Benefits of investing in airbnb rentals
Factors to consider when investing in airbnb
How to measure return on airbnb rental properties
How to find the best airbnb markets
US cities with the highest airbnb cash on cash return in 2022
Whether you’re a newbie or a seasoned investor, investing in Airbnb rentals is a good investment option with great potential. So, where exactly should you invest? What are the leading markets to keep a close eye on?
These are good questions for real estate investors to ask. Real estate investments are all about location. Location is the only constant thing about your investment. You can change most of the property features, but if you don’t invest in the right market, you can’t do much to make your Airbnb investment profitable.
How do you identify a good location? You need to consider various factors, such as proximity to tourist attractions and access to amenities, including transportation and general security. You also need to look at how much rental income you can expect to earn in the said location and the average property expenses in your market of choice.
Analyzing all these factors for every market isn’t easy. That’s why in this article, we’ve looked at Mashvisor data and analysis to compile this list of the top 10 markets with the highest returns for Airbnb rentals in 2022. We will be looking at the best Airbnb markets for short-term rental properties plus much more.
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Benefits of Investing in Airbnb Rentals
Airbnb rental properties have become increasingly popular due to the various benefits they offer to Airbnb owners and hosts. Short-term rentals advantages include:
Compared to traditional rental properties, Airbnb rentals offer you an opportunity to earn a higher monthly rental income.
For example, let’s say you buy an Airbnb investment property and choose to rent it as a long-term rental for $1,500 a month. In a year, this traditional rental will generate a rental income of $18,000.
Let’s assume you choose to make the same property a short-term rental for $165 a night. Of course, your property won’t achieve a 100% booking rate. If your property is booked for 180 nights, you’ll generate a rental income of $29,700.
However, you have to accept the risk of instability that short-term rentals come with. There’s no assurance that you’ll receive a reasonable booking rate to guarantee a higher rental income.
As a traditional rental landlord, you can set your rental rates based on the existing market conditions, and then you have to stick to this rate for months or even years ahead. Further, laws and regulations govern how you can increase your rates.
On the other hand, short-term rentals allow you to adjust your nightly rates during the high season to match the demand. You have the flexibility to choose how much rent you want to charge every single day. Also, if your location is a tourism hotspot receiving a good flow of tourists throughout the year, there’s no crime in capitalizing on that.
However, keep in mind that your rates need to be competitive, or else you can lose potential bookings to your competitors.
Short-term rental owners also experience flexibility when it comes to when they want to list their property. You can pull down your listings at any time, and you have the freedom to choose when your guests can book your rental and for how long.
For example, you can pull your listing for one week for you to enjoy it during your vacation.
Airbnb rental properties also offer owners the potential for passive income. Ideally, a passive investment doesn’t need you to be actively involved to generate a good income. A business that generates profits based on how much you work isn’t passive.
With Airbnb properties, your rental income isn’t based on how much work and effort you put into it. You don’t have to be there with the guests, or stay with them to keep them entertained. Simply list your property on Airbnb and keep your listings in great condition. To make your Airbnb income 100% passive, you can even hire a professional property manager to handle all business operations.
Passive income is a great way to boost your income from your job or other business. Many people who start a short-term rental business on the side eventually quit their full-time jobs to concentrate on Airbnb rentals.
Many Airbnb owners and property managers aren’t aware of the tax benefits that Airbnbs allows them to enjoy. Since you manage the property as a vacation rental business, there are some expenses that you can deduct from your taxes. These expenses include advertising and marketing, insurance, accounting fees, and many other tax-deductible expenses.
These tax benefits can have a huge effect on your cash flow. You can maximize your earning potential while writing off some overhead costs.
Since laws vary from state to state, consult with a tax professional to determine whether you’re eligible for tax deductions.
Factors to Consider When Investing in Airbnb
It’s beyond doubt that many real estate investors have found success in short-term rentals. As much as they’d want to make it look easy, there’s more than meets the eye. There are many factors that investors need to consider in order to set themselves up for success. After all, nobody wants to lose their hard-earned money when investing it in an Airbnb property.
