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Are you considering buying a house for Airbnb as a rental investment?

Owning a vacation rental property to rent out as an Airbnb vacation rentals has proved to be quite profitable for many investors around the world. But how does one achieve success in the Airbnb investing world, and is it worth opening an Airbnb?

Note: For the intent of this article and most of our posts, I focus on the term Airbnb as a common reference term when I am actually referencing all vacation rental properties or short term rentals. Airbnb is now the most common term used in discussion, and Airbnb is the top brand name to vacation rentals, much like Kleenex is to tissues.

15 Things You Need to Know Before Buying an Airbnb Property or Vacation Rental for Investment in 2022

To help you in your vacation rental business journey, we gathered a list of 15 things you should know before buying an Airbnb investment property.

Grab a coffee - this one is about a 10 minute read. Don’t forget to download the free budget template too.

1. Research How An Airbnb Investment Property Works

Before jumping right into buying an Airbnb investment property or rental property investment, make sure you have a good understanding of how it works, and what work is required FROM YOU to start-up, run and manage this business.

The concept behind vacation rental investing and making money from an Airbnb investment involves purchasing a property and putting a part or all of it on short-term renting platforms including Airbnb, VRBO and various direct-listing services where you manage bookings on your own website.

For those without the upfront capital to purchase an investment property, Airbnb arbitrage is the other option, where an investor rents someone else’s property as a full time renter, and then sublets it out as an Airbnb. Arbitrage involves no upfront property purchase, but a lot more research into bylaws, commercial leasing, insurance and having a great sales pitch to convince a landlord to rent to you knowing you will be running it as an Airbnb.

Here’s a great introductory article with more information on Airbnb Arbitrage from Kyle the Fearless Investor.

Airbnb rental arbitrage or subletting can only proceed with permission from the property’s landlord and you will quickly be shut down if you are found to be running an illegal sublet. The landlord or building manager can evict you and your guests immediately if you are going against the rules or trying to sublet without permission and as soon as a guest reports this to Airbnb, your listing will be cancelled on the spot. This can result in not just this listing but ALL of your listings and accounts being cancelled from Airbnb or VRBO, so it’s important to do things the right way, from the start.

To get the most out of your investment, research what a vacation rental property is, how it works on Airbnb vs VRBO and their fees, create a start up budget estimate and weigh out the pros of running an Airbnb rental instead of traditional long-term renting. This can help you decide: “Is it worth opening an Airbnb rental or not?”

(CLICK HERE for my free starter budget excel template and to view the new Start-Up guide)

Consider the following in your research

• Start up costs for the property purchase

• Ensure you know the licencing rules for the city/town and any HOA or community requirements for specific buildings or neighborhoods. You are responsible for this research, do not rely on your realtor to tell you “oh ya you can do airbnb here” without checking on the licencing and if it’s legal or zoned in this area. Keep in mind that many towns and HOA buildings are coming up with new rules to restrict or ban Airbnb rentals so be sure to search for any recent news in your area as well and ask lots of questions of your realtor and city to see if there’s any potential changes coming so far.

• Budget for furniture, supplies and decor

• Budget and timeline for any renovations - how soon can you furnish and get your rental up and running after purchase and how much do you have set aside to carry the mortgage and fixed costs until you have rental income (you should have at least 6 months set aside on top of any renovations/furniture budgets)

• Research similar Airbnb listings in your area, look at their rates, their calendars, see how busy they appear to be for different months, look at their cleaning fees

• Run the numbers to compare Long-Term Rental income vs Short-Term Rental income. If the rules suddenly change to ban Airbnb’s in your area, can you still make a profit if you rented the property long term? Or is it easy to re-sell and get out of this market?

• Check into cleaning services and property managers, make sure you will be able to find cleaners, especially if you are looking in remote areas, cabin retreats, small communities. If you can’t be there to clean and manage, can you realistically find someone to do this for you?

