Airbnb is undoubtedly leading the way for the vacation rental ownership market
. Airbnb is a worldwide sensation with properties located in 190 countries. As of November of this year (2018), 640,000 people
have invested in and are hosts of an Airbnb property. As others see the popularity of the site and its competitors, many wonder if they should jump on board and invest in their own vacation rental property.
Investing in an Airbnb Property
Many people that would’ve otherwise never thought to rent out their home or apartment are looking into buying a piece of property just to get in on the popularity of Airbnb. Thinking of doing the same? Before you invest there are a few considerations you will want to take in account:
1. Research the Local Rules and Ordinances
Before purchasing a property for short-term rental, research the rules and ordinances in the area. Some cities enforce certain rules that limit short-term rentals in favor of long-term rentals. Depending on where one lives, they may find that investing in an Airbnb property breaks the law.
Moreover, some local rules force renters to pay additional taxes and fees on the income generated with their Airbnb. Similarly, these renters may also be forced to obtain certain licenses to be able to rent out their property.
2. Ensure that the Property Can Also Be Used for Long-Term Renting
Buying a property specifically for Airbnb? Be sure that the property is also available for long-term renting. As business is always ebbing and flowing, it isn’t feasible to solely rely on revenue from short-term rentals.
3. Keep Tax Rules in Mind
Renters that set their Airbnb property lower than the market value may find that they are disqualified from using the property as a tax write-off. Before setting the rates or the property, research the IRS tax code and ensure that the property is in accordance with federal guidelines.
4. Review All the Expenses of Your Short Term Rental
While renting a room in one’s apartment on Airbnb requires little additional effort, renting an entire property tack on extra responsibility for the renter. In addition to maintaining the property by repairing and cleaning it, the owner must pay for the water gas, cable, electric, and Internet. All of these should be reflected in the price of the rental.
Don’t invest in an Airbnb if all the aforementioned considerations haven’t been made. Failing to consider these four things can turn a potentially profitable investment into a loss.
There’s a level of risk inherent to any investment, but successful investors can tell you that making money in this manner should never be a game of chance. Research constitutes a significant portion of any investor’s job, and that’s especially applicable when dealing with real estate. Any number of factors could affect the value of your property, but these tips can help you get some sensible grounding in the industry.
Learn the Lay of the Land
The value of a property is about a lot more than the size and quality of the home. The neighborhood and city it occupies is just as important, and getting a feel from the street level can help you not just predict what the property is worth now but what it might be worth in the future. If possible, you’ll want to make sure to visit the house itself so you can get an understanding of the local traffic situation, aesthetics, and access to entertainment and public facilities. Driving around can give you a big picture understanding, but going out on foot is just as important. Speak with local business owners and residents to get an understanding of the attitudes and get to know about upcoming development projects. This can be a good barometer for how well you can expect your property’s value to grow.
Assess the Market
There are a number of online resources that can help you determine if the property you’re looking at is a smart investment or a money trap. Check with a local Realtor or with online rental directories to get an understanding of typical rent in the area, and then evaluate that against your budget and the cost of your investment. Zillow can be a great resource here. You can also dig up the mortgage and lien history on your property directly. This information is public record and can be uncovered online without too much effort.
Scope Out Total Expenses
Figuring out the cost of your investment is about more than just comparing the cost of your mortgage to the average rent. You also have to take utilities, maintenance, and insurance into consideration. This will help you more accurately determine what your overall costs can be. And while some owners may be reticent to give up this information, the promise of a reliable buyer can often encourage them to be transparent with that data.
After putting these tips to use and conducting thorough research, you are ready to make your investment!
As humans, we like things orderly, and it’s in our nature to look at all the important things and rank them. But life is generally more complicated than that, and “the best” is often subjective and subject to any number of different factors. That’s as true for the world of real estate as anywhere else. In short, the best place for investing in real estate is determined by your own situation, your unique ambitions, and your interests. In short, everyone’s best country for real estate investment is different.
That means that you should be asking yourself some important questions when it comes to deciding where you’d like to invest your money. You’ll want to begin with the practical considerations of what resources you have available to you. Finances are a big factor here. The Georgian market, for instance, won’t pay sizable returns on investments that aren’t in the six figures, but less developed countries could see a better return with a smaller investment. Just keep in mind that these regional markets are always shifting, so staying abreast of shifts in the market and assessing your finances is of critical importance.