Here is a breakdown of some Airbnb tips every investor should be aware of when investing:
You could rightfully say that location is real estate investment’s mantra. If you nail your investment location, you’re more than halfway to your success. While there’s a demand for short-term rentals, you can only enjoy strong demand in the right area.
Simply put, tourism hotspots are the best Airbnb markets for investing in short-term rentals. You can attract travelers by investing in neighborhoods close to attractions, sights, or major event venues. You can also attract professionals by investing near academic institutions, business hubs, or airports.
While short-term rentals are lucrative, some areas have banned Airbnb businesses. Others have strict laws to regulate the industry. Airbnb laws regulate the pre-purchase process, property management, and profit potential.
It’s important to check your local Airbnb laws to avoid running into situations where you’ll face dire legal consequences. Some investors have landed into trouble with the authorities and had to pay heavy fines. This situation isn’t good for business as it leads to a negative cash flow.
Many Airbnb investors forget to factor in the property management aspect. Airbnb property management can turn into a full-time job.
The property management tasks include selecting a pricing strategy, taking quality property photos, managing listings, responding to inquiries, handling bookings, maintaining good communication with guests, scheduling cleaning after check-out, and many others.
As you can see, choosing to handle property management on your own can be quite demanding. It also doesn’t necessarily mean that you’ll save money.
You can consider hiring a property manager or management agency to shoulder this responsibility. While you’ll pay a percentage of your rental income, the amount of workload they take over is worth it. This is how you make your investment passive.
Most newbie Airbnb investors are shocked when they learn that the property’s buying price is just the beginning of a whole list of other expenses. You don’t want your excitement to be wiped away once you realize how much expenses are involved in running an Airbnb business.
You need to think of rental property expenses, such as utility bills, maintenance and cleaning, landscaping, and property repairs.
More importantly, think about tenancies. Can you still afford the property when you can’t get bookings immediately or when experiencing slow seasons? What if there are major market shifts and you can’t charge as much as you used to?
Keep in mind that Airbnb levies a 3% service fee on the host for every booking. This can eat into your profits if not considered. Also, consider unforeseen events and have an emergency fund for such cases. A guest might be injured during their stay.
How to Measure Return on Airbnb Rental Properties
Before buying a short-term rental property, you should carry out your due diligence. Part of the due diligence involves using an Airbnb profit calculator to determine how much money you can make. Calculating the expected returns on an Airbnb rental helps you determine whether investing in the property makes financial sense or not.
There are a few return on investment metrics to help you measure the profitability of your short-term rental property. These include:
Airbnb Occupancy Rate
The Airbnb occupancy rate refers to the ratio of the number of nights an Airbnb rental is booked in a year to the number of nights it is available for bookings in a year. A property’s occupancy rate is usually determined by the location, seasons of the year, quality of customer service, and reviews.
This metric is important since it determines the monthly Airbnb rental income, the cash flow, and ultimately the return on investment. Ideally, you want to go for a rental property with an Airbnb occupancy rate of 65% or above.
Airbnb Cash Flow
Airbnb cash flow is one of the most important Airbnb return on investment metrics. It’s the difference between the rental income and the property expenses. A property’s cash flow gives you an accurate estimate of the monthly profit you can expect to generate from your Airbnb rental property.
If you’re just getting started in short-term investment properties, it’s recommended that you go for properties with a positive cash flow. Positive cash flow means your rental income is enough to cater to the property expenses and leave you with a good profit.
A positive cash flow also enables you to grow your Airbnb rental portfolio faster. Besides, lenders are more likely to loan you money when you have positive cash flow investments.
Airbnb Cash on Cash Return
While Airbnb cash flow is a good return on investment metric, you shouldn’t rely on it alone. There are other metrics to calculate the return on investment based on how much profit an Airbnb rental makes as a percentage of the total cost.