To make things easier, learn about the process of listing a property, the fees charges, and the host requirements that need to be met on Airbnb and VRBO for things like SAFETY and CLEANING standards.

2. Understand That Airbnb Investment Is Not A Passive Investment

Passive investment broadly refers to long-term investment with minimal touch points or active work along the way, and is most common on the stock & equity market. It involves a buy-and-hold strategy, usually of market indices or mutual funds with minimal trading.

However, buying an Airbnb property is not a passive investment. Airbnb is a short-term rental, and investing in it involves effort, hands-on work and constant effort and focus to keep it updated and running. This means that you have to be available all the time to manage your property and welcome guests or have a reliable property manager and cleaning and maintenance team.

If you want to be hands-off owner and hire a full service property manager, you can expect to pay 25-40% in gross revenue fees to this person to do the management for you, so this is a big consideration in the value and budget vs operating it as a long term housing rental, which is more passive and cheaper for property management (average 10%-15% monthly fee).

There are other options such as Co-hosts or guest service administrators (like myself) who charge a flat rate or smaller fee but provide just the customer service and active booking management for calendars, rates and bookings, but the owners still need to be handling things like maintenance and on-site issues on a regular basis.

Ready for 1:1 Coaching to help you through the start-up process to Launch your Airbnb?

Meet with me by zoom to walk you through the Launch Process from Start to GO with your first guests? Ask all the questions, review what’s in our start-up guide, assist with design and staging suggestions and basically any info and tools you may need to get to the launch point for your Airbnb.

I offer various start-up assistance packages and coaching to help you with your unique space. Packages include zoom chats and unlimited email q&a with listing reviews, marketing suggestions and more.

I also FEATURE our coaching student listings right here on the website and my social media.

3. The Airbnb Business Is Highly Competitive

Currently, Airbnb operates in 220 countries with 7 million active listings in 100,000 cities globally. Their 2021 statistics revealed around 2.9 million hosts, with an estimated 14,000 new hosts that joined each month. These numbers prove how fiercely competitive the Airbnb rental business can be. This doesn’t include VRBO, Hotels or other direct bookings that are also competing for the same travellers and coming out of a 2 year hospitality decline from Covid.

To become a successful Airbnb property investor and host, you will need to bring something unique to the table to stand a chance against other hosts. Your listing needs to stand out or have an ideal location and amenities. Although differentiating your rental by offering unique and quality services would cost you extra money, the result would be worth it to set yourself apart by investing in something like a hot tub or family games room for your rental.

Know who the travellers are to your area and how to best outfit your space to target them. Make sure you know the seasonality for your rental as well. Does your rental appeal to year-round business travellers in the area? Is it a seasonal beach cabin that likely will be vacant outside of summer season? You need to know who your Airbnb appeals to, who is renting in your area and when, and how to stand out to get the most bookings.

4. Formulate Investment And Business Strategies

In order to make your Airbnb investment profitable, map out a basic business plan and see what strategies will work out for you.

First and foremost, set realistic goals of what you want to achieve with a proper timeline. Be detailed but realistic while planning. Include not only specific targets and goals but also possible setbacks in getting started and starting to generate income, with solutions and contingency budgeting to minimize negative outcomes.  If you start pre-accepting reservations for summer before your renovations are complete, only to be hit with a 2 month renovation delay, can you float these extra carrying costs? You will also have to cancel your incoming bookings which will negatively impact your listing and hosting status and can result in a full cancellation or de-listing of your Airbnb on the website. It’s best to wait to launch until your are sure that you will be ready for guests.

You should also check how much capital you will require to purchase an Airbnb and initiate the business (free budget template download here).

Furthermore, talk to other hosts that have been investing in Airbnb. This will give you insight into what strategies work for them and how you can benefit from them.

Lastly, you need to calculate occupancy rates and devise pricing strategies to generate profits and keep the business running during low seasons.

