With the explosion in popularity of new AirBnB options for travelers in cities around the country, where are the best places to invest in 2022?
At the beginning of then year, there were several "Best of 2022" lists from numerous publications regarding the best cities for AirBnB investment. The most prominent lists came from AirDNA, and were supported with enormous amounts of data. While I believe these types of rankings are directionally informative, I also see some areas where new investors should pay attention to going forward.
First, it is important to understand the specific criteria on which the rankings are based, and whether that jives with your own investing philosophy. For example, some investors have preferences for immediate cash flow versus longer term appreciation, some prioritize properties with the best total ROI (projecting over a 5-10 year horizon), while others simply prefer a place that they can enjoy twice a year for vacation while also making some passive income.
There is no such thing as an absolute best list of AirBnB markets but these lists can help you narrow down a list of target cities if the criteria of those lists align with which investing criteria you are looking to maximize.
Let's dive in deeper with three key ranking lists from AirDNA.
AirDNA Top 25 Markets By ADR (Average Daily Rate)
The first list from AirDNA is based on ranking the top cities by ADR, or average daily rate. This simply looked at the average daily rental rates for all cities in 2021 and determined which city was able to charge the highest average daily rate. You will immediately notice from the list that high end ski resort destinations (e.g. Park City, Breckenridge), and beachfront areas (e.g. Lahaina, Santa Rosa Beach) are unsurprisingly able to charge the highest average daily rates in the country. In fact, all of the cities in the Top 10 have immediate access to skiable mountains or the beach.
However, it is important to remember that ADR doesn't tell you the whole picture for how good an investment will be. In particular, ADR doesn't give any indication about how often a place is booked (i.e. occupancy %) or how much initial capital would be required to purchase a home in that market to be able to rent out. For example, Palm Springs has an ADR of $445, but its occupancy is far from full in the non-summer months. So while Palm Springs might rank #4 in ADR, it does not necessarily rank #4 in potential income an owner would generate, due to lower occupancy rates in those non-summer months. Furthermore, ADR doesn't take into account the cost of acquiring a property. For example, the cost of an average AirBnB rental in Lahaina (#5 on the list), is $1,042,355, which is far greater than Gulf Shores (#15 on the list), where the average home costs $427,806.
AirDNA Top 25 Markets By Occupancy Rate
The second list from AirDNA ranks cities by occupancy rate. This data simply looks at the available calendar of all properties in a particular city, and sees how many of those available bookable nights was actually reserved by guests. So if a city has an occupancy rate of 60%, it means that 60% of the available nights for rent are booked. Conversely, it also means that 40% of available nights in that city were left empty and not being used by guests.
With this list you will notice a concentration of cities in the largest metropolitan areas having the highest occupancy rates. Apart from Kihei (HI), Lahaina (HI), Davenport (IA), and Destin (FL), all other 21 cities on this Top 25 list are part of major US metropolitan areas.
Occupancy is an important metric to look at because when you combine it with Average Daily Rate (ADR), you can estimate the monthly revenue of a property. For example, looking at Lahaina, HI (with an average daily rate of $438/day and an occupancy of 68.3%), we can project an average annual monthly revenue of $8,974. While this is for an "average" property, you should realize that there will be differences for individual properties depending on property specific features (e.g. 1BR vs. 2BR, beachfront or not, unique features of the home, etc.)
Looking at occupancy and ADR together start to give you a better picture of the potential income an AirBnB listing in a city might generate. When you combine the two and apply that same analysis to all the cities in the list above (just like a I did for the Lahaina example above), you can get a much better estimate of total revenue by city. That is where the final list from AirDNA comes into play.
AirDNA Top 25 Markets By Revenue
The third list of AirDNA combines the concepts of ADR and occupancy rate %, into a metric they call RevPAR (or revenue per average rental). Simply put, this is the expected income for the average listing in that city (before subtracting for expenses). Looking at this list, it is clear that there is a significantly higher average revenue for the top 10 cities (~$73k) versus those outside of the top 10.
While this might make you think, "Let's go buy a property in one of these Top 10 revenue locations!", there is a one other big piece of the puzzle that is still missing. Up until this point we have only looked at the revenue part of the equation, but as any good business person knows, what you really care about is profitability. Profitability = Revenue - Expenses, and none of these lists have talked about how to think about or calculate expenses.
Looking At The Whole Picture, Including Expenses
There are two main areas of expenses you will need to consider before investing in a market, the purchase price of a property (and how you will finance it), and the monthly costs for operating and maintaining a property in that particular market.
