Kate and I are on pace to make over $70,000 this year from our three Airbnb investment properties. Today I’m going to walk you through the most important parts of our Airbnb investment strategy.
Opening an Airbnb start to finish is a big undertaking, and there are a lot of opportunities to make a mistake. It’s ok to mess a few things up, but if you stick to this process, you’ll have a pretty good chance of making some money.
How To Research Your City
Before you purchase a property for Airbnb, you should verify that you can make money. We’ve thus far only bought property in our home town, but our next property will be in another city. Here’s the steps we will take to decide if a city is viable for an Airbnb.
Scour the current listings
The first, and arguably most important step is to open up the website or app as a guest and search for listings in your city. Just put in the city and leave the dates and guest count empty. Run the search, here’s the info you want to be studying.
Number of listings
Before clicking into any listing let’s do some preliminary research. In the top left corner of the results page you’ll see a number of “stays”. This number represents the number of listings in the area you searched. No matter how big the city is, the largest number I’ve ever seen there is 300+.
Really all you’re looking for here is information. A city with 300 plus listings really just means there’s plenty of supply. And that often indicates that there’s a thriving Airbnb market in that city.
If the number in your city is low, that doesn’t mean and Airbnb can’t be profitable, it just means the market is probably small.
The next thing to look at is the map over on the right side. You can check the first several pages of listings and see where most of them are.
You should start to think about what attracts visitors to this city. Sometimes the biggest attraction is simply the downtown area. But often it’s something else. Could be the local University, or the lake. Just try to think of the reasons why people would visit.
This can usually lead you to a few places that are the prime areas. The best locations are usually in and near downtown, and then near whatever the main attractions are.
Now you want to look at the price per night on the listings. These numbers will vary widely, but you generally want to see some prices that seem expensive in the top results.
If you have some top results priced at $200 per night or more, then I take that as a good sign.
Too many listings at $50 per night and lower often means you’ll have a hard time getting bookings at a profitable price. You’re going to want to charge more than $50 per night to turn a profit, and if there are too many cheap options, you may struggle to get bookings.
This is where you can get a feel for how stiff the competition is. In competitive markets every listing has great photos and the homes look clean and gorgeous.
But cover photo is usually what determines whether someone will click through to your listing. We’ve had great success with cover photos of the interior of the property.
The best cover photos show part of the space the guest will be able to enjoy. Some good cover photos could include:
- A deck with furniture overlooking a lake front view
- Interior view showing the living area in the home
- A wide view photo of any stunning feature inside the house
You want a cover photo that makes someone say “I want to stay there!” If you see some listings in the top results that have ordinary cover photos, or photos that don’t show the living area of the house, you’ve got a good shot at beating them.
Now we want to start clicking into the listings. We want to see how busy they are. If you scroll down in the listing a little ways, you’ll see a calendar.
You want to see full calendars. They don’t have to be booked solid, but if they are that’s a GREAT sign. As you click through the top results, if every listing has more than 50% of the dates crossed off, you’ve got a great market.
This means that the demand is there. People are coming to the city and booking Airbnbs a lot.
Just dedicate a few hours to learning as much as you can about your Airbnb market.
Click into listings and learn about the competition. Click through the results pages and look at the overall quality of the listings and see what a bad listing looks like.
Also, you can start using filters. If you want to do a listing that can support 8 guests, filter out the listings that support fewer than 8 and see how the competition changes.
Before you purchase a property to list on Airbnb, you have to verify that the city will support it.
Check the local demand by seeing how many listings there are and how booked up their calendars are.
Check the competition by looking through the photos, prices and reviews of other listings.
And look at locations to determine where people want to stay.
Not every sign must be perfect, especially in smaller markets, but you’ll want to convince yourself you can make money.
Low Risk Airbnb First
Not everyone has the option to go low risk first, but it’s what we did. Three years ago before we opened our first Airbnb, we had no idea how much money could be made.
We turned the lower level of our home into an Airbnb and listed it hoping to bring in a few hundred bucks a month.
