Over the past few years Airbnb renting has emerged as a popular alternative to hotels for travelers who want the space and comfort that a home can provide. That’s opened the door for investors looking to cash in on the growing market for short-term rentals.
Key Profit Factors for Airbnb Renting
As with all things real estate, it’s location, location, location. Some American cities are able to generate hefty profits for those who list on the site. In other places the quest for rental income has proven a little more elusive. A number of factors account for those disparities.
If the city has a relatively small supply of hotel rooms, for example, that tends to drive up Airbnb prices. But where hotels are plentiful and affordable, investors have little choice but to keep their rates low. The cost of housing is another big part of the equation. Places where investors can rent or buy for relatively little—but see a steady demand from tourists—represent the real sweet spot.
Ranking U.S. Cities
Using numbers provided by Airdna, an analytics firm specializing in Airbnb data, we put together the best and worst cities for investors. We started by taking the revenue for the properties in the 75th percentile of each city. That, according to Airdna co-founder and CEO Scott Shatford, is a way of accounting for the fact that there may be a few zip codes that dramatically outperform other parts of a city. The 75th percentile, he says, is a better measure of the income that skilled investors can bring in from an Airbnb property.
Not every home or condo is available for rent year round, so Airdna adjusts its data to look at the 12-month revenue potential of each property. We then deducted the annual cost of a mortgage, based on average home values in each city. The result is the annual profit potential for each city. The rankings only included locales with at least 500 rentals that were booked 60 days or more in the previous year, as towns with a small Airbnb presence are prone to larger income fluctuations.
Topping the list is Palm Springs, Calif., which benefits from winter tourists seeking a warm, sunny destination. But Shatford says there’s another factor helping the desert town as well: music festivals. Coachella and Stagecoach, in particular, bring in huge crowds. “Most people are able to cover their cost for the entire year during those two events,” says Shatford.
Lahaina, Hawaii, situated on the island of Maui, is another town characterized by temperate weather all year long. Shatford says tourists have traditionally had to pay for upscale resorts when they stayed there, creating an opening for affordable Airbnb listings.
Noticeably absent from the list are major cities such as New York, Los Angeles, and Chicago. Shatford suggests that’s largely because those places tend to be saturated with Airbnb listings. “People got in pretty early,” he says. All those investors have put downward pressure on Airbnb rates. And when you factor in the high price tag for homes in those cities, it makes it harder to turn a profit.
The biggest city to crack the Top 5 is Nashville, Tenn., which is benefiting from an influx of group travel. “You’re seeing a lot of bachelor and bachelorette parties,” Shatford says. But the country music hub is also proof that investors need to drill down further than just city-wide data. For example, the neighborhoods just north of downtown have significantly outperformed other parts of Nashville, according to Airdna’s data. It’s a resurgent area where investors can still scoop up properties on the cheap while offering proximity to the city center. Shatford says those types of neighborhoods tend to be lucrative in a lot of other cities as well.
Figure 1. The following screenshot from Airdna’s Investment Explorer app shows the disparity between high-performing zip codes in Nashville and less successful ones.
Sunny locations such as Miami Beach, Fla., and Venice, Calif., would seem like perfect places to invest. But according to Airdna’s data, these are two of the least-desirable places to seek out short-term renters right now. One culprit: steep home prices. “The Airbnb rentals don’t always make enough extra income to cover the cost of the underlying home,” Shatford says. What’s more, a large supply of Airbnb listings has lowered pricing power and pushed down occupancy rates, he says. While some hosts have still been able to eek out reasonable profits, that one-two punch has been hard for many investors to overcome.
A few hours north of Venice, Bay-area hosts have had similar troubles. California cities Oakland and Berkeley make the “5 Worst” list, in large part because ever-rising real estate values are cutting into their potential profits. In blue-collar Oakland the average home sells for just over $644,000. Just next door in Berkeley, a progressive university town, a typical residence tops $981,000.
The Bottom Line
If you’re going to invest in Airbnb properties, don’t look for the usual suspects. Some cities that appear to be great tourist spots can be duds if home prices are too high or there’s an ample supply of affordable hotels. As our list makes clear, some of the best deals out there are locations that don’t have a huge profile. Don't forget to figure in the cost of managing the property, especially if you're not going to live there yourself.