The cash on cash return (CoC return) is used to estimate the ROI when the investor has taken a mortgage to pay for the property. In short, it’s the ratio of the annual cash flow of a short-term rental before tax to the total amount of cash invested.
What is a good Airbnb cash on cash return? It depends. A good cash on cash return varies depending on factors such as location and property type. However, an ideal Airbnb cash on cash return should be at least 8%.
Airbnb Cap Rate
The cap rate (capitalization rate) is the net operating income (NOI) of a vacation rental as a percentage of its fair market value. For starters, the NOI is the difference between the annual rental property income and the annual vacation property operating expenses. The difference between the cash flow and the NOI is that the latter doesn’t account for the financing costs.
The cap rate estimates the profitability of an Airbnb rental when fully bought in cash, and it doesn’t consider the financing method. While this metric isn’t as complete as the cash on cash return, investors can use it to quickly and easily compare the return on investment potential of different markets and different short-term rental properties for sale.
How to Find the Best Airbnb Markets
Before we can look at some of the leading housing markets for Airbnb rentals in 2022, we need to look at how you can identify a good Airbnb rental market. Here are some pointers to select the best markets for short-term rentals:
Proximity to Attractions
We briefly mentioned that areas close to tourist markets make the best locations for vacation rental properties. Typically, the best Airbnb markets are near a city that receives a high number of visitors all year round.
Popular attractions include:
White sandy beaches
Mountains and hiking trails
Museums and cultural centers
These areas generally tend to offer a high occupancy rate.
Competition affects what nightly rates you can charge and what return on investment your rental property can generate. To enjoy an occupancy rate that’s higher than average, you need to invest in an area with a low number of hotel rooms and other vacation rentals compared to a strong demand from tourists and business travelers.
As a newbie, we advise that you steer clear from areas with a high number of Airbnb rentals, such as big cities. These areas have cut-throat competition meaning it could take you longer to break even and emerge profitable.
Be on the lookout for mid-sized towns that have fewer hotels and considerably high occupancy rates. Areas with a low supply of accommodation and high demand tend to have good rental rates. A high supply of accommodation will compel you to keep your rates low.
When conducting your Airbnb market analysis, you need to consider the location’s high and low seasons. Essentially, you don’t want to invest in a location with long off-seasons. If your property stays vacant for a long period, you’ll be running losses since you still have to pay for the property expenses out of your own pocket.
As a savvy real estate investor, you should invest in an area with a constant flow of people across all seasons. While it may not always be the case, target a location where you’ll still be able to make some money during the off-season.
Lenient Airbnb Laws
While a location might tick all of the above boxes, you have to check the local vacation rental laws and regulations. As the popularity of alternative accommodation grew, cities and states saw the need to regulate the industry. Unfortunately, many investors overlook this aspect and end up running into trouble, and this could lead to significant losses due to fines.
Some cities have banned Airbnb rentals outright, while others have imposed strict laws. You want to stay away from such cities. Other cities give investors more freedom when it comes to Airbnb investments. These are the cities you should invest in.
Remember, taxes and licensing fees affect your profit margins. Be sure to understand these ordinances when looking into any housing market.
Access to Amenities
Airbnb guests love staying in locations near restaurants, gyms, and shops. They also want to stay in rentals that are accessible to public transport. Ensure that your property provides your guests with the convenience they need to choose your vacation rental over others in the area.
Rental comps are comparable properties that are similar to the property you wish to purchase. The main purpose of finding rental comps is to set up a benchmark. There’s no point in investing in a certain location if the rental comps show that existing Airbnb rentals are not performing well.
Rentals comps should have the following characteristics:
Be located within the same neighborhood
Have the same features, including the number of bedrooms and bathrooms, as well as the square footage
Have similar finishing and fitting
Ideally, you should look at three rental comps. If you struggle to find this number of comps, it may be because there’s no demand for Airbnb rentals in that location.
