Is Airbnb a Good Investment?
Maybe you’ve stayed in an Airbnb or two. Maybe you’re even a big fan. But have you ever considered investing in your own Airbnb?
Many of our readers have probably asked themselves at some point whether running an Airbnb would be a worthwhile investment of their time, money, and energy. Perhaps some have deeply investigated, while others may only have idly dreamed about the possibility.
This week we have two exciting pieces of news for you. First, we’re going to show you a complete revenue projection tool we’ve developed for potential Airbnb owners, and second we will hear from a real, live owner of an Airbnb about their experiences of hosting.
Running an Airbnb isn’t for everyone. It comes with risks, and it takes work, but as a member of the BudgetBakers team will explain through their account of being an Airbnb owner and Host over 6 years, it can be profitable – if you’re willing to take risks. Before diving into an investment, though, you need to understand what the costs will be, what the risks are, and what the downside is. That’s what we’ll go over today with our complete Calculator for Airbnb Revenue.
Is Airbnb a Good Investment?
It would be cheap to state simply that “it depends” when asking such questions, but in this case all Airbnbs are truly not created equal. As we go over the Airbnb Revenue Calculator, you will become aware of how different rental scenarios can have vastly different outcomes. A revenue projection is only as good as the assumptions behind it, which is why it’s critical that you thoroughly explore the realities behind any risky investment before pulling the trigger.
With that, let’s dive into a thorough overview of how the calculator works, and explore its many advantages (and limitations!), along the way.
What the Calculator Covers
As you can see, the calculator involves a number of important base assumptions about the property you would be investing in. Among these is the price, the average rate you’d be able to charge for it, the occupancy rate (how often it is rented), and the various costs associated with owning and operating an Airbnb, such as Airbnb fees, insurance, upkeep, and per-booking costs such as cleaning.
Many of these figures are standard multiples, such as property insurance; local prices may differ. You can copy and alter the sheet yourself to reflect a different local reality, however you should note that these costs do tend to scale in connection with the occupancy rate of the property, meaning that the more money you make, up to a point, the more it will cost you.
The other variables the calculator includes concern your potential income. There are two main sources of income: per-night fees, and per-stay charges, both of which go to the owner. In this calculator we have left out Airbnb’s guest fees, so you should consider that your stated price will not reflect the final price a guest will pay; they must also pay the Airbnb fees. Many non-host travelers do not know that Airbnb charges both the guest and the host a fee, and these fees vary depending on many factors, such as local conditions, the host rating, and the occupancy rate. There is no published price list from Airbnb, so these are fees you would have to account for as undetermined variables.
What is Not Included
For purposes of simplicity, local charges such as tourist taxes, property rental tax, and income tax are not accounted for. In some countries and states, Airbnb income is seen as “earned income,” subject to income tax. In others, it’s “unearned income,” subject to a different tax (usually a lower one). Some markets have changed their approach to Airbnb over the years, so you should note that the tax and fee situation can, and probably will change.
This is especially important if you’re trying to decide between renting out a property on Airbnb, or doing a traditional rental. Traditional rentals in many territories are taxed as unearned income, subject to a lower tax rate. In others, they are subject to a special surcharge. Your local laws can determine whether your Airbnb plans are viable. You should never overlook this.
Key Top Line Variables
It’s also important to distinguish between your “top line” variables, and your “bottom line” variables.
Top line variables are the fixed costs that impact the whole equation, and can make or break your investment. These are costs which are fixed at the beginning, and can’t be easily changed. In particular, top line variables are the cost of the property, the cost of borrowing, and the startup cost of the Airbnb: or how much money it will take to get the flat or house ready for your first guest (such as getting furniture, renovating, etc). For the purposes of this calculator, we have simplified these to just two variables: the cost of property and the cost of borrowing.
A good rule of thumb is to assume that you will spend a minimum of 10% of the cost of the property on necessary renovations and furniture. This is also why many home loans and property investment loans offer a “bumper” loan, or a part of the loan which can be used for upgrading the property or making it suitable for renting. These bumper loans typically are for 10-20% of the cost of the property, and may come with higher fees and a shorter period of repayment. Make sure you have the funds or access to borrowing necessary to make the property viable as a rental first.
We arrange it this way because the total cost of owning a property is heavily dependent on how much you pay for it, or how much interest you pay on a loan. As you can tell from working with the sheet, a fixed mortgage rate of just 1-2% more or less can account for your entire profit margin.
As you investigate the calculator, you will see that the top-line expenses shape the overall results massively. If your top-line expenses are too high, then the investment just will never make sense, no matter how rosy your projections may be. Cost up front is what normally makes an investment a winner or a loser. Pay too much at the beginning and you’ll never recover your investment. Pay the right amount, and your investment can become very profitable.
In this respect time is also your friend. As you pay down a mortgage, you gain equity in your property. As you gain equity, you get more access to credit, and more security. If needed, you can renegotiate your mortgage to take out equity, or pay it off early to reduce your payments. This is why an Airbnb that is a few years old may already be much more profitable than one that just started. As property prices rise, having access to a property at a fixed cost becomes more valuable.