Consider what your maximum per month occupancy will be (90% is a good target as you’ll have a couple single vacant days and possible maintenance/deep cleaning days needed between longer stays). If you have seasonal fluctuations, will the revenue from peak season be enough to carry the costs through slow months?

5. It’s Better To Start Small

Before buying a vacation rental, experiencing how it works would help you decide whether you want to buy an Airbnb investment property. For beginners, it is recommended to renting out another listing first in the area you are shopping in and see how things work from communicating to the host, to what they include and what your guest experience was like vs expectations you had. Think like a guest and a planner at the same time, what do you like, what would you skip for your rental or what would you want to add that would make it even better?

You don't need to be a professional in the real estate field to get into this business. But improving skills such as customer service, management, etc., step by step, can help you become comfortable with investing.

Your Airbnb is a business in hospitality, which means customer service first and foremost. You need to be able to communicate, to understand cleaning requirements and guest expectations, to be positive, and provide customer service at most hours of the day and night, while setting expectations with your guests of times when you may not be available. If you are not willing to be quickly available to reply on check-in days, to cleaning concerns, or issues that happen on evenings and weekends, you need to consider having a co-host or property manager who is readily available to answer messages promptly, especially on evenings and weekends.

By starting small with one space, potentially a smaller rental space, it’s a good way to test the water and see if you enjoy the process of setting up, managing your listing and bookings and connecting with guests. You don’t really know how much time and effort it will take until you get started, so it’s best to start small and focus on being prompt and friendly for all guest communication.

6. Read Up On HOA Rules And Permits

I mentioned this at the start but I can’t stress enough, if you are buying an Airbnb investment property within Homeowner Association’s(HOA) jurisdiction, know what their rules are. Don’t just ask on facebook or ask your realtor, you need to go straight to the source. You must do your due diligence about all legal and permitting issues for any property.

Since you will become a member, you are bound to pay monthly or annual HOA fees for services and follow the rules set by the board of directors and in general, most HOA areas are fully restricted against rentals and Airbnb, and you would be better to avoid these properties as much as possible in your search. In addition, HOA can vote to change the rules at any time and require an immediate end to Airbnb rentals even if they were previously accepted.

Also, make sure to check with the authorities whether listing your property on Airbnb is allowed or not and if any licencing is required.

It is not worth fighting after the fact because you “didn’t know the rules”. You must fully research the rules yourself upfront and don’t rely on second hand advice or input as your approval. Just because you see other airbnb listings in the building does not mean that it’s ok, or that they are operating legally.

Fines can be upwards of $500 per day in some cases from HOA or City Ordinance, in addition to lost revenue from cancelling guests. It’s just not worth the headache to find out the hard way because you didn’t do thorough research up front.

7. Know Zoning Laws And Airbnb Regulations In Your Area

In some countries and cities, Airbnb short-term rental operations are not legal. Although legal in most North American cities, restrictions are imposed by the law and are different in every location. Some cities enforce an outright ban of all Airbnb or VRBO short term rentals. Other cities restrict the amount of licences per year and Airbnb works with these cities to remove unlicensed properties from their platform.

Other resort communities like those in Florida, welcome and embrace all the year round tourism they can get, and are a hub for vacation rentals even in HOA buildings. Florida also has a number of Condo-tels that are condo residence buildings operating like a hotel or resort for short term rental owners.

Cities like Los Angeles, New York, Dallas, Austin, Seattle, Barcelona all have extensive rules or outright bans of Short Term Rentals and the listing platforms like Airbnb will not even allow you to post a property that falls in these areas on the map.

Housing shortages, negative impacts to neighbourhoods due to parking and parties, or a negative impact on a healthy hotel industry, are all reasons wy cities are restricting or creating new regulations on Airbnb Investment properties and any short term rentals.

Regulations can include a limit over the number of guests allowed, duration of renting (14-30 day minimums), purchasing properties in a specific location, etc. Such restrictions vary among laws of different zones, cities, or countries. It is essential to know about the rules for the specific property location before buying an Airbnb property.

