Airbnb is the 168th most valuable company in the world, with a market cap of $81.10 billion. If you’re considering investing in a rental property and advertising it on the platform, it could be a very lucrative venture.
If you do it right, investing in short-term rentals like Airbnb can be a reliable source of cash flow. Unlike traditional landlords, short-term rental hosts can alter their nightly rate according to demand. With Airbnb and similar platforms, you can automatically adjust the prices based on local trends to maximize your income.
But before you start enjoying the rewards of owning a rental property, you must understand how to value a property. To buy and sell successfully, investors first need accurate valuations.
So whether you’re a seasoned real estate investor, branching out to Airbnb, a property management company, or just looking for an extra income we’re here to help. This article explains how to calculate a rental property value for your Airbnb business and how to use technology to make this more precise.
Nine Steps to Valuing a Rental Property for Your Airbnb Business
Follow these nine steps today to accurately value rental property for your Airbnb business.
1. Identify the Location You Want to Invest In
An Airbnb rental property is like any other commercial real estate investment—location will determine property value and whether or not you get a good ROI. Certain areas are ideal for short-term rental investing, while others aren’t. You must research locations before you even start considering properties.
You can begin by analyzing the city you currently live in to see if it’s a viable option for investing in a rental property for Airbnb. If it is, great—your knowledge as a local can help you offer your guests a premium experience.
Here are the factors to consider before settling on a location.
Seasonality
Airbnb is a primarily seasonal business. It’s therefore imperative to understand when peak and low seasons are while performing your Airbnb analysis. Despite it being preferable to find a location with a high inbound travel population year-round, this isn’t always possible or feasible.
To stay in the black, you need to be able to make money in the off-season as well as during the peak. After all, you’ll need to pay your bills during the low season too, so you don’t want extended periods where the rental property is sitting empty.
Remember, the cities to invest in with the highest rental property values are ones with more peak seasons than off-seasons.
Tourist Attractions
Local and international tourists who travel for leisure make up the majority of Airbnb guests. For instance, Charleston, South Carolina, is one of the most desirable locations for investing in rental properties. Aside from being the largest city in South Carolina, it has some beautiful beaches bordering the Atlantic Ocean.
Apart from its sandy beaches, it’s home to several attractions and activities, including museums, historical sites, and walking tours. The charm of the city also makes it an ideal romantic getaway.
Consider the attractions located within or near the city of your choice when selecting a location for your vacation rental. Many holidaymakers like to stay near sightseeing activities because they’re convenient and entertaining.
You’ll attract more guests and maximize occupancy by choosing a strategic location for your short-term rental investment.
Local Events
A rental property analysis for Airbnb should also consider holidays and town events in addition to attractions in the area. Not knowing that a particular event will bring in more travelers could cost you the opportunity to charge more for accommodation.
Events calendars are typically available on city tourism or government websites. Several platforms also list significant events throughout the year in various cities.
Choosing the right location for your Airbnb business requires thorough research. Be sure to obtain this essential data so you’re always informed.
Other Attractions Like Bars, Restaurants, and Shopping Centers
Apart from events and attractions, it’s worth considering the accessibility of investment properties. A rental property that’s easily accessible will attract more guests, which leads to higher occupancy rates and, ultimately, more revenue. Look for public transport options, parking facilities, and proximity to popular landmarks.
Furthermore, amenities and services can impact your rental’s value. For example, a property with a pool, gym, or spa nearby will be more attractive to potential guests, and you can charge higher rates for these added niceties.
2. Understand the Airbnb Regulations in that Area
Before you can offer an Airbnb or vacation rental, understanding all relevant regulations and tax rules is critical. This is to ensure compliance with city and state laws.
Increasingly, local governments and tax collection authorities are realizing how much money vacation rental hosts are making—and they’re trying to ensure they get a share of this.
Hosts operating Airbnb rental properties must now obtain a business license in most locations. Registering your short-term rental business according to the correct process is essential.
You can use ESG software to help you understand laws, regulations, and tax implications in your chosen area. You may be wondering, “What is ESG software?” Essentially, it’s a system that consolidates data from various sources and allows you to track, analyze, and report on environmental, social, and governance (ESG) performance.
ESG software is designed to help you meet regulatory requirements and improve sustainability performance, so it can help clear up any uncertainty. For example, regulations and practices have not kept pace with fraud trends, so you might wonder about the laws surrounding chargebacks in your chosen state i.e. whether someone can stay in your rental and then claim the money back. This sort of software can act as a valuable resource to help you.
3. Decide on the Type of Property You Want to Buy
The next step is deciding what type of rental property you want to buy. Airbnb lets you rent out different property types, including:
- Apartments
- Townhouses
- Glamping domes
- Boats
- Trailers
The type of rental property you buy will be impacted by the guests you want to serve. For instance, a glamping dome is ideal for couples in search of adventure but not as suited to someone on a business trip. The location and its attractions should also influence your choice.
4. Research and Identify Comparable Listings
When conducting a rental property analysis for Airbnb, be sure to benchmark similar properties. For instance, analyzing a townhouse if you’re buying an apartment doesn’t make sense. Research and look at rentals in the same neighborhood with the same sort of features and amenities.
Ideally, you should identify three direct competitors. If you’re having trouble finding these, try to work out why this is. Perhaps there’s no demand for this type of property in the area, or maybe you’ll be the first to offer this sort of home on Airbnb or another platform.
Take note of the property price and how many days remain on the Airbnb calendars for comparable properties over the next few weeks. Check out the number of reviews, the overall rating, and what guests have said too. Studying your competitors should give you some ideas for how to make your offering more valuable.
Also, compare the amenities and furnishings of the rooms in these homes based on their photos. Viewing these will give you an idea of what you should aim for with your rental property (even if they don’t have anything unique to offer).
