Should you invest in an Airbnb/STR Property?
In February of 2020 Tyler and I embarked a new adventure: buying and managing an Airbnb property. And so through the midst of the pandemic and starting our family we learned a lot about the short-term rental industry—both on the investment side, as well as the operational side—and ended up building a lifestyle business that we are super grateful for!
The journey has been nothing short of thrilling and challenging. But one that we decided to continue down, as we bought our second property in 2021! And we have plans for a 3rd, but as you’ll soon find out in the information below, our investment strategy is changing slightly.
But seeing as how we get asked about our rentals all the time, I decided to compile some insights for anyone considering short-term rentals as an investment. Whether you've been eyeing that cozy cottage or a swanky city loft, here are some critical points to consider before taking the plunge.
Side note: I’ll use Airbnb and STR interchangeably, even though you might want to list your property on multiple Online Travel Agencies (OTAs), with Airbnb and VRBO being the major players.
First, what’s the goal?
Investing serves as a means to an end. Therefore, before delving into the prospect of purchasing STRs, it's important to determine your financial goals, and THEN you can decide if STRs can be part of your strategy. When we embarked on this journey, we narrowed down our focus to four primary goals/values, which solidified our decision to opt for STRs as a viable investment strategy.
- Net worth: Real estate has historically proven to be a significant asset in building wealth.
- Cash flow: While other real estate investments might have been more lucrative, we prioritized creating a stable income source to supplement my income as a real estate agent, since we were planning to start a family, and I wanted to have the opportunity to be home more.
- Flexibility: Managing STRs allows the freedom to work from any location, which was a priority considering our desire for a flexible lifestyle.
- Travel: Travel has always been an integral part of our lives and continues to remain a top priority. Both our girls had stamps in the passports by the time they turned 1
The two main reasons YOU might want to buy an Airbnb.
- Offset the costs of a second/vacation home: If it's about owning a vacation home, then things get a lot more subjective…. Where you buy, how much you pay, how much rental income it generates, etc. can all be flexible because the ROI is a secondary factor.
- Make money: If your focus is primarily financial, the dynamics change considerably. And since this was our primary motivator for getting into it, so that’s what most of the rest of this article is focused on.
In the past, and especially during the pandemic, it was kind of hard NOT to make money doing short-term rentals. However, the current landscape is a LOT more competitive, and the best opportunities are a lot less sexy…
Similar to the way a lot of successful real estate investors buy things like apartment buildings in Cleveland, OH for Section 8 housing, or light industrial buildings in the Riverside, CA – a lot of the opportunity that currently exists is in STRs is not in top-tier vacation markets.
For example, you might have a great opportunity in a college town in rural Indiana or in a small metropolitan area such as Memphis, TN. (Tyler is really hot on Milwaukee, WI!) But a ski chalet near the slopes in Colorado may not give you as great of a return.
How we finance our properties.
Determining the financing structure - whether paying in cash or opting for a mortgage - depends on what you prioritize, be it cash flow, cash-on-cash return, or other financial aspects.
We have only ever done a 10% down payment with the rest financed, and we likely will continue with this strategy. The reason for that has to do with the correlation between initial investment and revenue generation.
With STRs, a nicer/more expensive property can have a much more significant impact on rental revenue than it does with long-term rentals. For instance, investing an extra $100,000 in an long-term rental may only increase rental income by 10%, but with an STR it could potentially DOUBLE your rental income!
Think about it…. If you’re in the top 10% of properties for a given market, the price and occupancy are going to be SIGNIFICANTLY higher than a property that’s middle of the road.
Take the Palm Springs area as an example (where one of our properties is located). During spring break, Coachella, etc. EVERY property gets booked. But during the middle of August, only a small percentage of the available rentals get booked. And if your property gets consistent bookings year round it’s a major difference in profit. Because the largest expense with an Airbnb is the mortgage (assuming you finance it), which is a fixed cost. Variable costs are significantly less. So the best properties make a LOT more profit than the average ones.