In my local region we have several different small cities. Permits range from non existant to $300 to $1500 per unit for the year. Every single location is different and be sure to add these considerations to your operating budget.

8. What Is The Demand For Rentals In The Market Area, Will It Get Booked Year Round With Guests?

Staying up-to-date with the market, attractions, events and seasonaility of your area can assist in recognizing demands for Airbnb rentals and planning your investment.

You should look out for the number of listings and quality of other Airbnb rentals and the pros of short-term rentals over long-term ones. Moreover, check the strength of tourism and if people are willing to opt for vacation rentals rather than hotels. This helps in lowering the risk of high vacancy rates.

Check out tools like Airdna to get a rough idea of pricing and occupancy and review listings in your area. Keep in mind that Airdna does not include hotels, guests who are direct booking and bonus amenities that affect pricing from some properties more than others.

Also make a note if there are big annual conferences, festivals or events that bring in extra people at other times of the year.

Make a list of 20 Airbnb similar properties listed in your potential area and make a list of their average rates month by month and peek at their calendar to see if it looks like they have bookings coming in already for lots of dates. It’s not an exact science but it’s a good start to get the most accurate, local info.

9. Make Sure You Can Get Insurance

The popularity of the Airbnb Investment industry and short-term rentals, has created a market demand that the insurance industry has not been able to keep up with.

Many companies have no options for short-term rental insurance or adding a rider to your homeowners policy.

Some oversaturated or high-risk areas for natural disaster (hurricanes) are outright refusing to issue new policies any longer for certain states like Florida.

For international listings in the Caribbean, you may find it difficult to get insurance or financing in some countries at all, so consider this risk factor as well.

Airbnb has a “cover me” insurance for some guest damage and liability but you must have your own protection. VRBO DOES NOT offer any protection for hosts, so again you need to have insurance coverage and consider your security deposit charge for guests.

A short-term rental insurance covers your property and liability exposure throughout the entire time it is rented.

Acquiring short-term rental insurance coverage and your current homeowner insurance policy can protect your assets in case of an accident. Prior to buying an Airbnb investment property, check whether you can get short-term rental insurance to ensure a safe investment and that the costs are manageable with your expected budget and overhead operating expenses.

10. Do You Have Enough Budget To Furnish And Decorate?

Your capital purchase cost is not just about buying an Airbnb investment property but also for everything involved in getting furniture and amenities. You may be lucky in finding a fully furnished, turn-key rental with minimal changes needed, but often you will be starting with an empty home.

We go through the budget planning and prep details in our Start-Up guide in detail.

In most cases, even for furnished listings, you will need to do some basic refreshing, deep cleaning and maintenance before listing and you need to have a little more character than just bare-bones thrown-together second hand furniture to be able to attract the most guests.

• Re-painting

• Adding new furniture (and how long will it take to arrive before you can rent)

• Deep cleaning filters, appliances, top to bottom thorough cleaning

• Damage repair and replacing worn out items

• Replacing smart locks, adding security cameras,

• Monthly costs for utilities, Wi-Fi, pool heating, HOA fees

• Stocking all of your first amenities (3 sets of linens per bed, fully stocked kitchen, cleaning supplies, etc)

11. Know That Property Management Takes Time And Effort.

Before you make a decision to buy, will you be DIY’ing the management and cleaning or hiring help?

I manage 5 properties and the launch process is the most time consuming (allow at least a month to get all your supplies, your cleaning, your photos, your listings up and running, descriptions completed). On average between shopping, cleaning, research, set up, the actual listing, etc, you are going to have a full-time extra job until you get it launched.

Part of my service package as a guest booking manager includes the option for an initial set up, staging and deep cleaning package, so the owners pay me to go on-site for a weekend to do the staging, the clean up, give them their final shopping lists for supplies, and arrange the photos and then complete the listings and house rules and guides. Basically taking all those admin hours away from the owners and just doing some basic Q&A and task lists for them to finish up.

