How to Use Your Furnished Apartments for Short-term Rentals
Have you thought about using Airbnb for your furnished apartments? Well, you’ve landed on the right blog!
In this post, I’d like to talk about the step-by-step process of getting your furnished apartment ready for short-term rentals. Before we start, I’d like to ask you if you actually know what Airbnb means?
What is Airbnb?
Airbnb is an online community marketplace that connects people looking to rent their homes to people who are looking for accommodations. Airbnb users include hosts and travelers: hosts list and rent out their unused spaces, and travelers search for and book accommodations in 192 countries worldwide.
Travelers (or “guests”) search the available database of properties by entering details about when and where they’d like to travel. Travelers can further refine searches by making selections for:
- Room type – entire place, private room or shared room
- Price – range from minimum to maximum
- Size – the number of bedrooms, bathrooms and/or beds
- Amenities – wireless Internet, TV, kitchen, pool, pets, etc.
- Property type – standard properties such as apartments, houses, and bed & breakfasts, as well as non-standard accommodations such as castles, caves, igloos, and tipis
- Host language – English, Spanish, French, etc., including sign language
- Keywords – if the traveler is looking for something specific, such as “oceanfront” or “close to Le Louvre”
How Does it Work?
Travelers can search the database of properties at any time but need to create an Airbnb profile to book any reservations. Travelers can contact hosts using an online form that appears on each listing page and can submit a reservation request by clicking the “Book It” button and entering payment details via a secure payment system.
Travelers pay a guest service fee of 6-12% on top of the reservation to cover services such as customer support and the Host Guarantee.
Airbnb supports several payment methods, including major credit cards (Visa, MasterCard, AMEX, Discover, and JCB), PayPal, Google Wallet (on the Airbnb Android App for the U.S. only) and some debit cards that can be processed as credit.
Once a traveler pays and the host confirms the reservation, Airbnb holds the payment for 24 hours after check-in before releasing the funds to the host.
Available payout methods and currencies differ by country, but hosts are paid via automated clearing house (ACH)/Direct Deposit, bank transfer/international wire, PayPal, Western Union, paper checks (in the U.S. and Canada only), and Payoneer.
Airbnb takes a 3% service fee from the host for each reservation to cover the cost of processing the transaction. This fee is in addition to the 6-12% paid for guest service fees.
What Makes Airbnb Better Than a Long-term Rental?
The short answer, more profit.
Let’s break it down quickly: long-term vs. short-term.
Furnished Apartments for Long-Term Rental
You have a standard year lease and let’s say you can charge 2000 dollars a month for a 2-bedroom apartment.
2000 * 12 = 24,000 dollars a year. Your net profit is probably less than that because of your expenses( mortgage, property tax, insurance, and etc). According to Biggerpockets( a popular real estate investing blog), your typical operating expense ratio is around 50%.
Net profit = $12k a year.
That is not bad for all passive income! Let’s explore short-term rental.
Furnished Apartments for Short-term Rental
Now, assume your sunk opportunity is $24,000 dollars a year because you’re able to get 2k a month. Next, we have to figure out your daily cost, which is 2000 /30 days = 66.67 dollars per day.
In order to be more profitable than a long-term rental, you have to get at least 67 dollars per day. This is where market research comes in handy.
How to Do Airbnb Market Research
- Go to Airbnb.com.
- Look up the city that you want to do rental arbitrage. For me, I chose the Bay Area. But for the sake of simplicity, let’s pick San Francisco. Type “San Francisco” into the search on the top left corner. See picture below.
- Click on “Homes” under “Explore San Francisco”
- Scroll to the bottom and it’ll tell you how many rentals are in the market. When you have 300+ rentals, it’s a good sign because it tells you that you have a market-fit.
- Click on the “Home type” and filter out “Shared Room” and “Private Room.” This is important because it’ll further narrow down your competition.
- Go one step further and filter out places that can accommodate 4. It depends on what you’re trying to go for. I find it that in order to maximize profit, 4 is the max for 1-bedroom and 6 is the max for 2-bedrooms.
- Look at your competition with the most reviews and see how much they’re charging per night. If they’re charging 200 dollars per night and can fit 4 people, then it’s good for you to come in at 160 or 170 dollars per night to build out your reputation.
- Airbnb gives higher ranking to hosts that have the most 5-star reviews. These hosts show up on the first page of the search engine.
If you’re a numbers guy then what you could is to add up all the listings and divide it by the total listings. For example, 30 listings at 150 a night = (30 * 150) / 30 = $150 dollars per average night. Again, it’s a bit tedious, but if you like numbers, then I’d go for it!
How to Calculate your Monthly Income
Based on what we learned from above, let’s assume you can charge $150 dollars per night and assume that is the base nightly rate regardless of the seasonalities. Typically, there are three seasons: low-season, shoulder season, and peak-season. For the simplicity of this exercise, let’s not consider seasonalities.
Most hotels would consider an 80% occupancy rate a highly profitable margin. So, knowing that we can work backward.
80% * 365 * $150 per night = 43,800 dollars per year.
Let’s say you only hit 65% occupancy rate because it’s your first year and you’re still getting used to the business model.
65% * 365 * $150 per night = 35,587 dollars per year.
Well, that is 11,587 dollars more than what you would have gotten if you were to rent it out long-term. Just so you know, my occupancy rates are around 87%. I know guys that have 95%, occupancy rate.
The point is that short-term rental will make more.
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