How to Invest in Airbnb & VRBO Properties

Interested in Airbnb real estate investing?

It’s a hot space.

And for good reason!

Airbnb and VRBO properties can be highly profitable.

This guide will show you how to making money investing in Airbnb & VRBO properties.

Continue on to learn more.

Several Short-Term Rental Homes on the Beach

Beach home rentals like this can be highly profitable as short-term rentals.

How to Use This Guide:

This guide is intended to give you a high-level overview of STR-investing. But unfortunately, it is not an exhaustive resource.

We recommend you read through this guide from top to bottom. This will give you a sense for the entire process.

Then, once you begin your STR investing journey, you’ll want to dig in further to each component.

And before you know it, you’ll be an expert in STR investing.

Now, let’s get to it.

What is Short-Term Rental Investing?

For starters, what is a “short-term rental”?

Basically, it’s a rental that lasts fewer than 28 days — typically shorter. If you go on Airbnb to book a long-weekend vacation on the beach, that’s a short-term rental (we’ll use the abbreviation “STR” throughout this guide).

We can contrast STRs with “long-term rentals” (think: an apartment that requires a 12-month minimum lease). Further still, we can consider the concept of “medium-term rentals” (think: snow birds from the Midwest heading to Florida for three months in the winter).

While definitions will vary depending on who you ask, this is a general outline of different rental styles.

In sum, STR investing means investing in homes so that they can be rented out for profit on sites like Airbnb and VRBO.

Takeaway: STR investing means investing in homes so that they can be rented out for profit on sites like Airbnb and VRBO.

Are Short-Term Rentals a Good Investment?

So are short-term rentals a good investment?

Ultimately, it depends.

While there are a lot of compelling reasons to like STRs, there are some real drawbacks that must be considered.

Let’s look at both the Pros and Cons of STR investing.

Pros of STR Investing

STR investments can be very compelling.

You’re reading this guide, so you probably have a good sense for the benefits.

Let’s briefly discuss the primary ones: 

  • Earn High Returns.
    • STRs can produce a lot of cash. Thus, the “return on investment” (ROI) on short-term rentals can potentially be very attractive.
    • One measure of ROI (“return on investment”) is the “cash on cash” return (“CoC”). This is the amount of annual cash flow produced by a property divided by the cash invested into that property (shown as a percentage).
    • While a good long-term rental might produce 8-12% CoC returns, it’s not uncommon for STRs to produce 15-25+% CoC.
    • Not only do STRs offer high cash on cash potential, but they will often appreciate in value over time (increasing your equity value).
  • Live an Exciting Lifestyle.
    • Becoming an STR investor will give you the opportunity to own desirable vacation homes in beautiful parts of that world (that you can visit when they aren’t filled with guests!)
  • Reach Financial Independence Quicker.
    • STRs produce a lot of cash flow that you can reinvest.
    • By reinvesting that cash flow into additional STRs, your cash flow can compound very quickly.
    • In the course of just a few years, you could be in a position to step away from your 9-to-5 job and focus on investing full time. Or better yet, if you can afford managers for you STRs, you could retire to focus on passion projects or just to spend time with family.

A backyard patio with a pool and an ocean view.

As a short-term rental investor, you could travel to homes like this and call it “work”.

Cons of STR Investing

Unfortunately, STR investing isn’t some low-risk, low-effort path to wealth.

It’s not a “get-rich quick” scheme.

STRs offer high returns, but they also come with serious drawbacks.

Let’s discuss some of the biggest negatives related to STR investing.