In Lake Arrowhead, CA the average revenue for a 3 bedroom property is $50,000-$70,000 – but some properties do $150,000 per year!! So let’s imagine it will cost you an extra $200,000 to buy a home with lake access that is walking distance from Lake Arrowhead Village. That will add ~$1,500 to your monthly payment (at current interest rates of 7.5%), which is an additional $18,000 per year in expenses. But you could add $50,000+ to your top line!! (Of course your variable costs would moderately increase, mostly just due to being booked more often – but nowhere near enough to negate the higher revenue). And at 10% down, you only need to come to the table with an additional $20,000 in startup capital to get into a significantly better property. Not to mention you will then own a much more valuable piece of real estate!
Airbnb expert Danny Rusteen (https://optimizemyairbnb.com/) says, “If you buy the right home, in the right micro-neighborhood, in the right market, you’ve done most of what you need to set yourself up for success.”
And one last note on financing… it can can cost upwards of $30,000 to furnish and decorate an STR from scratch (and that’s assuming you don’t have to do any renovations). So that is another reason why we do a low down payment. If you have limited capital (which we definitely did lol), skimping on the furnishings and décor can have a really significant impact on whether or not you recoup your startup capital. And if you don’t believe me, just read our reviews and notice how many comment on our comfy mattresses!!!
How to know what’s a good investment?
If you’ve ever spoken with residential real estate investors, you know that long-term rental investments tend to follow long-standing rules/guidelines such as these:
- A property should rent for 1% of the purchase price monthly.
- A rental should have between a 4 and 7 gross rent multiplier.
But STRs don’t have such well established guidelines. So here’s mine:
- The annual revenue for an STR should never be less than 20% of the purchase price.
For example, a $500,000 property should ideally yield at least $100,000 in rental revenue annually. This is why we are more interested in Milwaukee, WI than Big Bear, CA – because if you buy a cabin in the mountains near a ski resort for $700,000, it might be difficult to get $140,000/yr in rental income. However, if you buy a house in Milwaukee for $195,000, you have a much better chance of grossing $39,000+ in revenue. And that 20% mark is generally the threshold for good returns.
Jenni Vega is an STR investor, and she uses this rule:
- Buy a property for under $400,000 that will gross at least $100,000
- Source: https://podcasts.apple.com/us/podcast/biggerpockets-real-estate-podcast/id594419649?i=1000622483601
REALLY good properties will gross 30%+ of the purchase price annually. And yes, those deals are out there! And if you’re not sure how to tell what a property has the potential to bring from a revenue standpoint then consult with a more experienced investor, especially in that market. There are all kinds of groups/communities of STR investors, and most of them will talk to you. There are also great tools like Airdna and PriceLabs that give you lots of data and take most of the guess work out of it.
Last thing… it’s NOT passive income.
Managing an Airbnb property demands a substantial time commitment. While we don't mind the effort, as we sought flexibility rather than a fully passive income source, it's worth noting that overseeing two properties typically consumes 5-10 hours each week. Opting for a fully passive approach can significantly impact your returns, considering management companies often charge steep fees (aka more expenses) and don’t provide the same level of quality and service, which leads to fewer bookings over time due to negative reviews (aka less revenue).
The reason that (in my opinion) full-service management companies aren’t a great option is because there isn’t a lot of money to be made on each property, so it becomes a volume game. Which is bad for quality…
Don’t believe me?? Try this… Go on Airbnb and search an area with a high density of rentals. Then find all the properties that have less than a 4.7 rating, and the vast majority of them will be managed by Evolve, Vacasa, or some other big management company.
Even small rental management companies often don’t do a very good job because they are under-resourced. So even a small portfolio spreads them thin. And your property can suffer as a result.
To wrap up…
I hope this helps give you some insight into the world of STRs/Airbnbs as an investment. And that the info will help you arrive at your own decision as to whether or not you should buy one of your own.
And if you’d like to explore it with us, we’d be happy to help! Especially my husband, Tyler. is an enthusiastic resource who can talk your ear off about it if you’ll let him :).