Investing in Airbnb Property: A Beginner’s Guide to Passive Income
New Passive Investor Circle members wanting to invest in real estate syndications typically look for ways to build cash flow without having to rely on their full-time job.
In the past, I’ve given information about the different assets classes we’ve invested in to help educate our group including:
- apartments
- self storage
- hotels
- mobile home parks
Another hot asset class involves Airbnb investment property (or short term rental). The good news is that you can do this passively (via syndications or funds) or as an active investor.
If you choose the active route, then you’re able to lower taxes using the short-term rental tax loophole.
Related article: Short-Term Rental Tax Strategy For High-Income Earners
If you want to invest in Airbnb property but not sure how to get started, this article should help.
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Sign up for my newsletterWhy Invest in Airbnb Property?
Whenever I tell friends about an upcoming trip, one of the first questions asked is, “Are you staying in a hotel or Airbnb?”
The idea for Airbnb started in 2008 by two industrial designers, Brian Chesky and Joe Gebbia, who recently moved to San Francisco.
In order to make money, the pair began renting out their apartment to people who couldn’t find hotels to stay at while attending nearby trade shows. They quickly saw a potential market for the idea and developed a website called airbedandbreakfast.com.
Since then, Airbnb has become one of the best places for online vacation rentals connecting both property managers or real estate investors and travelers in one place.
Due to their popularity, the site has started to catch the attention of real estate investors.
One of their strategies involves investing in Airbnb property with options to either:
- rent it to short-term tenants
- flipping it
- rent it to long-term tenants
Many high-income professionals are considering Airbnb investing in order to develop additional revenue streams along with benefiting from the tax advantages.
Click HERE to learn more about our latest STR (AirBnb) Fund II
5 Steps to Finding the Best Airbnb Property Investment
Whether you choose to invest actively or passively (i.e. Airbnb fund), these 5 steps will help you find the best ones.
#1. Location, location, location
As with any type of real estate, location is one of the top factors to consider. Especially when you’re considering Airbnb listings.
Questions to ask about a potential investment:
- Is it in a popular location (i.e. Los Angeles, Las Vegas, New Orleans)?
- What type of visitors? (tourists, locals, business)
- How many tourists visit annually? Has this number increased or decreased?
- Desirable, high-demand areas?
Ideally, the key would be finding locations where visitors are present year-round.
Examples include:
- cities known for holding major events (sports, conferences, etc.)
- location near a city center
- beaches
- national parks
Location also involves identifying cities that allow Airbnb investments to begin with.
#2. Supporting laws and regulations
Before considering a property to Airbnb, it’s a good idea to research the area’s laws and regulations regarding vacation property or short-term rentals.
These can greatly vary from location to location given the fact that Airbnb rules are often based on short-term rental local laws in each location. Also, keep in mind that certain places prohibit Airbnb rentals where others might require a license before starting an Airbnb business.
There are general rules that apply to most locations that you can use as a starting point in determining whether or not listings are allowed.
Other things to look for include:
- If certain locations have laws in place to govern the practice via business licensing, zoning regulations, and hotel ordinances. If you need further help, check out the Airbnb Help Center.
- Understanding the taxation rules. As there’s some areas that requires Airbnb to collect occupancy tax on your behalf and others making hosts pay taxes via their Airbnb income.
- Compliance with insurance and safety requirements. Each location has its own safety regulations for tenants (i.e. fire exits, smoke detectors, etc.). Make sure that you comply and obtain the proper insurance to ensure guests’ safety.
#3. Property type
It goes without saying that a good investment in Airbnb property is one that can charge premium rents thus producing a large amount of rental income. But that’s not the only factor to consider.
It’s also smart to look at both the profitability and occupancy rate.
Even though you may be able to earn a decent profit with a high average daily rate and low occupancy rate, ideally finding a good place where there’s a balance would be better. A specific area like this is where your property could be consistently occupied which generates a positive cash flow.
Keep in mind that an occupancy rate of 100% would be great to attain but it’s simply not realistic.
#4. Develop a budget
It goes without saying that creating a budget for both the property and ongoing expenses is a must. Not only must you factor in the mortgage payments, taxes and insurance, but also the ongoing expenses to keep the property occupied.
If done correctly, short term rentals can be a great investment strategy and it’s best to only consider properties that fit within your budget that won’t compromise your finances.
#5. Analyze properties
Once you’ve determined your budget, it’s time to look for rental property, but more importantly, the right investment.
A great place to start is with online listings or use a property finder tool. It would also be wise to consider hiring a real estate agent to help you undertake the process, especially if this is your initial investment.
Typically, agents have access to the best deals on the real estate market.
They can also assist by:
- negotiating the best price
- advising on top neighborhoods
- informing you of local laws and regulations
Property analysis takes a lot of time and effort. And depending on what market you’re targeting, there’s a possibility of the property being sold before determining whether it’s worth the investment.
The good news is that there’s been an advancement of real estate investment tools like AirDNA. These tools provide reliable data giving predictive analytics making it efficient to grow a vacation rental business.
Click HERE to learn more about our latest STR (AirBnb) Fund II
Pros And Cons: Airbnb Investment
As with any type of investment (not just real estate), there are pros and cons to be considered before investing.
Pros To Airbnb Investing
#1. Potentially high profits
When comparing an Airbnb investment property vs a long-term rental, you can typically make 2-3x the revenue. This is one of the top advantages of implementing Airbnb investment strategy.
#2. Inflation hedge
Having Airbnb property in your portfolio is also a great way to hedge against inflation. Even though prices continue to go up each year, the mortgage payments stay the same.
Owners are also able to vary the nightly rate to adjust for the changes in costs that will affect maintaining the property.
If you want to learn more about inflation and what you can do to counter its effects, I take a deep dive in the video below:
#3. Airbnb marketing
With regards to real estate investing, the tenants pay the bills. Active investors typically have to pay for advertising in order to keep the property rented out.
One of the great “pros” with an Airbnb property is that you’re able to utilize their platform for free to list your property.
They also provide tools such as a calendar scheduler and customizable searches in order to make a great user experience.
#4. Lower risk
Typically, short-term rentals (STRs) offer less risk vs long-term rentals.
For example, if a tenant in a long-term rental can’t pay the monthly rent, you may have to pay legal fees in order to evict them and also miss out on revenue.
Airbnb rentals present you with lower risk because:
- tenants pay in advance
- it’s easier to find a renter for a short period of time
Cons To Airbnb Investing
#1. Unpredictable income
Unlike an apartment or other long-term rental, STRs have a more unpredictable income.
With STRs, you’re never guaranteed to fill your entire calendar.
Also, other issues could affect bookings such as natural disasters.
For example, I know someone with an Airbnb in the Yellowstone area. For several months, he wasn’t able to book tenants due to flooding in the area.
#2. Time consuming
If you plan on self-managing your Airbnb property, then it can take a fair amount of time.
If you want to use the Short-Term Rental Tax Loophole, then you have to do this in order to pass one of the seven “material participation” tests.
Managing can involve:
- laundry
- cleaning
- repairs
- booking tenants
- answering inquiries
If you have no interest in utilizing the tax loophole, then hiring a property management team will be the way to go.
#3. Keeping up with laws, regulations, and taxes
As previously mentioned, it can be difficult to navigate the local laws for short-term rentals depending on the location.
Make sure you perform research before deciding to invest in certain areas.
Want To Learn More About Passively Investing in Airbnb Property?
Click HERE to learn more about our latest STR (AirBnb) Fund II