Short term/Airbnb rentals -- how to estimate rental income?

Question

I'm looking at purchasing a property as a short term/vacation/Airbnb type rental. This property is very close to a spring training stadium, good proximity to a state university, and also near some larger shopping districts so I think it has good potential as a short term/vacation rental. My question is, when purchasing a property specifically for short term rentals how did you estimate rental income? My biggest fear with short term rentals is the cash flow instability. Worst case I could rent this place out as LTR and still have some modest cash flow but it wouldn't be great and am mostly interested in a STR scenario.

Any insights on best strategies for estimating what your rental income would be? Apologies if this has been asked before, happy to be redirected to a previous post!

Chris Mason · Answer

If this event has taught us anything, it's that you don't estimate STR income.

You underwrite it as a long-term rental, and it either makes sense or doesn't on that basis alone.

And then once you actually own it, any surplus rental income from STR is icing on the cake.

And you take that higher STR income, and do nothing but stash it until you have 6-12 months of payments saved up.

Here's what just happened:

• A bunch of people underwrote the deals assuming STR income, allowing them to justify the highest possible purchase price, mortgage balance, and mortgage payment, of any other buyer considering purchasing that property.
• I, their loan officer, told them they also needed six months of reserves, Per Fannie. They showed me the bank account with their "buy furniture and redo the property" budget to check that box.
• They subsequently spent that six months of payments on furniture and renovations.
• Then they took all that profit, and spent it as soon as it came in. Many of them quit their day-jobs.
• So even though they HAD six months of payments at closing, they blew it all, quit their jobs, lived month to month, and are now completely broke less than 2 months into this downturn. 
• They are calling me asking what to do. I'm telling them to get a job and pay their mortgages. 
• (To those people reading this that are/were my clients, you don't need to call, that's my answer. :) )

Paul Sandhu · Answer

Good post.  That's why we save income from our STRs and pay cash for the purchase of the next STR.

Joanne Eriaku · Answer

Speaking from my past experience: I used to manage my brothers STR's which we're all on airbnb; There we're times when cashflow was just as it was written in the books, then there we're times when stuff would just come out of the blue and we hadn't anticipated it. We ended up converting them all into rentalsTruth is all well meaning estimate tools are lagging data, they are not really built for what might really happen. Have an STR but have a backup too. Just my two cents.

Mark Koslow · Answer

I own 3 STR in Scottsdale - with COVID, you are going to sit relatively empty util November. Make sure you have cash reserves.

Nathan Gesner · Answer

You can do some heavy research into other short-term rentals in the market. Look at their rates, look at their calendars, and make an educated guess.

There are paid services like Mashvisor, AirDNA, or LearnAirBnB. I'm not sure what they cost or how accurate they are, but I would expect it's fairly accurate if you're in a larger market. It may be worth coming up with your own numbers and then comparing that to a paid research service.

Lisa Irimata · Answer

Thanks Chris! This was really insightful. I'm still really new to REI and have always thought of LTR but recently started entertaining the idea of STR. This is a good reminder for me to be flexible with my investment plans and transitioning/pivoting from LTR/STR/selling/etc when it's an opportune time. Also good reminder why reserves (outside of rehab budget) is REALLY important.

Carlos H DeOliveira · Answer

@Lisa Irimata I have a few STRs in Florida and occasionally I use mashvisor to check on my own property and the data is about 90% accurate.

You way want to use one of those services to have an idea on occupancy rates and ideal strategies.

Lisa Irimata · Answer

Thanks for the resources! I was trying to estimate based on Airbnb calendars (when they're booked out vs empty) and the relative rates they charge but it's tough since nobody has anything on their Airbnb calendars right now with the COVID situation and I can't see previous bookings at a property. Will keep poking around.

Lauren Kormylo · Answer

Make sure STR is allowed where you're looking.  Scottsdale has enacted a law last fall on this.  https://www.avalara.com/mylodg...  They have had a lot of complaints, and citizens are getting to be a pain in the a** about noise and traffic in their neighborhoods.   I expect there may be more legislation in the future, despite Gov. Ducey's law of a few years ago.  Also, if you are looking at a condo, there are only so many that explicitly allow STRs.  The rest may ban them, or could ban them in the future.I don't know where Tempe or the other east side cities stand, but it would be a good idea to investigate the municipality's actions of the subject.There is a AZ forum here, and the people who have STRs usually rent in the summer to longer term renters by the month, maybe someone in town on business.  They don't see a demand for true STR when it's hot.  Post your question there for local advice.    https://www.biggerpockets.com/...

Paul Sandhu · Answer

@Lisa Inmate  Here is a good way to determine your weekly rate.  Take your monthly rate for a LTR property.  That'll be your weekly rate for the same house as an STR.  Then you have expenses like cable, internet, water, electric and gas.

Short term/Airbnb rentals -- how to estimate rental income?

Most Popular Reply