How to Estimate Airbnb Income Before Investing in a Rental Property

Investing into an Airbnb property can be a fun way to diversify your real estate portfolio. Before diving in, you will want to be fully prepared with the estimated costs and income you will be receiving from the investment. Unlike traditional investment properties, Airbnb’s can sometimes be tricky to evaluate. Here’s how to estimate your Airbnb income before investing in a rental property.

Conduct an Investment Property Analysis

Although an area might seem prime to invest into, not all properties within the same area will be valuable to use as your Airbnb. You should judge every property you consider investing into with metrics to help determine its profitability. These metrics include:

Calculating Cash Flow

To give yourself a proper understanding of the metrics you need to calculate your Airbnb income, you first need to understand how to calculate the property’s cash flow. The cash flow of a property is the difference between the gross Airbnb rental income and the property expenses. Having a positive cash flow makes you more attractive to lenders as you have less risk in your investment. You are able to fully cover your monthly Airbnb expenses with your income, which is what lenders want to see. Many investors use a real estate cash flow calculator online.

Compute Capitalization Rate

Similar to your cash flow, the capitalization rate of a property tells you about the potential return on your rental property. Your capitalization rate is calculated by dividing the net operating income with your property price. Unlike cash flow, which is calculated with your gross income, the capitalization rate uses your net operating income, which is your gross income with costs of maintaining the property subtracted from it. A good capitalization rate is between 6-12%. However, a capitalization rate that is very high could mean the property is not receiving proper maintenance. The capitalization rate gives you a good idea of the long-term gains the investment property offers.

Cash on Cash Return

Understanding your cash on cash return of a property is an important metric when investing into an Airbnb. Your cash on cash return is the return you will receive in your property compared to your initial investment. For example, if you put $40,000 down on a property, and you receive $4,000 in net income annually, then you will have a cash on cash return of 10%. The cash on cash return rate will give you the best idea of what to expect out of your investment relative to what you put into it.

Complete a Real Estate Market Analysis

When completing a real estate market analysis for your investment property, you will first want to look at the location of the property. The location of your property is the core factor in its real estate analysis. This will give insight to if you are tapping into a profitable market. You want to seek out an area with high demand if you wish to have a profitable Airbnb.

When conducting your real estate market analysis, look for statistics that include data related to Airbnb and not traditional renters data. Short term and long-term rental have different market trends, so it is important to separate the data when conducting your analysis. Overall, real estate market analysis helps you find out how much capital you need to purchase a property, what your nightly rates are, what the appropriate rate is for nearby properties, and the trends/demands of the market. The use of predictive analysis is quite common when calculating these different factors, as you want to predict future data.

Perform a Comparative Market Analysis

A comparative market analysis is performed when you wish to analyze the properties similar to yours in the same area to get data regarding the other home’s current values. These homes are called “comparables” because they are similar to your property, making it appropriate to use in your research. Be sure to not confuse comparative market analysis with home appraisals, as these are two very different evaluations. Home appraisals use guidelines and regulations to give you a value. This would not be appropriate to use to value your Airbnb investment property. Comparative market analysis has different factors, like using the recent sales data to give you a value. This analysis allows you to give more accurate pricing for overnight stays. Another advantage to performing a comparative market analysis is that you quickly educate yourself on the housing market you want to buy into, so you are more well aware when purchasing the property.

About RCN Capital

RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing as well as long-term rental financing for real estate investors, and that includes multifamily properties. RCN Capital also has flexible and competitive loan options available. If you are a real estate investor looking to secure financing for a rental property, RCN Capital is the lender that you are looking for. Connect with us today to discuss your next real estate investment.