If you are not paying for this service, you need to allocate the time to do all of these things as quickly as possible, so you can launch and get income coming in as quickly as possible.

After you launch, you need to allow a couple hours per week to respond to guest inquiries (which are time sensitive and must be done promptly), communicate for check ins and check outs and follow up with guests for reviews. You also need to be available for any issues when guests are staying with you, to call the plumber or deal with any problems.

You will want to regularly update your listing, calendar and rates every week to keep on top of the schedule (or look into programs like Hostaway or BeyondPricing that can help automate some of this but adds another cost to your expenses)

Cleaning - this is the big one for time. Can you do it yourself and are you available between 11am-3pm on all check out days to do it for same day turnaround? If you have a full time job, or are not local, you must hire a good, reliable cleaning company to manage your cleaning.

Even a basic studio or 1 bedroom rental is going to take 90 minutes or longer for cleaning and laundry per guest stay. A large house will take several hours and in many cases a same day check-in/check-out will not be possible, so this also impacts your revenue considerations in your budget.

You can either opt for management companies or self-management to take care of your property’s condition, calendars and rentals. Even though management companies offer professional services, the downside is the high percentage of service fees they charge. 

This is the reason why many Airbnb investors go for self-management. However, property management takes time if you start fresh and require lots of effort to find proper resources to get the work done. And many hosts find the process of dealing with customer service exhausting, and are better suited to hire a professional co-host or manager to take on this task for them

12. Be Prepared For The Obstacles

Before buying an Airbnb investment property, know that it is not an entirely smooth journey. There are several possible obstacles that might come your way. Your Airbnb may experience a slow vacancy period or a decrease in rent if the local travel declines or is shut down (hello Covid). It can take a significant amount of time to re-gain travel momentum after a government shut down, natural disaster or other major issue impacting your area.

Can you afford to pay your bills long term if your rental is shut down for months? What if your rates are down 40% for the next 2 years? Can you sell the property easily to recoup your expenses, and would you want to sell it or hold out for the long term?

With the day to day customer/guest interaction, you might have to deal with negative reviews, demanding guests, unexpected damages or injuries, and potential complaints to Airbnb by neighbors.

Preparing for such obstacles in advance by educating yourself, creating clear communication and expectations with guests and lining up a support network to assist you, will go a long way towards making the hosting process a fun and successful one.

13. Do You Want To Use The Property For Yourself?

This is one question that people often overlook if they are strictly jumping into an Airbnb Investment property as a business adventure. But think about it, do you want to use this rental personally at any time? Would your friends or family want to use it, or even expect to use it, for free, and often? You would be surprised how many new investors don’t consider the personal aspect to this rental and that your family now wants to get in on the fun and likely are not worried about your costs and profits.

Consider ahead of time when you are budgeting:

• Do you want to use it during peak season for your own vacations?

• How often would your or your close friends or family be using it?

• Can you still price your rental profitable if you are using it for personal use 2 weeks a month or every other weekend during peak times - such as ski season?

• Is your property manager charging you a fee for non-revenue bookings? If they are still doing the cleaning and arranging check-ins for you or your personal guests, they are still going to charge you, so does this make sense for your monthly budget

Often for owners who want to use the property for themselves, the budget is less of an issue. Many Airbnb investment owners see the property as a long-term investment that they can enjoy themselves first, and then any rental income is just a bonus to off-set some of their costs, but is not essential to their long term ownership goals.

14. It Takes Time To See Profits From Your Efforts

Buying an Airbnb vacation rental does not generate revenue instantly. It requires consistent work, effort, time, and ongoing management to see results. On average, it takes around 1 to 3 months to be ready to launch your listing for bookings. Depending on your local market, you could have guests booking instantly and staying immediately that month, or they may be pre-booking for peak season 6-12 months away for their vacations

• In Airbnb your payouts come within a couple days of the guest check-in date.