  • Operational Intensity.
    • STRs are a lot of work. You (or someone who works for you) will need to clean the home, wash the linens, restock supplies, etc. after every single stay. Not only that, but you’ll need to manage your listings on Airbnb and VRBO constantly.
    • Even if you have these systems mostly automated, sometimes things just go wrong! Eventually, the A/C will break on a hot summers’ day or a pipe will burst and flood the basement. You’ll have to find maintenance provider(s) to fix your problem. And you may also need to deal with your guests and find them a new place to stay.
    • You can handle all or most of this work yourself, but it will “cost” you significant time and/or headache (time that you could be used to make money elsewhere or even just relax).
    • On the other hand, you can outsource this work, but it will cost you significant amounts of cash. The cost of outsourcing this work can cut into (or even eliminate) your return on investment.
  • Regulatory Risk.
    • STRs can be controversial. Nearby hotels don’t like STRs as they increase competition. Neighbors don’t like the noise from rowdy house guests. And politicians often use STRs as a scapegoat for rising housing costs.
    • Right or wrong, restricting (or outright banning) STRs has become a common topic for local and even statewide governments.
    • As an STR investor, there is always risk that a new piece of legislation could be passed banning short-term renters.
  • Elevated Property Risk.
    • You might take pride in keeping your house in pristine condition, but your guests won’t.
    • While most guests won’t cause any harm to your property, you will occasionally have destructive guests. After all, it’s not their home, so they won’t treat it like it is.
  • Cyclicality.
    • When times are tough in the economy, families and businesses will cut back on travel. Depending on the location of your STRs, this could have a very dramatic impact.
  • Unpredictable (and Uneven) Cash Flow.
    • Due to the short-term nature of your guest’s stays, there will be some level of unpredictability.
    • Even if you are doing everything right, there will be months (and potentially years) when your STRs don’t produce the amount of revenue you would expect from them. But make no mistake, your mortgage payment will be due every month regardless!

These risks may seem insurmountable, but don’t get discouraged. After all, there is risk involved in every facet of life, especially investing.

To be sure, a good STR investor won’t neglect the risks above. Rather, they will find ways to mitigate them.

Indeed, each of the above issues can be mitigated, it just requires some know-how and some hard work.

Now that you understand the Pros and Cons of investing in STRs, let’s dive into the exact steps becoming an STR investor.

Takeaway: With hard work and some knowhow, STRs can be a great investment.

How to Invest in Short-Term Rentals

Step 1 – Select an Attractive Market for STRs

The first step is to decide which market to focus on. By “market” we mean a specific city and/or geographic region.

By focusing on a single market, you’ll become an expert in that market, able to decide between good deals and bad deals efficiently.

But you can’t pick just any market.

You need to pick one that is attractive for STR investing. 

So what makes a market attractive for STR investing? While there are numerous factors to consider, here are the four most important:

  • STR Friendliness. As noted above STRs can be controversial. Certain markets will be very “unfriendly” to STRs, imposing high fees, restrictions, or even outright bans on their existence. It’s critical to pick a market that is friendly to STRs. Typically, these will be established vacation destinations that rely on tourism to support their economy.  
  • Seasonality. A lot of markets will be highly seasonal — having a high season during one part of the year (and a low season in other parts of the year). The less seasonality, the better. In practice, this often means you should focus on locations in the Southern half of the US (where it’s warm all year) or locations with an outdoor sport focus (so visitors can ski in the winter and hike/bike in the summer). 
  • Revenue Potential. STRs are a type of business, and business is all about supply and demand. You need to find a market with high demand. This means a market that people know about and are actively visiting.
  • Market Pricing. Revenue is important, but it isn’t everything. If you overpaid for the property, then you won’t earn an attractive ROI. It’s critical to find a market where homes are priced attractively relative to their revenue potential. As a rule of thumb, you should look for markets where annual gross revenue potential for a property is >15% of the purchase price. You’ll need to perform deeper diligence later on, but this rule of thumb is quite helpful for quickly sorting potential markets.

With these factors in mind, you can evaluate markets for their attractiveness.

Once you have identified a market you like, it’s to go all in and start finding deals.

Step 2 – Find Properties for Sale

It’s critical to partner with an experienced real estate agent. That agent will help you find properties, vet them, and ultimately close the deal.

But it’s important that your agent has experience with STR investing.

To find suitable real estate agents, you can start by asking other STR investors in your target market for referrals or simply use google.

Once you’ve identified several potential agents, you’ll need to vet them. You should interview each prospective agent and ask them about their experience working with STR investors. Ideally, the agent will have a track record of closing a lot of deals with STR investors.

