Short-term rentals are one of the best types of real estate investments you can purchase. But as the old saying goes, “You make money when you buy real estate, not when you sell.” So if you mess up on the purchase of your short-term rental, then you’re really setting yourself up for failure.
Here at Stay Copper Rock, we get questions all the time that say things like, “How do I get my first Airbnb? Or Where do I start if I want to buy an Airbnb? Or how do I even get started?” Well, we’re finally going to answer that question for everyone. The four areas we will focus on are securing your financing, choosing your market, finding a deal, and last is estimating your profits.
Securing your Financing
Step number one, which is securing your financing. We like to start the buying process with the financing step because you need to understand what your purchasing power is, and that purchasing power is based on two things. First is your available capital, and second is your loan approval amount. Now your available capital is the amounts of money you have that you can spend on things like the down payments, closing costs, and any setup costs associated with getting your property ready to be a short-term rental like furniture permits, your Ring doorbell, things like that. This capital can be in the form of cold, hard cash in the bank, stocks that you can easily sell, maybe a line of credit or even a loan against your 401K, but any type of liquid funds work here.
Your loan approval amount is a dollar figure for the amount of money that a bank will loan you to purchase a home. This number will come from your lender and is based on your credit score, your income, and your debt to income ratio. If you are short on either available capital or your ability to get approved for a loan, we would recommend that you find a good partner to work with who might be able to fill in that gap for you.
Choosing your Market
This is where you start hunting for a market that matches your finances. People often ask, “What market should I invest in?” And the honest answer is that it’s almost impossible for us to tell someone else what the perfect market is for them to invest in. And that’s because choosing the right market is kind of a deeply personal decision. There’s always data you can use to help make a good decision, but what’s a good market for us may not be a good market for you.
There are so many different markets across the US and even more across the globe that would work really well as a short-term rental.
First we consider seasonality. Some short-term rental markets are feast or famine, where they’re extremely busy during peak seasons and then extremely dead during the off season. We like markets where there’s a little more consistency and the differences between peak season and the off season aren’t as dramatic.
This helps to better manage your cashflow and you’re less likely to have situations where your income can’t cover your expenses. Second, we look for true vacation rental markets where the primary economic drivers are based on.
- Vacation
- Tourism
We don’t invest in major metros like Los Angeles or San Diego or New York because in those big cities, there are so many other economic drivers like big business headquarters, universities, film and television that the revenue brought in by short-term rentals is really just a drop in the bucket.
In comparison, for the markets that we recommend investing in, their primary economic driver is vacation and tourism. We like these kinds of markets because it means that the local economy and governments and even the residents most of the time appreciate the economic impact of short-term rentals.
It also usually means that there’s the infrastructure in place to support short-term rentals. You have cleaners and handymen that thrive and live off of short-term rentals.
Nex we look at is regulation. Let us be super clear. When we say that we consider regulation, we are not saying that we want to invest in a city that has zero regulation because that’s actually risky, because it means that the city hasn’t quite figured out how they’re going to handle short-term rentals. And if the city decides that they’re just going to ban short-term rentals altogether, then there’s a chance that you’re left with a property that you can’t even list. When we say regulation, we are looking for a city that has very clear expectations and regulations in place for short-term rentals. This makes it simpler for you as the investor to really understand the exact steps that need to be taken to obtain and maintain your short-term rental permit.
We look at the potential revenue in that market. We’ll get into how to estimate potential revenue in the future steps, but for now, just know that you’ll want to understand how much money you can expect to gross in any given market.
The fifth and final factor we consider when choosing a market is investability. When we say investability, basically what we’re talking about is how does the average purchase price in that market compare to the projected revenue? Sure that beachfront property in Florida is going to generate well over six figures, but it also costs $12 million. So is it really a good investment?
Finding the deals
Once you’ve chosen your market, it’s time to move on to step three, which is finding your deals. Finding your first short-term rental purchase can come in a few different ways, but for the majority of new real estate investors and those wanting to get into the short-term rental space, you’re probably going to find your first investment working with an agent and buying right off the MLS. This is how we purchased our first four short-term rentals all directly off of the MLS. So we feel pretty confident that for any new investor, you can probably do the same as well.
