vacation rental investing

Case Study: Targeting the Perfect Vacation Rental Investment


Case Study
Customer: David Malka, Odyssey Vacations
Solution: Airdna helps Odyssey Vacations identify the top performing market and invest with confidence
Results:

  • Odyssey were able to test new markets and view accurate occupancy rates and annual returns before investing
  • The key features of top performing rentals were identified, down to precise geographic location
  • Odyssey moved forward with an investment, with Airdna’s data giving them confidence they could turn a $120,000 up front investment into a cash-on-cash return of 15.3%

Six years ago, a friend told David Malka, co-founder and CEO of Odyssey Vacations, about his Airbnb listing. David’s friend was paying $1400 per month for a long term lease on a Los Angeles apartment. He was placing the property on Airbnb and earning $4,500 in short-term rental income.

David’s friend was tripling his long term rental cost. He described the rate of return as “insane.”

Not long after this conversation, David partnered up with his friend. They leased a couple of Los Angeles properties and a new business venture was born.

Over time, pressure from Home Owners Associations (HOAs) drove David to drop his leased apartments. Many HOAs were restricting short-term rental activities. For example, some were adding clauses specifying that rentals must have a minimum duration of 30 days.

David knew that the short-term rental market still had immense potential. Instead of leasing apartments, he decided to purchase his rental properties. He initially focused on the Las Vegas market. It was an area David was familiar with and one that had a strong vacation rental market.david malka airbnb rental

“The returns were so good that I targeted as many properties as I possibly could,” David said.

That was two years ago. David now runs 11 vacation rentals. He purchased each property, either alone or with a partner. His top performing properties gross over $70,000 per year.

Vacation Rental Market Growth

David is not the only real estate investor to recognize the potential of the short-term rental market.

The National Association of Realtors reported that 1.09 million investment homes were purchased in the US in 2015[i]. This is an increase of seven percent, from 1.02 million in 2014.

The opportunity is not limited to US vacation rentals. According to Knight Frank’s Global Cities 2016 report, the supply of short-term lets is lagging behind the growing demand in many global markets[ii]. The report describes how companies are looking for a more affordable alternative to hotels, yet supply of short-term rentals is constrained by confusing local regulations.

This shortage in supply has created an opportunity for savvy real estate investors. David believes that now is the ideal time to invest in short-term rental properties: “Expedia just purchased HomeAway for $3.9 billion. The traditional travel sites will soon be listing vacation rentals alongside hotels. The market is not even close to full capacity. There’s so much more room for growth.”

Challenge: Where To Invest Next

The criteria for a successful short-term rental property is limiting. In Vegas, the most profitable rentals have a pool, a spa, and four bedrooms. It’s also within a 15-minute drive of the Vegas strip.

There are only so many houses for sale that meet these criteria. “Months can pass without any suitable properties becoming available,” David said.

David realized that he needed to look further afield. He started to research other US markets. He hunted for areas where the ratio of purchase price to expected rental income was low.

First David identified the most visited US cities. Then, he researched real estate prices in each location. Last of all he estimated the expected Airbnb rental income.

“I would select a city and look to see how booked Airbnb’s calendars were for the next 30 days. I’d then look at the average nightly rate and estimate the rental income.”

The search for the best markets was manual, time consuming, and prone to error.

The Airbnb calendar data David was using represented a snapshot at one point in time. He had no way of knowing how nightly rates varied by season or for how long properties were vacant throughout the year.

Ending the Hunt for New Markets

David knew there had to be an easier way to find the best places to invest. A casual question on Reddit, a popular web forum, led him to the ideal solution.

David was searching for feedback on different US markets. Scott Shatford, CEO of Airdna, told David that he may have the solution to his problem.

Scott explained that Airdna collects rental metrics such as occupancy rates, ADR and revenue on nearly every Airbnb rental worldwide and that he had built a new tool specifically for real estate investors. Scott said, “By overlaying home values and rental rates across the US on top of Airbnb rental revenues, Airdna can identify the most profitable short-term rental locations.”

Best Areas to invest in Nashville“The Airdna product was a perfect match for what I was looking for,” David said. “It told me exactly where to buy my next investment.”

By using Airdna’s Investment Explorer Dashboard to explore the top performing short-term rental markets, David zeroed in on Nashville, Tennessee.