For help with comparative market analyses, outsource to an outbound call centre, which can conduct market research to gauge consumer interest in Airbnb properties in the area.
5. Calculate Potential Rental Income
As part of your market analysis for Airbnb, calculate a standard daily rate based on comparable properties. This is what you should charge as a minimum or during the off-season. Peak season charges can be decided later. Ultimately, this will help you to estimate your gross annual rental income.
Take the average daily rate of the three properties you looked at in the preceding step and assume this will be a fair property price for your rental. You can increase this rate if the features of your property exceed those of your competitors, meaning you can set your daily rate higher than theirs.
Alternatively, another way to set the correct rate for your property is by determining the daily rate per bed or bedroom in the area. This is important for calculating a realistic value as it influences how many people can stay over and split the cost between them.
See your research as being similar in function to a predictive dialler system in a call center i.e. its job is to point you in the right direction and allow you to make more efficient and informed decisions. This stops you from wasting time and resources by charging too much or too little.
If you’re relatively new to the market, it’s important not to overprice your rental. Otherwise, you may have trouble getting bookings. Since your property hasn’t received any reviews yet, guests may opt to stay at other tried-and-tested Airbnb properties with similar prices instead, so you need to find a way to make your offering seem more attractive than its rivals.
Generally speaking, you shouldn’t exceed your competitors’ rates by more than $20 per day, no matter how great your property is. If you get a swell of bookings and earn lots of five-star reviews, then you can review your pricing with a view to increasing your daily rate—without harming your booking potential.
6. Evaluate Expenses
Evaluating expenses is also vital for accurately valuing a rental property for your Airbnb business, as it helps you determine the profitability of your investment and gives you an idea of the sort of ROI you can expect.
To evaluate your expenses, list all the costs associated with your rental property. This includes mortgage payments, property taxes, insurance, utilities, maintenance, repairs, and so on. Be sure to include variable costs too, such as cleaning fees, Airbnb service fees, and other expenses that may arise.
Even though listing all of this out might seem monotonous, it’s nonetheless an essential tool in ensuring an accurate valuation process—much like auto dialler software in a contact center or SEO tools for marketers.
Once you’ve calculated your expenses, you can then determine the minimum amount you need to charge to cover your outlay and still turn a healthy profit.
Evaluating expenses can also help you identify areas where you can cut costs to increase profitability. For example, you may be able to negotiate a better deal with your property manager or find ways to reduce your utility bills.
Reducing expenses without sacrificing the quality of your rental property or the experience of staying over will help you maximize both your return on investment and your profits.
7. Determine the Capitalization Rate
The capitalization rate, also known as the cap rate, is a metric used to determine the value of an investment property. It takes into account its net operating income (NOI) and the fair market value (FMV) of the property.
The formula for working out the capitalization rate is as follows:
Cap rate = net operating income / property value
To determine the net operating income, you must subtract all the property’s operating expenses, such as property taxes, insurance, maintenance costs, and utilities, from the gross rental income.
Once you’ve calculated the cap rate, you can use it to compare your rental property’s value with other properties on the market. The higher the market cap rate, the more valuable the property, the more gross rental income.
8. Determine Whether You Want to Manage the Property Yourself or Outsource
Managing your rental property will give you complete control and save on management fees. However, it can be time-consuming and require a lot of effort. For instance, you’ll be responsible for finding tenants, collecting rent, handling maintenance requests, and dealing with evictions.
On the other hand, outsourcing to a property manager or a real estate agent willcut into your rental annual income. But it will also free you up to focus on different aspects of growing your business, like branding—for example, by selecting the best registrar for domain names, setting up social media pages, and working on your marketing strategy.
If you do decide to manage the property yourself, and forget about real estate agents, ensure you have the necessary skills and knowledge to handle the day-to-day tasks involved, such as maintenance, cleaning, and guest communication.
If you choose to outsource instead, be sure to research and compare different management companies to find one that fits your needs and budget. Consider factors like their experience, reputation, services offered, and fees.
9. Purchase the Property
Once you’ve completed all the steps above, and found there’s enough Airbnb demand in the local area to make your property profitable, all that remains is to purchase it and prepare for the arrival of your first guests.
You might want to invest in the property equivalent of the cloud-based case management software that legal firms use to streamline their processes. This will allow you to automate mundane tasks, like guest communication, and save you time and money in the long run.
Be sure to advertise your listings effectively to maximize your rental income, and make sure it’s easy for your target audience to find you in searches.
Wrapping Up
Investing in a rental property for your Airbnb business is an intelligent way to make passive income or diversify an investment portfolio—but you must know how to accurately value a rental property to turn a profit.
The steps we’ve covered in this article will help you perform a comprehensive market analysis for any property you’re interested in. Follow them, and you can more easily determine the value of potential rentals and the likelihood they’ll deliver a good ROI.
Step into easy vacation rental management with iGMS’s array of features that can automate and optimize your short-term rental operations:
- Manage multiple accounts and listings on top OTAs from a single interface
- Sync reservations across multiple platforms to eliminate double bookings
- Organize your messages into a unified inbox for prompt replies
- Improve communication with automated templates and triggered messaging
- Automate the process of guest review send-outs
- Coordinate cleaning tasks with live tracking to completion
- Access control with task creation and team management
- Manage direct bookings using a direct booking management toolkit
- Adjust pricing through integrations with Pricelabs and DPGO
- Securely process payments via integration with Stripe
- Create essential reports on your business results within minutes
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About the Author
Alwayne Powell is an experienced performance marketing leader with an extensive background in the digital space, working client and agency side to provide paid search, SEO, and CRO solutions in the B2B and B2C sectors. They are the current Senior Digital Marketing Manager at leading communication platform provider 8×8. You can find them on LinkedIn.