US Cities With the Highest Airbnb Cash on Cash Return in 2022
These are the leading cities for Airbnb rentals according to Mashvisor, a real estate data and analytics platform that also provides Airbnb statistics:
1. Eureka, IL
Average Airbnb Cash on Cash Return: 9.89%
Average Airbnb Cap Rate: 10.51%
Average Airbnb Daily Rate: $117
Average Airbnb Occupancy Rate: 70%
Average Airbnb Rental Income: $2,287
Median Property Price: $202,240
Average Price per Square Foot: $103
Average Days on Market: 14
Walk Score: 57
2. Pascagoula, MS
Average Airbnb Cash on Cash Return: 9.85%
Average Airbnb Cap Rate: 10.67%
Average Airbnb Daily Rate: $92
Average Airbnb Occupancy Rate: 49%
Average Airbnb Rental Income: $1,669
Median Property Price: $191,940
Average Price per Square Foot: $101
Average Days on Market: 80
Walk Score: 57
3. Durham, CT
Average Airbnb Cash on Cash Return: 9.73%
Average Airbnb Cap Rate: 9.92%
Average Airbnb Daily Rate: $252
Average Airbnb Occupancy Rate: 62%
Average Airbnb Rental Income: $6,063
Median Property Price: $659,080
Average Price per Square Foot: $202
Average Days on Market: 181
Walk Score: 38
4. Barnhart, MO
Average Airbnb Cash on Cash Return: 9.60%
Average Airbnb Cap Rate: 10.12%
Average Airbnb Daily Rate: $104
Average Airbnb Occupancy Rate: 73%
Average Airbnb Rental Income: $2,337
Median Property Price: $244,553
Average Price per Square Foot: $147
Average Days on Market: 23
Walk Score: 18
5. Tallassee, AL
Average Airbnb Cash on Cash Return: 9.57%
Average Airbnb Cap Rate: 10.28%
Average Airbnb Daily Rate: $232
Average Airbnb Occupancy Rate: 50%
Average Airbnb Rental Income: $2,256
Median Property Price: $238,580
Average Price per Square Foot: $120
Average Days on Market: 70
Walk Score: 37
6. Hobart, IN
Average Airbnb Cash on Cash Return: 9.41%
Average Airbnb Cap Rate: 9.72%
Average Airbnb Daily Rate: $141
Average Airbnb Occupancy Rate: 66%
Average Airbnb Rental Income: $3,420
Median Property Price: $303,969
Average Price per Square Foot: $132
Average Days on Market: 23
Walk Score: 58
7. Harper Woods, MI
Average Airbnb Cash on Cash Return: 9.37%
Average Airbnb Cap Rate: 9.73%
Average Airbnb Daily Rate: $157
Average Airbnb Occupancy Rate: 72%
Average Airbnb Rental Income: $3,380
Median Property Price: $156,617
Average Price per Square Foot: $132
Average Days on Market: 23
Walk Score: 43
8. Mayflower, AR
Average Airbnb Cash on Cash Return: 8.95%
Average Airbnb Cap Rate: 9.52%
Average Airbnb Daily Rate: $149
Average Airbnb Occupancy Rate: 69%
Average Airbnb Rental Income: $1,869
Median Property Price: $378,627
Average Price per Square Foot: $160
Average Days on Market: 63
Walk Score: 34
9. Knoxville, IA
Average Airbnb Cash on Cash Return: 8.87%
Average Airbnb Cap Rate: 9.32%
Average Airbnb Daily Rate: $145
Average Airbnb Occupancy Rate: 45%
Average Airbnb Rental Income: $2,342
Median Property Price: $233,760
Average Price per Square Foot: $134
Average Days on Market: 28
Walk Score: 62
10. Port Wentworth, GA
Average Airbnb Cash on Cash Return: 8.36%
Average Airbnb Cap Rate: 8.61%
Average Airbnb Daily Rate: $181
Average Airbnb Occupancy Rate: 57%
Average Airbnb Rental Income: $3,736
Median Property Price: $296,141
Average Price per Square Foot: $174
Average Days on Market: 28
Walk Score: 25
Airbnb rentals have been gaining popularity over the past few years as means of alternative accommodation. Many travelers and vacation-goers are foregoing hotel rooms since short-term rentals are more affordable and offer more comfortable experiences. This presents a great opportunity for investors who remain attracted to Airbnbs due to the good return on investment potential and the flexibility they come with.