• In VRBO your first payout can take up to 1 month AFTER the guest checks out to be paid to your bank account. They also routinely hold payouts if your tax or banking info is not totally complete so watch for any warnings or pop-ups indicating this as you will need to contact their customer service.

• If you are doing direct bookings through your own website, your payments will be direct deposited when you collect from guests, but you need to keep these funds set aside in case they cancel before their stay and need a refund.

When you make your start up and monthly operating budget, consider that you likely will not be profitable within your first year even if you are generating income. The start up costs can be significant and if you miss the peak season for this year, it may take longer to recoup those up front costs.

Watch the market rates and competition closely to keep your rates at the best price possible. Use tools like Pricelabs and Beyond pricing for hands-off pricing strategies, to start gaining profits from your Airbnb investment property.

Do not expect Airbnb’s “price suggestions” or “smart pricing” to make you more money. Their goal is to get the most bookings possible, not the best price for you. The smart pricing tool will frequently underprice your listing vs the actual value in the current market, so you or your property manager should actively watch the market and rates (and big vacancies) to make sure you are pricing effectively to get the bookings without underpricing and missing potential profit.

15. A Few Benefits Of Buying An Airbnb Short-Term Rental

• Generate More Wealth Than Traditional Renting

Traditional renting is a form of long-term investment. It functions through a buy-and-hold strategy and has tenants renting the property for a more extended period. The reason why short-term rentals are considered to be more profitable than traditional renting is because of the rent rate. 

Traditional renting involves a fixed rent over a certain period for a single tenant according to your property value and generally has a limit on how much you can increase the rental rate per year for an existing tenant. On the other hand, you can change or increase the charges on short-term rentals daily or during high seasons.

Your Airbnb invest property rental can generate a higher revenue than a traditional real estate investment. With frequent bookings and continual price fluctuations, you can take advantage of holidays and peak season rates and seasonal market increases. There are no pricing restrictions on your Airbnb investment and are in control of the rates that line up with your local marketplace and demand. And if certain times of the year are slow, you can rent long-term through Airbnb and still gain monthly revenue without being locked in to a single tenant indefinitely.

• Experience A Diversified Portfolio Of Tenants

With traditional long-term renting, failure to pay or not receive rent at the proper time from your tenants can have a negative impact on your income and can often take months to sort out through the eviction process and still likely not result in you earning any of that lost rent. However, Airbnb and VRBO rentals work with different guests booking your property for a shorter time while you collect income from them immediately upon their stay.

Since bookings are recurrent, each guest adds a small percentage to your income daily. Hence, if an unexpected cancellation occurs, it will not have much impact on your total income.

There will be occasional issues of scammers and charge-backs where people inexplicably request a charge back to their credit card after they stay with you, just because they don’t want to pay. VRBO and Airbnb have tools to assist with this in their customer service but be aware that it can take a few months to resolve and you may not always win, but these instances are pretty rare.

The Impact of COVID-19 On Airbnb Rentals

Although it can vary, according to Airbnb pre-covid analytics, on average, a host made $924 per month. But the impact of the pandemic on tourism and property values changed the whole system. As a result, some Airbnb rentals had to close down or sell, while some managed to survive but are still experiencing reduced rates and occupancy.

However, with travel restrictions being eased and rental bookings now resuming, Airbnb investors can expect to see a rise in their revenues.

Conclusion

Is it worth opening an Airbnb rental business or not? Even though there are some risks involved, researching before buying an Airbnb investment property can help you decide, and putting together a realistic, running budget is an important first step to make sure you can not only get started, but can cover the costs for several months or longer until you have income coming in steadily. 

Plan your investment, choose the perfect location for your budget and personal needs, make sure you can get insurance, check your local competition, start slow and learn the basics. By serving consistent quality, your Airbnb investment property can be a profitable short-term rental investment.

Check out our Guides and Blog Posts to help you research more on your next steps towards launching and running your Vacation Rental