How investors spot Airbnb cash cows before everyone else (and how you can too)

How investors spot Airbnb cash cows before everyone else (and how you can too)

After the meteoric surge in pricing the short-term rental (STR) market experienced in the early 2020s, it became apparent that the Airbnb model is here to stay. Many investors seeking to diversify their portfolios concluded that, no matter how high the upfront cost, this is a buyer’s market.

That said, STRs have a way of being especially profitable to the people who buy in early. Apart from benefiting from less competition, local legislation also takes a while to catch up, leaving room for investors to make back their money before the grip of zoning laws and bans takes hold.

So how do smart investors find the perfect market for STRs early? PropertyReach offers a closer look at their strategies and how you can benefit from them.

Tracking the Volatility of Modern STR Markets

STRs were once a foolproof way of investing money, thanks to the simple business model and higher profitability compared to traditional long-term rentals (LTRs).

However, with the huge expansion witnessed right after the 2020 COVID-19 pandemic, local governments started paying closer attention to how this type of business affects the economy, and added “bans” or regulations that heavily control STRs. This is especially true for markets that see a lot of tourism, like Orlando, Florida; New York City; and Santa Monica, California.

That said, it’s wiser to look at the STR business as comprising several markets, not just one. While some of the aforementioned cities are closing in on investors, others are opening up.

Places like Buffalo, New York; Sarasota, Florida; and New Orleans are all booming with opportunity thanks to more lax regulations and falling property prices.

How Proactive Investors Locate Profitable Properties Early

The decision to invest in an STR property might seem easy to some, but a smart investor does their homework about where to invest, how much to pay for a property, as well as projected profitability from the STR model. Here are some metrics to consider:

Stable Home Value vs. Surging Rent

Some markets have been witnessing slow growth property value growth due to decreased demand. However, this doesn’t mean that rent prices aren’t rising alongside the general cost of living.

In the markets where home prices are stable, or even decreasing, you might find a property that would work perfectly for the STR model. Places like Portland, Maine; Harrisburg, Pennsylvania; and Madison, Wisconsin, are all potential candidates for this investment.

Gentrification

While considered a “dirty” word by some activists and organizations, it’s true that having amenities and gathering places, like workspaces, coffee shops, and grocery stores, close to a residential area is a magnet for property investment.

It’s beneficial for the residents but also an excellent marker for a refreshed new look for the area, and maybe even a desire to create new social and cultural hubs.

Low Owner-Occupancy Rates

If an area is mostly occupied by tenants instead of homeowners, it’s more likely to be accepting of a new STR business thanks to the absence of dreaded NIMBY (not in my backyard) sentiments and strict homeowners’ associations.

A quick lookup using a property search tool can let you know the status of each property in a specific area, so you can make sure you’re on the right track with the area you’re targeting.

Do High-Density Vacation Rentals Inflate Local Housing Costs?

The short answer is yes. Every 1% increase in the number of Airbnb listings in an area corresponds to a 0.026% increase in the house prices there, according to a 2020 study by Kyle Barron, Edward Kung, and Davide Proserpio, published in Marketing Science.

The effect balloons in high-density areas where the STR model reigns supreme, too. Another study found that in Barcelona, high Airbnb activity neighborhoods faced a 1.9% increase in rent, reaching 7% in highly coveted areas.

However, there seems to be a growing number of cities in the United States proactively putting out legislation to fight this phenomenon. STR “bans” are laws and local regulations that make it harder for someone to own and operate an STR property. These include, but aren’t limited to, the New York City law that prevents owners from adding internal locks on the doors inside their house, and the laws that force the owner to register the STR property as their primary residence, like in many California cities.

How to Future-Proof Your Rental Against Sudden Local Bans

These are a few strategies to consider when you’re preparing to invest in an STR property:

• Spot the Red Flags: No one can predict the future, but whenever a market turns on the STR model, there usually are signs that new legislation is about to be drafted. Look for local representatives adding anti-STR legislation on their election agenda, NIMBY homeowners, and general political leanings in the area.
• Cost-Benefit Analysis of a Sudden Lockdown: How much will you lose if the city you’re investing in suddenly cuts off STRs? Is it possible to flip the home and make back your money? These are questions you should be asking, and depending on the answer, you can decide if this property is right for you.
• LTR Pivot: Having a plan B for the property as a long-term rental could be helpful in uncertain times. Even though it might not be as profitable, it could still bring in cash with fewer risks.

Find Your Next STR Property Now

Understanding the right strategies for STR investment is an excellent way to diversify your portfolio and unlock a new income stream. All you have to do is keep an eye out for properties with a somewhat stable market value, but with high potential as a STR. You should also do your research about the property, the area, as well as local legislation that could present challenges in the future.

This story was produced by PropertyReach and reviewed and distributed by Stacker.