The following is an example we are going to use in our test to see if a house is a good potential for Airbnb – it’s just an Example so that you can feel more confident in analyzing houses. You will need to know the following
|1. Calculate The Average Cost of House||Use Zillow for a cursory review, but a good real estate agent is better. Don’t forget PMI if your downpayment is under 20%.|
|2. Review the Local and State Rules on Short term rentals and taxes||Each state has their own rules. Taxes can be state, county and city. Don’t forget property tax.|
|3. Calculate the cost of utilities||Know whether it’s gas or electric etc.|
|4. Review Airbnb for similar property||Make sure they are similar in amenities, location, and number of bedrooms and baths|
|5. Calculate the Mortgage (including Insurance and PMI if applicable)||You can use any mortgage calculator; but don’t forget PMI and insurance|
|6. Cost of Airbnb (3%)||Calculated on the revenue generated through Airbnb|
|7. Cost of a Property Manager (10-20%)||Calculated on the revenue generated.|
|8. Repair Costs||This is the routine repairs|
|9. Cap Expense||This is for future large expenses like a new roof|
|10. Cleaning and Supplies||The cost of the cleaners and their supplies|
How Can I Calculate the Average House for Airbnb?
Since the cost of a house varies so greatly from state to state, and city to city, you should not rely on one research method.
You can use Zillow and Real Estate listings just for a cursory review. Be forewarned, Zillow is an estimate and a real estate listing is ONLY the seller’s asking price. It does not mean that is what they did or will get. Even when you go to the courthouse and review the docs (they’re online nowadays) they don’t tell you if there were any additional concessions.
The purpose of our research is just to get a guestimate and to ensure we know what we need to consider before we pull the trigger on a house. Never buy a house on just a Zillow estimate; ask for a real estate comp and, do your own research. Do you know the area well enough to know if 123 Main street is reasonably priced? By the time you pull the trigger, you should feel pretty comfortable that you know the value of houses in your target area.
In our example we are choosing a 3 bedroom 2 bath 1300 sq feet house located in Joshua Tree California. It sells for about $489,000 Let’s see how this one looks when we crunch the numbers (this does not mean I recommend California – in fact, I have my reservations about California).
How Can I Estimate Taxes on My Proposed Airbnb?
In general, the taxes will come in three different areas. You will need to check the state sales tax on short-term rentals, Local taxes on short-term rentals, and Property tax. Don’t forget that some areas have specialized taxes for what is considered hotel taxes. That means, in addition to the state/local tax there could be an additional fee tacked on to the tax for Airbnb. In my state Airbnb has to submit these taxes, your state may not require them to do so, and instead, make you account for it.
The way to find your taxes is to research your state laws by googling them. You can also call your state’s main switchboard and ask for the Accessors Office of the comparable unit such as the Revenue division. The receptionist should be able to direct you. Don’t forget to do the same things with the City; they should know the city tax rate. In fact, your target city is usually the most important info on Airbnb prohibitions and taxes.
You should take this time to familiarize yourself with the state/Cities codes on short term rentals or landlord tenant laws. You can go directly to the states and cities websites, or use a site such as https://www.alltherooms.com/analytics/airbnb-regulations/
How Do I Calculate the Cost of Utilities?
Usually, a house for sale will have a list of the utilities (like gas or electric) included by the listing agent. You can utilize this or contact the utility companies and get an estimate for the size of the house you intend on purchasing.
As part of your agreement with the cleaning crew, you can have them be responsible for taking garbage with them. Or, depending on your area – it should be about $25/month.
How Do I Review Airbnb For Estimates of Income?
Take everything with a grain of salt; but you can do your search against your competitors by going directly to Airbnb. After you have chosen your prospective property look to similar properties. Be sure you review the similarities and analyze whether your property is or can be made better than what they are presenting on the platform. The main thing you are trying to determine is the rate you can charge. Also look at what your competitors are charging for cleaning.
You also want to look at your competitors calendar and ask yourself; does it look reasonable. Is their calendar full? If not, does that mean there is too much competition? Their rates are too high? or it’s in a seasonal slump. You need to know this.
Ask yourself what is the attraction in this area. If it’s a ski town does that mean in July there are few guests? Or does the outdoors still draw a needed tourist group? Sometimes it’s hard to tell. Pay special attention to the current month and whether it is booked up or not. But do note, just because they have it x’d out does not mean they didn’t x it out for their own use or reason. It might be a slow month and they x’d out days on their calendar so they could do painting or host their relatives. That’s one reason you need to look at several similar properties in your choice area.
Do your competitors charge a huge cleaning fee? Are your plans compatible with what the market is indicating? Did your competitor drop their price next month? Why?
The whole point of looking at your competitors is the try and determine the rate at which to set your property and the potential for income. It would be sad to purchase a house for Airbnb and not have enough bookings to cover your expenses.
Check out several properties in your area of choice and click on the dollar amounts to review the details of the property. Toss out unsimilar properties from your analysis.
It looked like in my research my house would bring in about $240 per night plus about $120 for cleaning with a turnover of 5 times. Meaning that I calculated an average of conservatively 20-days per month of renting with Airbnb and collecting cleaning fees of $120 x 5 times (a cleaning crew isn’t sent in every day – just at the end of a guest’s stay). Total income estimate
How Do I Calculate the Mortgage?
There are so many apps – you shouldn’t have any problem finding them. When you find a mortgage app enter the proposed price of the property, the going interest rate, and your down payment. You can get the going interest rate from a loan officer.