1) Cost Of Financing And Furnishing An AirBnB
As mentioned earlier, the average cost of a home in Lahaina (HI) is $1,042,355, while the average cost of a home in Gulf Shores (AL) is $427,806. In order to purchase that home in Lahaina, you are going to have to pay much more, whether you decide to buy in all cash or if you are taking out a mortgage (most likely with either a 20% or 25% down payment). These initial cash costs need to be accounted for before making a purchase decision. Some key initial upfront cash costs include:
Down payment for the home (typically 20-25% for an investment property)
Closing costs for the loan (including origination fees, points, other costs)
Costs to purchase furnishings
Costs to renovate the unit before listing on vacation rental platforms
Let's take the Lahaina (HI) example again. Assume you purchase the average home at $1,042,355 while only putting down 20%, and getting a mortgage for the remaining 80%. Based on today's average mortgage rate of 6.0% (investment property mortgages are typically 0.5% higher than a primary home mortgage), that would equate to a monthly mortgage payment of about $6,000 (including property tax and insurance).
Additionally, you can expect to spend at anywhere from $5,000-$25,000 to furnish and get your unit ready before renting it out on AirBnB. Even if you think that a unit you are buying is turnkey, you will be surprised how many small things still need to be fixed and modified once you take ownership. I find that $5,000 is the minimum you should expect to spend to get things ready, even in a complete "turnkey" property.
2) Monthly Operating Costs
There are also several monthly operating costs that will have to be paid by the owner of an AirBnB rental to operate the unit each month. Some of these key costs include:
Mortgage: If you are financing your property then you need to account for your monthly mortgage payment (principle + interest).
Property tax: Regardless of how you decide to pay for the purchase of your property, you will be responsible for property tax, which typically ranges from 1-2% depending on the city, county, and state of your property.
Insurance: Homeowners insurance for rental properties is typically required by lenders if you are financing your home (and a good idea even if you are buying with all cash). The specific insurance required will depend on the specific risks in your area (e.g. flood insurance for areas that are prone to flood).
HOA fees: These monthly home owners association fees can sometimes be over $1,000 in popular AirBnB beach locations such as Hawaii, or very low in more residential areas like Palm Springs, CA. HOA fees are correlated dependent on the amount of community amenities (e.g. community swimming pools, gyms, parks, playgrounds).
Utilities: Electricity can be a significant cost in beach and snow locations that are popular for vacation rentals. Imagine heating a hot tub in your Park City rental, or running the air conditioning in a South Florida beach home all day. You should understand what the average monthly utility costs are for your area, since unlike long-term rentals, these costs are generally the AirBnB owner's responsibility.
Property Management: If you are not living in the area or do not want to manage the day to day operations (e.g. getting new bookings, coordinating with cleaners, guest communications, billing issues), you should factor in the cost of hiring a property management company to help you. The fees for a property manager vary but most full-service property managers will charge a fee around 20-25% of monthly revenue. However the services included from each property manager may be different. For example, when I started my first AirBnB, I was using a property manager that handled the online bookings but did not handle coordinating with the cleaners or with guests during their stay. They only charged 10% (as opposed to the normal 20-25% for a full-service property manager).
Maintenance: Things will inevitably break and wear down in your unit. Broken coffee machines, washer and dryers, and sinks are all part of the life of renting out your property. While AirBnB, VRBO, and other booking platforms offer some damage protection when guests damage specific items, this coverage is not always comprehensive because it depends on being able to document the claim quickly and generally limits the total amount you can be reimbursed for. There are many wear and tear items that break where you can not point to one specific guest, and those are costs that over time need to be accounted for.
The Bottom Line
While there are several lists of "Best Cities to Invest in AirBnB", I recommend you don't blindly select one of the top cities and just go buy a property there. Use these lists as a starting point for understanding the key financial metrics of cities as you narrow down your selection of possible markets. In addition to the financial returns, also ask yourself what personal motivations you want to fulfill with owning a property. For example, I only want to invest in AirBnBs that I also imagine myself visiting annually with my family. While the financial return on investment is critically important for me, any location that does not meet my primary requirement of wanting to visit at least once a year is automatically excluded from the consideration set.
After looking at the total financial picture (both revenue and expenses) of what a potential AirBnB might make for you, I recommend you also think about those personal reasons that motivate you to want to own that property, as this will hopefully be an investment you hold onto for many years - making you both wealthier and happier, starting in 2023.
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