What happened completely changed our investing strategy. We listed our basement at 11pm and promptly went to sleep. When we woke up the next morning we already had 7 confirmed bookings worth over $1,000!
It didn’t take long for us to realize that we had to do this again.
Option 1: Leverage your home
If you can turn part of your home into a separate unit used exclusively for Airbnb, that is the best option. This allows you to label your listing as an “entire place,” which is pretty important for most guests.
Most guests want a private space where they don’t have to worry about being interrupted by a stranger. So bedroom bookings just won’t do as well, but if that’s your only option and you’re up for it, go for it. You’ll learn a lot.
Option 2: Buy a small, cheap home
Our property with the highest occupancy is only 800 square feet. Many guests don’t need a huge property to stay in. They’re not visiting to stay cooped up in a huge luxurious home. They’re coming to go out and experience something.
So I say buy a small, cheap, but nice house to start your short term rental experiment. That usually gives you the best chance to making money anyways.
Buying Your Property
OK, we’ve determined our market is viable, and we’re not going to open something in our own house. How do I find the right property and the right price?
Search for and visit homes
This is how we start. Kate looks through Zillow and shows me every house she thinks looks like a good lead. These are usually houses that are 1,200 square feet or less, and they look move in ready.
I’m sure you can do great renovating underpriced homes, but that’s not what we do. We look for small, cute, fully finished houses that don’t need any work.
Then we go and visit them. At this point we can go into a house and within 15 minutes pretty much know if the house will work.
Here’s what we look for:
- At least one bedroom that can fit a king bed
- At least two bedrooms total
- Kitchen is functional and looks great
- Hard floors are a plus because they clean better
- Would we love to stay here on vacation? This is probably the most important question.
- Anything that will take a great picture or be a selling point for guests
You want a house that excites you. If you leave feeling like “yeah, we could probably make that work,” it’s not a winner. If you leave feeling like “people are going to LOVE this place!”, that’s the place you want to make an offer on.
Determining a profitable purchase price
But what should your offer be? This is one of the most important questions you ask as a real estate investor. You need to have an idea of how much you can pay for a house while still being profitable.
Estimate revenue from Airbnb
Your first job is to estimate how much you’ll make from Airbnb. This can be done using the information you gathered about your market. Always use conservative numbers.
If the average occupancy rate of the top listings was 75%, then assume your occupancy rate will be 60%. If the price per night of a similar listing was $110 per night, assume you’ll only be able to get $90 per night.
If you multiply your expected number of booked nights by your expected price per night, that’s you estimated revenue.
So if your expected occupancy is 60% and your expected price per night is $90, then your estimated revenue is:
$1,620 per month = 0.6 x 30 nights x $90 per night
Now you need to estimate your expenses. Take all these into account.
- Utility bills
- Internet bill
- Cost of maintenance and repair
- Is there an HOA fee? (And if there is, you’d better make sure that HOA allows Airbnbs)
- Estimated property tax
- Insurance costs
Try to think of every conceivable expense that you could have at that property. Get a number for how that expense would break down on a per month basis (so if you expect $3,000 per year in maintenance and repairs, divide $3,000 by 12 to get a $250 per month estimate).
Then add them all up and tack an extra 10% on for conservatism’s sake.
When you get that number, subtract it from your estimated revenue. That’s what you have left over to pay the mortgage.
Calculate the purchase price
This the number you use to decide what price you can pay for the house, we’ll call it operating income. Let’s say your operating income is expected to be $1,000.
How much can you pay for the house. That’s a little bit of a personal preference, so I’ll tell you what I do.
I look at expected cash on cash return, and I look for a minimum cash on cash return of 25% in the first year.
So if my expected operating income is $1,000, my cash flow depends on the down payment and the purchase price. We go for 30 year terms and interest rates between 5-6%, and we usually put 20% down. So here’s the formula.
0.25 x Down Payment = 12 x (Operating Income – Mortgage Payment)
But since both the down payment and the mortgage payment are dependent on the purchase price, we need something a bit different. Down payment is 20% of the purchase price and mortgage payment is about 0.54% of the purchase price.