In some markets, like some of the ones that we invest in, things are really hot and every deal that goes up gets bid up tens of thousands of dollars over asking price. So if you’re in a market like that, there are alternative ways to find your first deal. So let’s break down a couple of those. If your chosen market is within driving distance, then the first thing I’d recommend is literally just driving around the neighborhood and trying to find the properties that are a bit neglected, and then reach out to the owners to see if they might be interested in selling.
Another option is to work with wholesalers who are basically real estate investors whose entire focus is finding good deals for other real estate investors. So there’s different ways to connect with wholesalers. You can go on biggerpockets.com and type in your market and type in wholesaler. You’ll find somebody, talk to your agents. They’re typically not that hard to find. The last thing to point out is that in most markets today, it’s going to take a little while for you to find the first deal that makes sense. Don’t feel discouraged if you go on Zillow today and you don’t find that perfect deal. You are going to have to look at 100 deals and submit 20 offers probably before you actually get your first accepted offer. So stay positive, stay…
Estimating your Profit
The final step in buying your first Airbnb is estimating your profit. There are two pieces of data you’ll need to estimate your profit. Those are your income and your expenses.
Income
There are a few different places you can go to estimate the income for an Airbnb purchase, but the big ones are AirDNA.co, PriceLabs.co, Mashvisor.com. All of these are websites that specialize in providing analytics and reporting on short-term rentals. All of these sites that I listed, they typically allow you to go in there and look at data based on the size of the property. iIf you’re looking to buy a three bedroom in the Paradise Village in Utah, these websites allow you to view the data for all of the other three bedrooms in that area. The projected revenues that are listed on these websites aren’t 100% accurate, of course, but at least it gives you a general idea of what it could potentially be.
Expenses
Let’s talk about your expenses. These are a little bit harder to nail down when you’re trying to analyze a property. Your principal, interest, tax and insurance, those are pretty straightforward, but things like your utilities costs or your repairs and maintenance, those are a little bit harder to predict because the usage for those is going to be a lot higher with the short-term rental than it would be for a traditional long-term rental or a primary residence.
Another really good way to figure out what the expenses for that short-term rental in that specific market might be is to talk to other short-term rental owners, right? I think they would have the best idea or give you the best information because they’re running one in that same area. If your looking to buy a Vacation Rental in St. George Utah or the surrounding area’s reach out to us so we can help assist with getting you accurate information.
There are Facebook groups, multiple, multiple Facebook groups with tens of thousands of members that focus exclusively on connecting owners of short-term rentals. Find those groups, get active, post questions, and I’m sure someone will get back to you. Another really easy way to estimate your expenses on your short-term rental are to reach out to short-term rental property management companies. If you are in a mature vacation rental market, there’s going to be a handful of these companies out there. Give them a call, say, “Hey, I’m thinking of buying in this market. Here’s the kind of property that I’m looking at. What do you think the expenses will be?” And a lot of them would be willing to share that information with you.
One thing to call out when estimating your revenue and expenses is to make sure you make estimates for your annual projections, not monthly.
And it’s super important to do that because most markets have some level of seasonality. So say that you just picked the month of December when it might be the busiest month of the year, and you extrapolate those numbers out to the entire year, you’re going to way overshoot what the revenue projections are for that property. And on the flip side, say you picked, February, that’s the slowest month of the year, and you use that for your entire year, you’re going to way undershoot. Whenever you’re making projections, make sure you’re looking at an annual basis, not a month to month.
Once you’ve got your profit and expenses figures, you subtract the two and that is your profit. Once you’ve got a profit number in hand, it’s really up to you to decide if that number works for you. If you have maybe a $50,000 investment into a property and you profit $12,500, that’s a 25% return on your money. We don’t know if that’s a good number for you, right? You have to decide what’s a good number for yourself, but at least those are the pieces of data you need to be able to make that decision.
