5 steps to buying an Airbnb investment property

So you've been following along with the blogs, done your research, taken a test drive - and have decided you are ready to take the plunge. You are ready to purchase an Airbnb investment property.

If you have purchased an investment property before, some of this will be familiar information. However, Airbnb is its own niche within the real estate investment community. I have seen a lot of real estate investors fail by approaching their Airbnb rentals with the same techniques as long term tenants. There are extra considerations when buying for Airbnb vs. traditional buy and hold, and when converting your traditional investment properties over to short term rentals.

If this is your first time purchasing an investment property, congratulations! This is something a lot of people talk about, but not many follow through on. There is no way one blog post could give you everything you need to know about purchasing your first investment property. I will touch on some basic real estate investing techniques, but I would strongly suggest checking out the other resources mentioned at the end of the article.

For the purposes of this article, I am going to assume that you already have a primary residence, and are looking for a property that will be strictly for investment purposes. This could be a single family home, duplex, triplex, or even condo.

1.Set a price range

The 1% rule is sufficient for an Airbnb property.  Obviously if you can find something closer to 2% that is even better - but finding those kinds of deals in desirable areas of town is becoming extremely difficult.  The rate of return is so much higher for Airbnbs vs long term rentals, that 1% is safe enough for an exit plan.  It's better to buy a 1% property than sit and wait around for a better deal that might never happen. 

*The 1% rule simply states that market rents for the home should be at least 1% of the total acquisition price. This includes not only the purchase price, but any money spent on repairs or upgrades to get it ready.

For example: You find a house for sale at $100,000. If you can rent it out for at least$1,000/month, then it meets the 1% rule. To determine how much you could charge for monthly rent, check comparable properties online or ask your real estate agent.

2. Find a Good Location

"Location, location, location" is a real estate cliche for a reason. Location is one of Airbnb's star-rating criteria, which makes this step even more important.

You don't have to buy a house in a huge city or in smack dab in the center of downtown to be successful. There are Airbnbs all around world, including remote and rural areas. Anywhere there is at least one hotel, there is going to be a market for short term vacation rentals.

One of the reasons Airbnb guests choose to use Airbnb is because they are looking for a unique, authentic experience. If you can't find a deal in the center of your tourist district, there are plenty of other neighborhoods that could be appealing. What are some of the places you hit up when your have a night off? Start there.

Does your town have a big local music scene? We have one Airbnb that is close to a medium-sized venue, and have had fans and actual bands book with us.

Any big attractions that aren't in downtown? People and families visit our city specifically for the world famous zoo. The zoo is in a different part of town, so having an Airbnb in that neighborhood would be extremely successful.

Other things to consider: is the property close to public transportation? College campus? Nature center? Right off the interstate?

*A lot of real estate investors assume that a good long term rental house is automatically going to be great for Airbnb. Airbnb guests don't care about good school districts.  They do care about having a great vacation, being close to cool stuff, and not being in a dangerous part of town.

Once you have narrowed your search down to a couple zip codes, check out the competition! Log onto Airbnb's website, and use the map feature to find listings in certain neighborhoods. Read the reviews. What do actual Airbnb guests have to say about the location? If they comment about it being sketchy or feeling unsafe, probably not your best bet. Remarks about it being a cool neighborhood/within walking distance/right off the interstate indicate that this could be a good choice. Take note of the amount of Airbnbs and pricing in the neighborhood. You don't want to enter into a neighborhood that is completely empty or already saturated; you want something in the middle.

3. Determine Airbnb Criteria

Amenities are important. You want to be able to charge as much as possible per night, and you also want to appeal to as many people as possible.

Here is the ideal property:

2 or 3 bedrooms

1 full bath with a tub, and a separate half bath

Free, off street parking

Enough square footage for a gathering place (living room area where people can watch TV, play board games, or just sit and chat)

Enough square footage for a group to eat (place to put a fairly big dining room table)

Outdoor recreation space (patio, deck, fenced in yard, etc)

Reasonably updated interior: modern appliances (don't have to be stainless steel or brand new, but should work properly and not look ancient), aesthetically pleasing finishes and countertops (again, they don't have to be top of the line, but a cheap chipped countertop from the 80s and ugly laminate floors aren't going to cut it)

This is the type of property that is the most successful on Airbnb, and will give you the highest return on your investment. Bonus points if the property has character, like original wood floors or someone famous lived there.

Keep in mind that for the right price, you can take a house and turn it into the ideal Airbnb property. If you find an otherwise perfect house with shag carpeting in the bathroom, get a contractor's estimate on how much it will take to replace and then include then in your 1% calculation.  If there's no parking, get a bid for concrete pads. People are looking for amenities that they won't get in a hotel.

This is not saying that 1 bed/1 bath houses don't work on Airbnb.  Of course they do! Almost anything works on Airbnb - you can throw up a tent in your backyard and rent it out.  This is simply the combination I have found that produces the best returns and appeals to the most people. 

4. Buy the House!

The scariest part about real estate investing is the uncertainty. Is this a good deal, or not? Will it be rented or sit empty forever? Is the house going to blow over the next time a storm hits?

The most efficient way to conquer a fear is to learn about it. Since you've completed the above steps, you know exactly what kind of a deal you are looking for. Now you just have to be patient.

Don't fudge the numbers because you are anxious to get a deal. Hold out for the house that fits all of your criteria. It's out there - you just have to find it! Tell all of your friends, family, and acquaintances that you are looking for a 3/2 house in the XYZ part of town. Check Zillow daily.

When you find the house that checks all the boxes, be ready to move quickly. Chances are that if you found a good deal, others will also. If you are getting financing, make sure you are already pre-approved and have the downpayment funds ready to go. If you are paying in cash, make sure it is liquid. Make an offer sight unseen with an inspection contingency, which gives you room to back out if needed. If that makes you uncomfortable, make sure you get into see the house that same day. I've lost out on houses because I took a night to sleep on it. If you've been doing your research, you don't need to sleep on it! Do it!

5. Make repairs and upgrades

Remodeling for Airbnb guests is different than other real estate projects.

You are aiming for a remodel that is of higher quality than a rental, but not as nice as a flip.

Here is an example. For the long term renter, you could just leave the laminate kitchen countertops. For a perspective buyer, you would want to upgrade to quartz or granite. For an Airbnb guest, you could do something in the middle. A clearance slab of granite, or butcher block, or even nice looking laminate.

When you are planning your remodel, put yourself in the guest's shoes. What sort of upgrades would encourage you to stay here? You want things to either look cool, or provide another amenity.

Some of the upgrades we have found worth the money were: fresh paint, rainfall shower heads, extra 1/2 bath, semi finishing a basement for a game or movie room, privacy fence, deck or front porch, widening the driveway for more parking, fancy kitchen faucet, replacing carpets, adding crown molding, putting in a gas stove, adding a washing machine and dryer, shutters, painting kitchen/bathroom cabinets, and putting up backsplashes in the kitchen/bathroom.

Whatever upgrades you decide to do, make sure you have a plan and a budget for them. It is easy for you to go upgrade crazy and before you know it max out your budget.

Conclusion

Choosing your first Airbnb investment house is scary, but it is a risk worth taking. Worst case scenario, you convert it to a long term investment property. Still winning!