This is what we end up with:
Purchase Price = Operating Income x 105
Keep in mind that this equation will only work if your loan terms are 20% down on a 30 year mortgage at 5% interest. You’ll have to do the math for your particular situation.
Regardless, this equation provides a reasonable starting point to know how much to buy a property for.
Your market advantage
This is also the time to think about how this particular property can be branded. Does it have a hot tub? Is it great for large groups? Is it near down town?
You’ll want to think about how you can label the property before you actually buy it. You don’t want to end up with a property that doesn’t have anything particular interesting about it.
There are a lot of ways to stand out from the pack, so far Kate and I have highlighted how close we are to downtown for one property, we’ve created a “luxury” listing for another, and we’ve created a local brand for the third.
Whatever your advantage is, make sure you understand it and plan to highlight it in your listing.
Designing The Interior
I’ll be honest, this is where I pass the torch to Kate. She’s an excellent interior designer and has a knack for making any space feel homey and luxurious at the same time.
Since I’m not an expert here, I won’t try to pretend.
All I can say is that your interior design is CRUCIAL to the success of your Airbnb.
Your revenue, especially in the early months, is primarily dependent on two things:
- How many people click through to your listing on the results page
- How many of those people say “I want to stay there!” when they view your pictures
Your listing has to look incredible. It has to look like it came straight out of a magazine. And the pictures you take have to reflect how awesome your place is.
I know one day Kate will write a killer article covering this topic in detail, but for now I’ll point you to a Pinterest board with some amazing interiors.
When I look at these images I say “I want to stay there!” And that’s what potential guests should be saying when they look through pictures of your listing.
The “Thoughtful Touches”
Once you have you property and you made it look amazing, the work is only just beginning. Now you have to create an experience that will make your guests’ stays that much more relaxing and stress free.
You need everything a guest could want to be readily available once they arrive. Here are some things we put in every Airbnb we manage:
- Coffee machine with coffee pods ready to go
- Breakfast items (oatmeal, granola, fresh fruit, muffins)
- Labels on remotes and commonly used items
- Easy to use TV with Netflix
- A framed list of recommended places to eat in town
- A guest book with information about accessing WiFi and getting in touch with us
You need to think about the questions that a guest might have when they get to your place. Some of the questions you’ll learn as you go.
For example when we first started hosting we noticed a lot of guests asking for recommendations for dinner. So we put a list together and put it up on the walls for our guests to reference.
One of my friends who hosts an Airbnb puts soap, shampoo and conditioner dispensers in his showers.
For one of our listings we put a welcome sign up for our guests as they walk in with their name on it. That way they know we prepared the space just for them.
Solve your guests problems before they arrive
Try to answer your guests questions and solve their problems before they ever arrive. You’ll be happier because you won’t be fixing problems as often, and they’ll be happier because everything is going so smoothly. It’s a win-win!
And if you can make them feel special in some way, that makes a huge difference. Put a pack n’ play and a high chair in the unit before your families with small children arrive. I’ve even picked up some international guests from the airport before.
I’m sure Kate would have a lot more to add to this section, but the main idea is just to be an accommodating host and to solve all the common problems and questions with the things you set up in your Airbnb.
Scaling Your Business
Now I think I’ve covered just about everything we do for a single Airbnb. But we have several now, and we’re looking to buy more. The question I’ve been asking myself is how do we manage to recreate the same experience for our guests when we have 10 or 20 different listings.
Here is a peek into our long term Airbnb investment strategy as Kate and I make a push for property number 5.
Even before we opened our second listing, we found messaging guests to be a serious chore. It got to be oppressive. And it only gets worse with more units. You have to automate some of the messaging to survive.
Right now we use a site called Superhost Tools. We pay $5 per month for each of our listings and it literally saves us hours of work every month.
Here are the things we can automate:
- Response to a confirmed booking
- Response to an inquiry
- Check in instructions
- Check up on guests the morning after their first night with us
- Review guests
- Any reminders we want every guest to receive
Now the tool doesn’t do everything. We still have to answer questions and respond to guests from time to time, but our automated messaging takes care of probably 90% of all the messages we have to send.