It’s also important to consider that while less developed countries than the U.S. can result in more generous profits, the onus will be on you to do more of the heavy lifting. That means that you need to consider your education level within the industry and how much time and effort you’re willing to devote towards your investments. These will serve as a major determinant factor in your ideal country for investment. Frontier markets can make you a lot with relatively little cash upfront, but you’ll be working that much harder to get yourself set up.
And while frontier markets may be great in the long term, you’ll want to consider whether yield of appreciation is more important to you. Investors with more money to spare and less need for cash upfront will find the best results in economies like Georgia that are likely to see substantive increases in property value over the course of years or decades. Those just looking for some quick monthly income could look as close as Rust Belt states in The U.S. where they can easily earn between 20 and 40% yield.
It would be insincere to make a list of the best investment markets, both because these change regularly and because they’re highly circumstantial. What works for you is going to be decided by your situation, and that means undertaking a level of personal research to track down the market that meets your needs.
Investing in real estate can be a lucrative experience, but it doesn’t come without its share of risks. Before you invest your savings in any real estate venture, it’s important to do enough research to help you feel confident that the risk is small compared to the potential gains. Even then, employing certain tactics, such as those listed here, can help you determine if you’re taking a good risk.
Follow the 1% Rule
The 1% rule states that you should be able to rent the property out for 1% of the purchase price. Following this rule means that you can expect to generate a positive cash flow, which will make the investment profitable and worthwhile. If you can’t reasonably expect tenants to pay rent equivalent to 1% of the property’s value, you’re better off looking for a more promising investment.
Ignore the Media Hype
There are a number of television shows that push the idea that you’ll make a fortune off every investment. Instead of buying into that, concentrate on turning a profit
. Even a small profit is better than nothing. The best way to do this is to buy the worst property in a good neighborhood and fix it up as cheaply as possible. Go for the less expensive countertops and appliances. After all, these items are easily replaced.
Calculate the Cap Rate
This is an equation investors use to determine the profitability of any investment. It compares the purchase price to the potential income. The cap rate helps you determine if you will be able to earn back your investment within one year of owning the property. If not, this would be considered a bad or high-risk investment.
Look at the Listing
If there’s a noticeable lack of photos and information in the listing, you can expect to do more work on the property. That doesn’t necessarily mean it’s a bad risk, if you’re willing to do the work. In many cases, these types of properties are priced to sell and the seller just wants to get rid of it. This is an opportunity to save money on the purchase price and maximize your investment, although the location of the property should still be considered.
There are many more strategies for identifying the risk of investment properties. As you become more experienced, you’ll develop your own ability to identify good and bad risks. Even when you estimate something to be a good risk, you may still misjudge the opportunity. Mistakes will happen, but perseverance will help you turn those bad investments into profitable learning experiences.
Real estate is one of those industries that has plenty of jargon. Some terms may sound like a totally different language. For regular consumers, it is not critically important to understand all the jargon. For real estate investors, industry jargon matters. Here are some of the terms investors should add to their daily vocabulary.
Net Operating Income
Known as NOI, this term defines how much cash flow investors generate if there is no lien or mortgage on the property. Most investors calculate NOI on an annual basis minus vacancy rates and expenses. Experts say investors should see a 40 to 50 percent NOI when compared to net rental income.
The capitalization rate, also known as the cap rate, is used to determine an investment’s annual return based on the estimated profit generated from a property in one year. To calculate the cap rate, divide the above mentioned NOI by the sales price or the appraised value of a property.
Real Estate Owned
When investors use the term real estate owned (REO), they are referring to a property that is currently owned by a bank. In most cases, the property went into foreclosure, and the bank listed the property for sale at a public auction. When a property does not sell at auction, the bank must maintain possession of the property. REO properties are popular among real estate investors since banks often list these homes for much less than their appraised value.
The goal of any investment property is to make money by renting or by capital appreciation, also known as capital gain. To determine the capital gain of a property, subtract the current value of the investment by the purchase price. If there is a gain in value, investors must pay a capital gains tax. However, the tax is not applicable until the asset is sold
This ratio helps investors determine how much real ownership they have in a property. The ratio, expressed as a percentage, compares the total debt owed on an investment compared to its equity. For example, if an investor buys a property valued at $100,000 and used an $80,000 mortgage plus $20,000 of their own money as a down payment, the investment would have an 80 percent debt-to-equity ratio. Many banks and mortgage lenders prefer a ratio of 80 percent or less.
Now that you have a better understanding of some of the most frequently used jargon in the real estate investment industry, you are ready to tackle your next investment with ease.