5 Ways to Evaluate Your Market for Short-Term Rental Potential
Real estate has always been attractive as an investment vehicle, as both a source of supplementary income and a full-time career. Thanks to online platforms like Airbnb, the barrier to entry into the market has dropped considerably making investing in short-term rental properties a worthwhile venture.
But how do you know if a location is ripe for short-term rental investment? What is the best way to research the neighborhood, types of guests typically drawn to the area, regulations and more?
Here’s what you need to evaluate when considering a location for your next investment.
1. Determine Its Appeal to Tourists
Ideally, the location you target for buying your short-term rental property should be in high demand among tourists. Find out as much as you can about the area and whether it has:
- Easy access to public transportation and nearby attractions
- A solid selection of restaurants, pubs and shops
- Strong traffic from tourism throughout the year
If you’re considering using the property for your own personal use as well as a means to earn some supplementary income, it may not be a bad idea to invest in a property that’s busy during just one or two seasons. This could mean less competition when you’d like to vacate the premises and rent it out. If you’re strictly after vacation rental property income, however, you’ll want to set up shop in an area that draws in tourists year round.
2. Investigate the Local Economy
You’ll have to see for yourself whether your intended real estate market has walkability and charm. Other metrics are much more objective, including the state of the local economy.
It’s not hard to find roundups of cities with booming economies, but it’s important to determine which ones are likeliest to have staying power. Check the industries that are growing the fastest against projections from the Bureau of Labor Statistics to see which are most likely to sustain their momentum.
Is the economy in your market built on something cutting-edge, or something that’s potentially on its way out the door?
3. Find Out About the Cost of Living
How much can you afford to spend on an investment property to earn the return you’re looking for? You want to do better than just break even, after all. Finding a rental property with the right price means understanding the cost of living in the area, including:
- The average rent in urban, suburban and rural areas
- Property taxes and fees
- Average utilities costs
Right now, the average cost of renting a two-bedroom apartment in New York City is around $3,411 per month. Nationwide, the cost of renting in urban areas stands at $1,640 per month on average. These numbers can give you quick insights into how difficult it will be to enter into a target market.
Consider whether you can afford the ongoing expenses of managing a vacation rental in a city with a higher cost of living. Property taxes, utilities and seasonal market forces can cut into your profits even if the upfront cost of investment isn’t a problem.
You’ll need to charge a high enough nightly fee to cover expenses without losing your competitive edge in the short-term rental market. Understanding existing rent prices, property taxes, and other factors can help give you an idea of the cost of living in the markets you’re targeting. This will let you zero in on the right community at the right price.
4. Dig Into Airbnb Analytics for the Area
Some companies offer proprietary Airbnb analytics platforms, which offer insights into pricing, marketing and occupancy rates. This means you already have have tools at your disposal to help you discover how ripe or saturated an area is when it comes to new Airbnb opportunities.
Take a good look at the existing Airbnb listings in your market. Find out the price ranges in each neighborhood and see if you can discern which apartment or neighborhood feature sets command a premium. Look at the number and quality of reviews to make inferences on likely occupancy rates, busy seasons and whether guests enjoy what the area has to offer.
5. Know Your Target Market
It’s worth remembering that millennials are transforming the economy. They’re the largest segment, and many industries are evolving to account for their tastes.
For instance, many of us still feel at home in business elite chain hotels. However, seven in 10 millennials prefer locally owned rentals, and 42% want to stay someplace “unusual” when they travel. This may be a good time to buy Airbnb units in a location that is popular with younger travelers.
It’s important to understand other major market shifts, too — including changing regulations across the country and how they apply to Airbnb and other short-term rental property owners. Young professionals may want a touch of home when they travel, but local municipalities are being increasingly vocal about where short-term rentals may be situated.
Make the Right Short-Term Rental Investment
Even with all the moving parts, this is an exciting time to enter the short-term property market. The industry is booming, and more and more people are looking for alternatives to the traditional hotel room. If you can identify your target market and ideal location, you can thrive.