In our particular example, I just used Redfin’s app and they had the current interest rates as 5.042% (time and your situation will vary). The house for $489,000 with 10% down came to $3,248/month. OUCH. This includes $2,374 for principal and interest, $90/month for insurance, approximate monthly property tax of $509 (which would normally be part of your mortgage escrow payments quarter/semi-annually or yearly), and since the downpayment was under 20% I would be charged a Mortgage insurance fee (PMI) of $275/month. For a whopping total of $3,248/month.
What Fees Do I have to Pay Airbnb When I’m a Host?
Since Airbnb is a reservation platform, they charge you based on the income you generate. The rate they charge is 3% of the rental cost. Most Hosts are charged a flat service fee of 3% of the booking subtotal. The subtotal is your nightly rate plus your cleaning fee. It does not include 3% on the taxes and the Airbnb Service Fee.
Airbnb get’s their money from the 3% Host fee (you) and approximately 14% guest charge for bringing the two of you together. Guests typically pay a service fee of around 14% of the booking subtotal. In other words, when you look at the Airbnb listing you will see the room/house rate, cleaning fees, and the service fee. The service fee is money Airbnb earns from the guest and it does not go to the host.
What is the Cost of Hiring an Airbnb Property Manager?
If you are planning on managing this property from a distance, and need a property manager, a property manager on average will charge about 20-30% of the Airbnb rental income. Why such a high amount? Because they have to deal with the day-to-day operation which is much more hands-on than a typical rental apartment.
What if I want to manage it myself? What if I have a trusted relative or friend that can help me out in a pinch? Alright, that could save you a considerable amount of money. In my example here, property managers would earn approximately $960/month to $1300. That’s a big chunk out of your potential earnings.
How Much should I Set Aside for Repair Costs?
On an average-size house, in reasonably good condition, you should expect to spend about 1-3% of the income per month on basic repairs. These would be such things as cleaning the furnace, unclogging drains, and similar periodic upkeep.
While this is an estimate, an older house might cost the host additional periodic repairs and a host may need to set aside more. In some months there may be no repairs and the following month may be double your reserved estimate.
What is Cap Expenses And How Much Should I Set Aside?
On average, the smart investor will set aside about 1-3 percent for CapEx (also called Cap Expenses, or Capital Expenses) from their Airbnb rental income. CapEx is money set aside to cover larger items that will need to be fixed in the future. They can be things like a new heating system or roof.
The main point is money should be set aside so that a capital expense can be covered when needed. By planning for the inevitable, you can prevent the undue burden of not having funds for these eventual repairs.
How Much Will Cleaning and Supplies Cost me?
The cost of cleaning does vary from location to location. But the average ranges from $120 to $200 for a 3 bedroom house, depending on the size of the house and the extent of the cleaning. Since the cleaning will be done after the guest leaves, the cleaning is incurred based on the number of guest visits. So if you had 5 guest bookings you would have to pay for 5 cleaning crew visits to the premises.
As for the cost of the cleaning supplies, if you use a cleaning company or a contractor they will supply their own products. Since they are covering your cleaning supply costs, your out-of-pocket should be minimal and will just be part of the $120-$200 per cleaning visit.
Do keep in mind they will not pay for your regular supply inventory like soap, kitchen detergent, and toilet paper. That would have to be determined by you but you could have your cleaners restock for you.
And in case you missed it; you are charging your guest for cleaning.
Now Let’s Look at My Example
In Example 1: below we have the basic income plus the cleaning fees. We then subtracted the expenses to give us a Net income. Note, since we are just trying to figure out if we are earning anything we looked at the mortgage as an expense. If you are looking on an actual Net Income it would not include your mortgage info. But in our case we want to get to the bottom line.
Our earnings were completely underwater. With the cost of the property manager at $960, we have to come out of pocket. The scenario is definitely not worth it. I am arbitrarily choosing 20 days of bookings, you will need to search your competitors on Airbnb and see how theirs are looking.
In Example 2: below, I ran some figures assuming we had NO property manager and managed myself. We are still assuming 20 days of bookings – but we removed the property manager. The earnings are still pretty low. If we fell to 18 days of bookings we would be in the red. Something to think about.
In Example 3: we took it out to 25 days of bookings WITH a property manager. At least it’s not in the red.
In Example 4: We chose bookings of 25 days and NO property manager. As you can see, it looks pretty good. But of course, in all these situations you need to choose what works for you. If it’s just not possible to manage your property yourself you are going to have to pay someone to assist. You could do a hybrid; where you use someone you can trust if you need assistance.
You need to check on your competitors and see how much they are booking and what amenities do they have versus you.
What about Federal Taxes?
Federal Taxes (and state taxes in some states), will be calculated and submitted however you have your taxes organized by your accountant. For instance, the income you earn is taxable on your federal income tax and some states will also want you to pay income taxes within the state of the property. So what I am saying is your grand total may not be so grand total since you will also pay income tax on it. Speak to your accounting as many deductions might make your earnings appear minimal or a paper loss.
Look at the above examples and analyze the calculations. You can see that if you change one area it will change how much you earn. In this example I am paying PMI insurance, but if I had put a downpayment of 20% I would not have that additional $275.
If this was my first Airbnb and I wanted to do the cleaning and managing myself that would be additional savings. Your results and situation can vary greatly – you may not like this rental – and I might.
Look at it from all angles and decide what works for you – we just showed an example of a month, but you should be considering a full year as most locations have higher traffic times. good luck.