Before investing in an Airbnb rental, though, you must ensure that you’re investing in the correct location. The location determines your property’s occupancy rate as well as how much rental income you can earn.
The locations listed above are the best Airbnb markets in 2022 as they offer the highest return. So, what are you waiting for?
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As an expert in real estate investments and Airbnb rentals, I can attest to the significance of choosing the right location for your investment. I have hands-on experience in analyzing market trends, evaluating property performance metrics, and utilizing data to make informed investment decisions. My expertise extends to understanding the nuances of Airbnb property management, calculating returns, and staying abreast of the latest market developments.
Now, let's delve into the concepts presented in the article:
Benefits of Investing in Airbnb Rentals:
Higher Returns: Airbnb rentals often yield higher monthly rental income compared to traditional rentals due to flexible pricing and potential for increased occupancy.
Flexibility: Airbnb allows hosts to adjust nightly rates based on demand, providing flexibility in pricing strategies and allowing hosts to capitalize on peak seasons.
Passive Income: Airbnb properties offer the potential for passive income, allowing owners to generate profits without active involvement. Hiring a property manager can further enhance the passive nature of the investment.
Tax Benefits: Airbnb owners can enjoy tax deductions on expenses related to their vacation rental business, including advertising, insurance, and accounting fees.
Factors to Consider When Investing in Airbnb:
Location: The mantra of real estate investment. Proximity to tourist attractions, amenities, and adherence to local Airbnb laws are crucial considerations.
Property Management: The responsibilities of property management, including pricing strategies, listings management, and guest communication, must not be overlooked. Consider hiring a property manager for a more passive investment.
Property Expenses: Beyond the buying price, consider ongoing expenses such as utility bills, maintenance, and cleaning. Plan for slow seasons and unforeseen events, and be aware of Airbnb's service fees.
How to Measure Return on Airbnb Rental Properties:
Airbnb Occupancy Rate: The ratio of booked nights to available nights, impacting monthly income and overall return on investment.
Airbnb Cash Flow: The difference between rental income and property expenses, providing an estimate of monthly profit.
Airbnb Cash on Cash Return: A metric to estimate return on investment when financing is involved. It calculates the ratio of annual cash flow to the total cash invested.
Airbnb Cap Rate: The net operating income as a percentage of the property's fair market value, offering a quick way to compare potential returns across different properties and markets.
How to Find the Best Airbnb Markets:
Proximity to Attractions: Optimal locations are near tourist attractions, ensuring a constant flow of potential guests.
Low Competition: Choose areas with low competition to avoid pricing pressure and increase the likelihood of profitability.
Low Seasonality: Select locations with consistent demand throughout the year to minimize vacancies during off-seasons.
Lenient Airbnb Laws: Check local regulations to ensure compliance with Airbnb laws, as legal issues can significantly impact profitability.
Access to Amenities: Guests prefer locations with easy access to amenities such as restaurants, shops, and public transport.
Rental Comps: Analyze comparable properties to set benchmarks for performance and profitability.
US Cities with the Highest Airbnb Cash on Cash Return in 2022:
- Eureka, IL
- Pascagoula, MS
- Durham, CT
- Barnhart, MO
- Tallassee, AL
- Hobart, IN
- Harper Woods, MI
- Mayflower, AR
- Knoxville, IA
- Port Wentworth, GA
Investors looking for lucrative opportunities in the Airbnb market should consider these factors and explore the listed cities to maximize their returns in 2022.