Time is the Key Ingredient for Profitability
Think of this in terms of an example, which is based on the one our team member is going to give in our follow-up post.
imagine a property that you are looking at today. It’s a studio apartment in a good neighborhood. The local prices show that it is worth about 150,000 EUR. Here is the calculation on a $150,000 property that is break even, meaning it is just paying for itself, and not costing you anything out of pocket, but it’s also not generating any profits.
All of the variables represent the current market conditions:
|# of Rooms
|Average Base Rate
|Total Nightly Fee
|Airbnb Avg Fee
|Net Adjusted Income (Year 1)
As you can see, when we look at this example scenario, even at 70% occupancy and $41 per night (and this is not including taxes and tourist fees), we are only at break even.
Now let’s look at that same property, but assume it was bought 5 years ago for only $60,000. The benefit here is that 1) the property is now well reviewed and established, which ups the nightly price, and 2) the initial cost of the property is much lower, because it was bought before the current market boom.
|# of Rooms
|Average Base Rate
|Total Nightly Fee
|Airbnb Avg Fee
|Net Adjusted Income (Year 1)
As you can see, very little has changed, but because of the lower cost of the mortgage, this property now returns over $8000 year, meaning that just the price of the property and when you bought it would make the difference between a tidy profit, and nothing.
Key Bottom Line Variables
And it doesn’t stop there. Next is the “bottom line” variables that determine the performance of your investment. These include things such as the per-night rate, the occupancy rate, the guest fees, the per-stay fees, the taxes, and the depreciation of the property and costs of maintenance and repair.
These are “ongoing” charges and costs that scale with the number of people you host. If you host fewer people, your costs go down, but your income also goes down. If you host more, your costs will go up, but only to a point. This is why as you play with the calculations you will see that bottom line variables have less of an impact than the top line. If you strike a balance between occupancy rate and prices, you will find the “sweet spot” that will consistently deliver you a profit.
In general, we can say that in most scenarios, a higher occupancy rate is going to deliver more profit than a lower one. Thus pricing your airbnb for a balance between high occupancy and a fair rate is very important. However no amount of fiddling with the prices will change whether you paid too much for the property to begin with.
Understanding and Pricing Risk
A key thing that many Airbnb owners fail to understand at the beginning is that Airbnb is a risk.
Not only can you fail to make money with the property, losing your investment, but you can also potentially lose more than you planned to invest in the first place. That’s why it’s very important to simulate scenarios in which your property performs well, and scenarios where it doesn’t. Changing your occupancy rate and playing with your per-night costs can give you a better idea of what the possible outcomes will be.
You should also be realistic about “pricing risk.” This means understanding the cost of taking a risk, if that risk should be realized. For example, by comparing the optimistic and pessimistic scenarios for occupancy to the average rental income for your area, you can understand whether you even stand to gain much from doing Airbnb over a traditional rental arrangement.
If you end up making the same income on a traditional rental as you would an AirBnb, we can say that the risk involved in an Airbnb is not worth it.
In addition, you can project what will happen if your Airbnb does fail. If, for example, Airbnb is banned in your area, or another global pandemic should kill the tourism business, you need to have a viable backup plan. A great many Airbnb hosts went out of business during the Covid 19 Pandemic. But many of these simply transitioned to long-term rentals. While they didn’t make the same profits they used to, they did not lose their properties. Those who were overextended did lose everything.
A surprisingly large number of Airbnb properties are not more profitable than traditional rentals, but Airbnb carries much more risk. A problem with the property that prevents it from being used costs you all the income from the guests you have to turn away. Not only that, but a few bad reviews can also sink your listing, and the you’ll lose the cash you invested to make the property viable. These are factors you must price into your decisions. Can you survive financially if Airbnb doesn’t work out? If not, you shouldn’t be doing it.
This is why many Airbnb owners eventually switch to long-term rentals. Aside from the more stable income they provide, they also involve much less financial risk, and much less day-to-day effort for the income they generate. As your listing becomes more “mature” meaning the price of a monthly rental increases, while competition for nightly rentals also increases, it becomes more likely over time that your property would be more profitable as a long-term rental than as an Airbnb. That means it pays to go back to your assumptions and recalculate from time to time, to make sure you aren’t taking large risks for no real advantage.
The Sweet Spot
Another key thing to keep in mind with Airbnb is that every market is unique. The local tourist or business travel industries are different, and can’t be generalized. If you have a strong understanding of what your local market needs, you have a better chance of a successful listing.
As you’ll learn working your way through the calculations, there are “sweet spots” to every market where a certain kind of property can be very successful. For example, it may be that large apartments in central areas perform well in Prague, where many large groups of people travel together for stag parties or corporate events. However it may also be that small one-room apartments in more remote areas are most popular in Paris, where more individual travelers are seeking quiet neighborhoods.
There are other important variables, such as the high seasons for your market, be they winter or summer, and any additional costs (such as for heating and air conditioning) that this might bring. Remember that many of your monthly costs are fixed, so the average nightly occupancy really means average. Your high season will probably not last all year, unless you are in a market or location where there is always high demand.
Insight into your local market is very important, and nothing can substitute for your own research. The financial calculator is only as good as its assumptions, so make sure your assumptions are logical and based in facts.
In our follow-up posts, we will dive into individual examples of listings in major markets, and explain in detail how we assess whether a property is viable on Airbnb, and how we came to this conclusion. Hopefully by then you will have a very good understanding of the thinking you will need to do about whether Airbnb is right for you.
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