tool in that case. As its name implies, it requires you to analyse the possible failures of your plan. Think of what can go wrong at each stage and make a Plan B for all these situations to be as ready for them as possible.
Summary
Summing up, the short-term rental business has its downsides and benefits. It requires a lot of preparation to begin, but it offers lots of advantages that are unavailable for most other spheres. It is stable and has relatively low risks, but most importantly, you can make it bring you a passive income in case you use management services.
There are lots of tools to help you out and automate most of your daily routines. Airbnb itself is a great platform that has everything you need to comfortably interact with the guests and your colleagues.
The competition, however, is pretty serious in this market. To outperform other vacation rental owners, you will have to provide better offers at lower prices, especially until you build a positive reputation on Airbnb. It makes it challenging to maintain the profitability of your business, but that is applicable for almost any industry.
To be successful with the short-term real estate rental business, you will need to perform a thorough analysis of the aspects we’ve elaborated on in this article. The more precise your research is, and the more flexible you are in terms of adjusting price and other parameters, the better chances you have of prospering in this sphere.
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