Investing in rental properties can be a profitable venture for professional real estate investors and everyday working-class American’s looking to gain financial freedom or save for retirement. With the advent of short-term rentals made popular by sites like Airbnb and VRBO, a new investment opportunity for real estate investors has been born.
Investing in Airbnb’s is attractive because of the potentially increased monthly revenue generated by the short-term market rents. In some cases, short-term market rents can be 2-3 times higher than long-term market rents. Hence, the unique opportunity for real estate investors.
If you’re an active or future investor interested in investing in Airbnb’s, the article will go over the various strategies for investing in Airbnb’s, how to identify profitable Airbnb investment opportunities, what costs should you plan for, and the best markets to look for profitable Airbnb investment opportunities in.
Strategies For Investing in Airbnb’s
There are two main strategies for investing in Airbnb’s: Buy and Rent and Fix and Rent.
1. Buy And Rent
With the Buy and Rent strategy, the investor is buying a turnkey property that is ready to rent. With this strategy, there is no rehab or heavy maintenance to be done on the property. In, theory the investor could purchase the property and then have a rented cash flowing asset the next day.
2. Fix and Rent
With the Fix and Rent strategy, the investor is buying a distressed property to renovate it and then rent it. This strategy is also called the BRRRR investment strategy (Buy, Rehab, Rent, Refinance, Repeat). The advantage of the BRRRR Strategy or the Fix and Rent Strategy, is that investors can recover the initial cash invested upon refinancing with a DSCR loan (more on this later).
Both strategies above, end up in the same place: The investor owns a cash flowing real estate asset. The tradeoff is that in the Buy and Rent Strategy you are tying up your initial investment long-term whereas with the Fix and Rent strategy you’ll have to do a considerable amount of construction before recouping your investment upon refinancing.
How To Assess an Airbnb as An Investment
The principal used in identifying any profitable rental property is as follows: “The monthly rent of the property should cover the monthly cost to own and operate the property.” This analysis is easier said than done and is dependent on several factors which we’ll discuss below.
1. Long-Term or Short-Term Rentals
The monthly rent of a rental property is largely dependent on whether you plan to hold it is a long-term rental or a short-term rental. If you plan on holding it as a long-term rental, you can estimate the monthly rent using Zillow’s Rental Property Estimator. If you plan on holding your property as a short-term rental, you can use AirDNA’s Rental Property Revenue Calculator. This tool will allow you to estimate the monthly rent you will bring in from listing the property on Airbnb and the tool accounts for anticipated vacancy, seasonal price fluctuations, and operating costs (Maintenance, Property Manager, etc.).
2. Operating Costs
The next factor to consider is operating costs. These costs include Property Taxes, HOA Fees, Insurance, and Property Management Fees. When assessing an investment, you can find the figures for Property Taxes and HOA Fees on the NMLS listing or you can ask your realtor. You can generate an insurance quote from any number of online enabled insurance companies. Finally, for Short-Term Rentals you can assume a property management fee of 10% of the monthly rental revenue.
3. Financing Costs
Most investors chose to borrow to help finance their real estate investments. For Airbnb rental properties, there are a handful of specialty investment property lenders which will finance up to 80% of the property purchase price. Therefore, to ensure your investment is “cash flowing” you must include you monthly mortgage payments into your investment property analysis. You can determine your anticipated monthly mortgage payment by requesting a quote from your lender.
With this information in hand, the ratio used to determine if you will have a profitable rental property is called the Debt Service Coverage Ratio (DSCR). The DSCR is calculated as follows:
DSCR = Monthly Projected Rent / (Monthly Mortgage Payment + Operating Costs)
If your rental property has a DSCR greater than 1, it means that your property will bring in more monthly rent than it costs to own and operate the property. As an investor, you should only consider properties with a DSCR greater than 1.
How To Finance an Airbnb Investment
Depending on whether you’d like to Buy and Rent or Fix and Rent, there are several financing options available to real estate investors. All the financing options include a small equity investment from the Real Estate Investor and a loan (mortgage) collateralized by the property. Both Bank and Non-Bank lenders provide loans on Airbnb’s – we’ll discuss the pros and cons of each in this section.
1. Financing For Fix and Rent
In the Fix and Rent scenario, investors typically leverage two types of loans: a short-term bridge loan and then a DSCR loan.
In this scenario, investors buy distressed properties that most banks will not finance. So, the first type of loan you’ll need is a short-term bridge loan to buy and renovate the property. Most hard money lenders will provide loans up to 80% of the Purchase + 100% of the rehab funds for first time investors with good credit scores (680+).
Then upon completion of the project, a hard money lender will refinance the property with a DSCR loan. DSCR loans are 30 Year Fully amortized loans that are based on the monthly cashflow of the property. DSCR Lenders will provide up to 80% of the appraised as-is value of the property. The requirement here is that the property must be cash flowing (i.e. must have a DSCR > 0).
2. Financing For Buy and Rent
In the Buy and Rent scenario, investors are buying turnkey rental properties. Banks compete more actively in this space because the properties are in good condition at purchase. However, banks provide financing based on an investor’s personal income. So, an investor cannot qualify for long-term financing on a rental property unless they could otherwise afford it.
DSCR loans are the main way of financing Buy and Rent Airbnb’s and are based on the properties DSCR not the investor’s personal income.
There are several Hard Money and DSCR Lenders that work with investors. Among them, Ridge Street Capital is highly recommended and operates in 35 States across the U.S., including Texas and the surrounding areas.
The Best Cities to Invest in Airbnb’s In Texas
Texas is one of the top states to invest in Airbnb’s because of its several cities well supported by tourism and major business centers. Below we’ve listed the top 2 Texas markets for Airbnb’s.
1. Austin
Known for its vibrant culture, tech industry, and year-round events like SXSW, Austin consistently ranks as a top Airbnb market nationally. The cities numerous activities and attraction of business travellers’ results in high occupancy in the downtown and suburban areas of Austin. The city’s rapidly increasing prices have made it difficult to identify economical Airbnb’s opportunities in the most sought-after regions of the city.
2. Dallas-Fort Worth
The DFW metroplex offers a growing Airbnb market, largely driven by a high demand from business travellers. Suburbs like Arlington, with its proximity to AT&T Stadium, are also hotspots for short-term rentals, providing investors with steady income potential.
Texas’s growing population and robust economy make these cities prime locations for Airbnb investors.
Getting Started with Airbnb Investing
Investing in Airbnb properties is an exciting opportunity to generate income and build wealth. Whether you choose the simplicity of a turnkey property or the equity-building potential of the fix-and-rent strategy, success begins with a solid plan. Start by identifying a promising market, running the numbers to ensure profitability, and securing the right financing tailored to your goals. With the right strategy and diligent preparation, your journey into Airbnb investing can unlock a profitable and rewarding future in real estate.
Author Bio:
The author Zach Cohen is the managing partner of the Ridge Street Capital, an investment property lender that finances Airbnb’s across the U.S. on a weekly basis. Zach has originated over $30M of U.S. Real Estate Debt on single family, multi-family, and commercial investment properties. Zach loves working with local real estate investors with ambitious goals of building big investment portfolios. He is hyper-focused on serving the niche of regionally focused real estate investors and dedicates his time to constantly improving the company’s processes to make getting investment property financing more efficient. He is a former Aerospace Engineer and active entrepreneur with core values of integrity and determination.