And another great thing is that response time is one metric used by Airbnb ranking algorithms. Using an automated message system guarantees you have fast response times.
Cleaning or “flipping” your listings
This has been one of the hardest problems for us to solve. Local cleaning companies charge an arm and a leg to clean, and we also require our units to be cleaned during a very specific time frame (11am – 3pm)
Once you have 2 or 3 listings up, you’ll inevitably run into situations where they all need to be cleaned on the same day.
So far we’ve taken to hiring cleaners specifically to clean our homes, kind of like a babysitter. We train them how to clean them the way we want and we pay them a respectable fee for doing it our way.
There have been some bumps with this approach, and we’re still looking to improve our methods, but so far we’ve made it work.
Manage your risks
There are risks associated with any business model and every type of investment. Even burying cash in the backyard has plenty of risks. This is what my mind has been working on lately.
How do we buy more Airbnbs while minimizing the risks of being too dependent on one form of revenue?
We’re headed out of town to look for our next short term rental.
Right now all of our listings are in the same city. This means they are all subject to the same laws, and our city has been working on new ordinances around short term rentals.
There’s a huge risk here that one change to the local laws could wipe out our entire revenue model.
For this reason, we’ve started looking to other cities to mitigate this risk. Yeah we may have three or four properties hit by a new ordinance, but if we have 20 properties across 5 or 6 different cities then we’re only ever looking at hit to a small percentage of our total income.
Going remote with an Airbnb has its own set of problems, and we’ll get to learn about those first hand with our next purchase.
Another risk is that some areas are very seasonal. If you have an Airbnb in near a ski slope you’ll be much busier in the winter months. And if you have an Airbnb in a college town, you’ll probably slow down when school’s out.
I think this is another risk that can be reduced by some forethought and planning.
Try to keep your properties dispersed in such a way that the effects of seasonal ups and downs are minimized.
The list of risks is long with any investment, and I won’t bring them all up in this article. But I do want to mention one thing specifically about Airbnb.
They have an insurance policy built in to allegedly protect hosts. Don’t count on that policy to protect you.
Make sure that when your property has an insurance policy meant specifically for short term rentals. Don’t count on the Airbnb policy to bail you out of a bad situation. I’ve heard some horror stories.
Expand beyond Airbnb
One of our recent experiments is to start listing our Airbnb properties on other short term rental sites. We’ve put one up on VRBO and have gotten a few bookings from it.
In my opinion Airbnb is still the best (at least for my area), but it never hurts to get some more potential guests looking at your property. So consider listing your properties on multiple sites.
Love Your Guests!
It seems there’s something about human nature that makes it natural for us to hate our guests. If they leave a mess behind we get flustered and angry and ask “how could they be so thoughtless?”
I’m going to make a very bold claim though.
Hating your guests is the worst thing you can do for your Airbnb.
Your guests help you pay your mortgage. In fact, they help you gain wealth and get richer. And the more you love them the more they will love you back.
If you love your guests then you want them to have an amazing stay in your home. And that’s what they want too! You will spend time figuring out how you can create the perfect environment for your guests and not only will they love it, but they will tell everyone how amazing your place is when they leave a review.
Because your place is so amazing, they will have fewer problems and ask fewer questions. And because your place is so clean, they will subconsciously make fewer messes.
Trust me, you’ll be more successful if every day you say out loud “I love my guests!”
But guess what, that won’t prevent you from having bad guests.
Some groups will come in and leave messes that leave you wondering “How could they have created this mess in only 16 hours?” Some groups will even damage things in your house. And yes, some will steal from you.
You don’t have to love the fact that those guests were disrespectful. But you need to remind yourself all the great things that your guests do for you.
Love your guests.
Wow that was a lot. But the truth is there is a lot to running a successful Airbnb.
If I’m breaking this article down to the most important take away items, these would be my picks:
- Research your city’s Airbnb market
- Purchase a property at the right price
- Design a listing that makes people say “I want to stay there!”
- Love your guests
And that’s a wrap.