In 2015, AirDNA released the¬†first data-driven analysis on the best cities to buy vacation home rental properties. The interest was phenomenal. That post has now been read by over half a million aspiring Airbnb entrepreneurs. ¬†But the short-term rental industry changes fast, and we figured it was time for a refresh to show exactly where the best cities are to buy, rent and host Airbnb rental properties in 2017.
Vacation Home Investing: What’s the Big Deal? ¬†
Even though our data models are showing Airbnb rentals making up to 3x more than traditional long-term rentals, using vacation rentals as an avenue for investment is still not mainstream. But, buying vacation rentals is fast becoming a whole new real-estate asset class, allowing normal folks to afford – and significantly profit from – a second home.
But choosing the right place to buy vacation homes is a challenge. House prices, short-term rental restrictions and profit margins vary wildly from city to city and even street to street.
Everyday we get emails from customers asking: What are the new trends for Airbnb investing in 2017? What cities have the highest profit margins? And crucially… how do I get started?
In this article we share our most important insights into the best places to buy vacation homes to rent on Airbnb.
Let‚Äôs get started: How to read the graphs
The dashboards display all the cities in the United States that have at least 100 entire home rental booked for at least 60 days in the last twelve months.
Just hover your mouse over a circle to see more details about each city. The circle size represents the number of Airbnb properties in each city, and the color sweeping from red to green indicates an increase in the median annual occupancy rate.
Where to Buy Vacation Home Rental Property
Take a look at the results we found when we compared our latest data for purchasing property to list on Airbnb.
You would think from reading articles in the press that the most profitable Airbnbs are located in larger cities popular with tourists. Yet our analysis reveals this approach to be totally wrong.
Looking at the graph above, we can immediately see a strong correlation between housing cost and profitability: the more expensive the house, the lower the return on investment.
In fact, average revenue drops so significantly with rising annual mortgage costs that a number of typically popular cities for Airbnb – such as New York, Los Angeles and San Francisco – on average might actually lose you money… up to $10,000 per year in fact.. Even cities such as San Diego, CA, Washington, DC and Seattle, WA are offering low returns, risky with such high upfront costs.
By comparison, stand-out cities that you would never expect boast low mortgage costs and high gross profits on Airbnb. These include Joshua Tree, CA, Savannah, GA, and Nashville, TN. A property in one of these three cities could¬†earn hosts between $25,000 – $27,500 per year if their Airbnb is performing at the 75th percentile.
Other cities worth mentioning include the cluster found just under the trend line with mortgage costs between $9,000 – $13,000 per year, including Saint Louis, MO, Cincinnati, OH and Pittsburgh, PA. In fact, this¬†sweet spot seems to be the homes in cities with a Zillow mid-tier home value index under $300,000.
What is crucial to remember, however, is that these numbers are an average. Gross profit on Airbnb fluctuates majorly according to the neighborhood your property is located. An apartment in Chinatown, Los Angeles, will give you far higher returns than a luxury villa in the eye-wateringly expensive neighborhood of Bel Air – which in fact, is most likely to put you in the red.
For this reason, it‚Äôs crucial to narrow your search to a zip code¬†level to separate the neighborhoods that are going to make a healthy resources, from those that are going to drain your resources.¬†Using the¬†AirDNA¬†Investment Explorer, users can¬†compare areas to find the exact neighborhoods that will provide the highest returns for Airbnb investment property.
Subleasing Investment Opportunities
Our second dashboard analyzes the profitability of renting and subleasing property on Airbnb. Comparing the average rental cost of a 2 bedroom apartment with average gross profit on Airbnb, the numbers tell us that property investors who want to rent units should take¬†an entirely different approach.
What immediately stands out is the change in trend line. In sharp contrast to purchasing property, subletting rentals in cities with higher rental costs will give, on average, higher returns. The difference in results is so stark that Santa Barbara, CA appears as one of the top 5 places to rent-to-rent on Airbnb in the entire U.S., but as one of¬†the worst 5 for buy-to-rent.
Santa Fe, NM and Portland, ME jump out¬†as unexpected Airbnb investment jewels, offering $28,500 – $30,500 in Airbnb profit on properties, with low upfront costs. Even with its relatively low percentage occupancy rate, mountain town Mammoth Lakes, CA, is offering phenomenal returns of $33,000 per year thanks to average rent for a 2 bedroom property being priced at just over $9,000 per annum – and an epic winter snowfall didn‚Äôt hurt.
Also worth mentioning are the Hawaiian islands of Kihei and Lahaina, which despite their small size, look like savvy investment opportunities, with their high occupancy rates and relatively low rental costs compared to their Airbnb earning potential.