Testing the Airdna Data

Before he went any further, David needed to make sure he could trust the Airdna data. He was about to invest a large sum of money in a new market. He was not prepared to do this without assurance that the predicted return was accurate.

David acquired Airdna’s Las Vegas Market Report for $79.99. He wanted to know how Airdna’s report measured up against his own firsthand experience.

The Airdna dataset passed the test with flying colors.

The Airdna data showed that the top 20% of 4-bedroom properties in Las Vegas were earning more than $60,000 per year. David’s established, 5-star listings were grossing just over $70,000. Beyond that, the report accurately predicted the actual revenue of all of his rental properties within a 5%. margin of error.

David was convinced that the data was trustworthy and confident that in a new market he could outperform the competition much like he had in Vegas.

Buying the Perfect Vacation Rental Investment

David was nearly ready to pull the trigger on his next investment, but he needed to do some more research.

David wanted to determine exactly what type of property to buy. He knew that he wanted to focus on single family homes due to his experience with HOA’s in the past, but wasn’t sure if 4-bed units were also in high demand in Nashville.

To gather this information, he turned once more to Airdna’s Investor Dashboard.

most revenue rentals in nashvilleThe dashboard showed him that zip codes 37206 & 37208 were seeing the most rental activity and best overall returns based on local home values. He then viewed the annual performance of the over 178 houses between 2 & 4 bedrooms that were in those two locations.

He noticed the same thing that he had experienced in Las Vegas. Four bedroom homes were seeing about the same annual occupancy, but were charging at least 2 times the nightly rate compared to their two bedroom counterparts. The cost of the average 4 bedroom home was only 43% great than a two bedroom. David had proven that larger 4-bed unit was the best investment in the downtown Nashville market.

With the information, David searched for houses for sale that met these criteria. He ended up purchasing two newly remodeled 4 bedroom Nashville properties on the same lot for $450,000 each.

These properties were purchased in May 2016 and are expected to produce conservative combined annual revenue of $140,000. After expenses, his expected cash-on-cash return is 15.3%.

Book a Demo of the Airbnb Investment Explorer

 

PROPERTY PURCHASE PRICE: $450,000
Upfront Costs
$ Down (20% of Purchase) $90,000
Furniture $30,000
UPFRONT COSTS: $120,000
MONTHLY RENTAL INCOME: $5,833
Monthly Operating Expenses
Property Taxes $375
Insurance $140
Utilities $820
Maintenance/Supplies $300
Gardener $100
Cleaning $550
24/7 Guest Communications $175
MONTHLY OPERATING EXPENSES: $2,460
MONTHLY NET OPERATING INCOME: $3,373
Monthly Mortgage Payment: $1,846
CASH-ON-CASH RETURN: 15.3%

Earning a Passive Income

David’s rental income is almost entirely passive.

He uses a lockbox so that his guests can check in without anyone needing to be present. He outsources guest communication to a third party. He also works with a reliable vacation rental cleaning company. The cleaning company prepares his homes for new guests and inspects them when guests depart.

David is pleased with the results he has seen in Nashville. He plans to use the Airdna data to identify other profitable rental markets. He explains that the Airdna data saves him countless hours of manual research and allows him to explore new markets before investing his money.

“The Airdna data offers an extremely positive return on investment. It tells you exactly where to buy your next property. My investment in Airdna data is already worth around 20K. What I plan to utilize in the future is worth 50-100K. You simply make more money by using the Airdna data,” David said.

Looking Ahead

David has a growing portfolio of rental properties in Nashville and Las Vegas. But his long-term plans are even bigger.

His goal is to start a real estate investing trust. Existing trusts focus on commercial and large residential real estate. Their average yields are 4-6%. David knows he can double or even triple this rate of return by investing in short-term rental properties.

“Airbnb has changed the residential investing domain. It has created a market inefficiency where the return on short-term rental properties far outperforms the return on other real estate investments.”

With the help of Airdna’s data, David is poised to take maximum advantage of this lucrative investment opportunity.

[i] Adam Descantis, ‘Vacation Home Sales Retreat, Investment Sales Leap in 2015’, National Association of Realtors, April 6 2016   http://www.realtor.org/news-releases/2016/04/vacation-home-sales-retreat-investment-sales-leap-in-2015

[ii] Tom Bill, ‘Global Cities The 2016 Report’, Knight Frank, http://www.knightfrank.com/resources/global-cities/2016/all/global-cities-the-2016-report.pdf