Calculating the Profitability of Airbnb Homes

 The price for an Airbnb home can vary widely depending on various factors such as location, size, amenities, and demand. This is your most important starting point when reaching profitable and sustainable operations. You can have a great home for a bad price and a not-so-nice home for a great price. You have to think about all aspects of the deal. Lets take a look at all the considerations for how to calculate profitability of Airbnb homes.

Relevant Templates:

Revenue Calculation:

To estimate the revenue, you need to consider the average nightly rate and the average occupancy rate. Multiply the average nightly rate by the number of nights your property is expected to be rented in a year, considering any seasonal variations. Then, multiply this value by the average occupancy rate (expressed as a decimal, e.g., 80% occupancy rate would be 0.8) to get the estimated annual revenue.

  • Estimated Annual Revenue = (Average Nightly Rate) x (Number of Nights Rented) x (Occupancy Rate)

Expense Calculation:

To estimate expenses, consider the following factors:

  • Mortgage or Rent: If you have a mortgage on the property, include the monthly mortgage payment. If you are renting the property, include the monthly rent.
  • Utilities: Consider electricity, water, gas, internet, and any other utilities that you need to pay for.
  • Insurance: Include the cost of property and liability insurance specifically for the rental.
  • Maintenance and Repairs: Account for regular maintenance, repairs, and upkeep of the property.
  • Cleaning Fees: If you hire a professional cleaning service, include their fees.
  • Airbnb Fees: Airbnb charges a service fee for each booking, usually a percentage of the booking subtotal.
  • Taxes: Consider local occupancy taxes or any other taxes applicable to short-term rentals in your area.
  • Note, if you use a property management company, their fees need to be estimated as well and they may take the place of some of the above expenses so make sure you don't double count any costs.

Add up these expenses to get the estimated annual expenses.

Profit Calculation:

To calculate the potential profit, subtract the estimated annual expenses from the estimated annual revenue:

  • Estimated Annual Profit = Estimated Annual Revenue - Estimated Annual Expenses
Once you get down to the expected annual cash flow, you want to compare that to the purchase price. This will give you a good sense of how profitable the home actually is. You can run an IRR calculation with this information and estimating the future value of the home in a certain future year. Generally, 20%+ IRR is considered good.

There is another metric to pay attention to and that is cap rate, which means the net operating income (NOI) divided by the purchase price. To calculate NOI, you do the same calculation shown above, accept don't include the mortgage principal and interest costs. This shows how long general operating income takes to repay the purchase price of the home. A cap rate of 8%, means each year the home generates 8% of the purchase price and so that means 12.5 years to equal the purchase price (assuming no change in NOI). 5% = 20 years and 10% = 10 years.

It's important to note that the profit and loss calculation provided here is a rough estimation. Actual results may vary based on various factors and unforeseen circumstances. Additionally, local regulations, competition, and market demand can significantly affect the profitability of an Airbnb rental. It's advisable to conduct thorough market research and consult with professionals in your area to get a more accurate estimation tailored to your specific property and location.

Article found in Real Estate.