Again, it’s crucial to remember, however, that this analysis does not differentiate between high and low performing neighborhoods within each city. In reality, many cities that look like great investment opportunities are made up of some not-so-desirable neighborhoods. Equally, some cities that look like financial sinkholes have their share of cheaper, up-and-coming rental markets.
To conduct a deeper dive into each market we recommend subscribing to the Investment Explorer. With the ability to view the performance of over 100,000 individual rental properties along with postal code summaries and historical trends, the tool helps users to identify the standout neighborhoods that will ensure the best possible ROI for your budget and preferences.
Covering Your Rent Listing A Spare Bedroom on Airbnb
Is it possible to cover the rent by renting out your spare bedroom on Airbnb?
Crunching the numbers for our last blog post, we found that the returns on renting out a spare bedroom on Airbnb to cover rental costs are nowhere near as exciting. It looks like things have brightened up a bit for private room rentals in the last two years. With more travelers feeling comfortable sharing spaces on the cheap and regulation forcing many people into this option, this category of Airbnb rentals is on the rise.
Take a look at the dashboard below comparing the average cost of rent for a 2 bedroom house with Airbnb income from renting out a private room.
Renting in Sedona, AZ, Louisville, AZ and Detroit, MI, will more than cover your rent, making you between $2,500 and $7,800 in profit every year. The highest returns are to be found in Savannah, GA, making Airbnb many private room hosts over $9,039 per year.
Big, popular cities such as Venice, CA, and San Francisco, CA continue to top the list of the worst places for an Airbnb investment – renting your spare bedroom in these California towns will certainly soften the blow of your monthly outgoings, but aren‚Äôt going to make you any money.
Short-Term Rental Regulation Impacts
Any article on short-term rental investing would be incomplete without a short overview of the ever-changing restrictions and regulations surrounding Airbnb.¬†
2016 was a record year for Airbnb: more people used it than ever before, but the platform also found itself in a few sticky spots with a number of municipalities. Yet¬†as our guest writer, Helen Hsi, explored in detail in her research report on the effects of regulation, the conditions, penalties and impact of Airbnb regulatory enforcement vary greatly from city to city. ¬†¬†
One trend in the data continues to become clearer over time. Where there is more restrictions, there is more financial opportunity.
As would be expected in a marketplace in which rental supply is restricted by regulation – while travel demand continues to surge – prices and profitability of Airbnb units in highly regulated markets are on the rise. We see this especially in the rent-to-rent strategy because there is less initial capital expenditures to get an Airbnb rental up and running. It looks like many entrepreneurs still seem willing to accept legislative risk for the outsized returns. As they say – more risk, more rewards.
We would not recommend entering into any new investment without fully understanding the local regulatory environment, and current enforcement of those regulations. To start off, you can check current restrictions at¬†Roomscore, which makes it easy to compare cities over the U.S. To dive a bit deeper in individual restrictions¬†refer to Airbnb, where they are offering improving¬†host compliance assistance. ¬†
It is interesting to see in the analysis that many smaller cities provide a low a risk environment and stellar returns.¬†Savannah, GA and Indianapolis, IN, for example, are favourable towards Airbnb and also show up in our analysis as being great places in invest. It‚Äôs cities such as these that represent fantastic, low risk, investment opportunities with their under supplied rental units and lenient regulation.
Variation between cities is repeated on a more local level in variation between neighborhoods within the same city. It‚Äôs important to identify the best-performing neighborhoods within these cities – and again, it might not be where you think. You can directly compare how thousands of cities and zip codes over the U.S. are performing using the¬†Investment Explorer. Investing in vacation rental real-estate is large, long-term investment so feeling confident in the market and type of property purchased is monumental.
AirDNA collects and analyzes the data for every rental property listed on Airbnb worldwide. Visit our data methodology page for more details on how we aggregate and model ¬†this information.
We utilized the free data provided by Zillow Research for average home values and long-term rental rates. Holes and minor inconsistencies in the Zillow data were supplemented with information purchased from ATTOM data.
A major enhancement to this analysis versus our report in 2015, is our ability to predict the full year revenue of properties that were not, in fact, available for rent the entire year. By creating a model that looks at the daily RevPAR (revenue per available rental) of comparable properties we were able to normalize the data set and compare ‚Äėapples to apples‚Äô part-time and full-time Airbnb rental properties. Each property included in the analysis had to be rented at least 60 days in the last 12 months to maximize the number of properties analyzed while ensuring a high level of accuracy for our forecasting model.