Once you’ve partnered with a real estate agent, they should start sending you promising deals to review (and when they do, make sure to analyze them quickly and respond in a timely fashion! More on this in Step 3 below).

In addition to working with your agent, you should begin looking for deals yourself. Here are some of the best places to find STR investment properties for sale:

  • Major Listing Sites. Yep, even major listing sites like Realtor.com, Redfin, and Zillow can be great for finding STRs. Make sure to filter your search settings aggressively. One trick is to search for keywords like “VRBO” or “Airbnb” in your target market. Sometimes, you can find active STRs available for sale.
  • Mashvisor.Mashvisor is one of the single best online resources for identifying potential STRs. Because Mashvisor is linked to the MLS, it works just like Zillow in that you can search in any city/place for properties available for sale. Mashvisor then uses data & analytics to provide revenue and cost estimates as well as projected cash on cash returns and cap rates.
  • Rabbu. Rabbu is a tech-enabled property manager with a focus on STRs. The team at Rabbu sends around a weekly email with a curated list of available STRs. In addition, they include a detailed underwriting analysis for each property, helping you get a jumpstart on your due diligence.
  • Propersum.Propersum is a property listing site focused on vacation rentals with a couple unique features — most notably, Propersum partners with local vacation rental managers to estimate revenue and expenses for listings. From these estimates, you can calculate projected returns.
  • Airbnb Homes for Sale. Nowadays, there’s a Facebook group for pretty much everything and STRs are no different. This Facebook group called “Airbnb Homes for Sale” is one of the best communities for finding short-term rentals. With >60k members, the community is quite active. Many of the opportunities are “off market” and most properties are currently used as an STR.
  • Vrolio.Vrolio is another property listing site focused on STRs and VRs. Because of this focus, the listings often include detailed information such as historical revenue and average daily rates (at least for properties that are currently used as STRs).
  • HighFlyRE.HighFlyRE is yet another property listing site with a focus on STRs. In addition to active listings, HighFlyRE seeks to provide additional resources such as detail on the STR regulations in popular markets (which is essential for investors to understand).

Step 3 – Analyze the Deal

After uncovering a deal with some real potential, you’ll need to analyze it more closely.

To determine profit potential, you’ll need to estimate both revenue and costs.

To estimate revenue, you should use both data & analytics tools and “comps”.

The best data & analytics tools available include Mashvisor, AirDNA, and Rabbu. These will provide you with useful estimates for revenue potential.

Next, you should look for “comps” — comparable short-term rentals active in your market. Take a look on VRBO and Airbnb for listings close to your target property with the same number of bedrooms and similar amenities. Then, take a look at their average daily rate and how booked up their calendar is. With some practice, you should be able to estimate monthly revenue.

Ideally, your revenue estimate will be >15% of the asking price.

Now for costs, you’ll need to estimate upfront outlay and ongoing expenses.

Your upfront outlay will include: the down payment (you should try for >20%); closing costs (title, fees, etc.); repairs and needed maintenance; and any new furnishings or amenities you’ll need to provide. All together, this upfront outlay will represent your cash investment.

Next, you’ll need to estimate your ongoing expenses. This will include those that are relatively fixed (like your mortgage payment, insurance, property tax, etc.) and those that are more variable depending on your revenue (management fees if you use a manager, channel fees paid to Airbnb or VRBO, lodging/hospitality taxes, etc.).

Estimating each of these components will be difficult. The only solution is to do as much as research as possible. You should consult with with your realtor and other investors in your market. Where possible, you should try to get quotes from key vendors, such as property managers (if you choose to use one).

Once you have estimated your revenue and all costs/expenses mentioned above, you can begin to look at the return potential.

One of the key metrics will be the deal’s cash on cash return (CoC). To calculate this, simply take the annual cash flow you determined above (annual revenue minus: ongoing expenses) and divide it by your upfront cash investment.

What’s an acceptable CoC return?

That ultimately comes down to your goals and risk tolerance, but it’s reasonable to look for >20%.

After repeating this several times, you’ll become an expert on your market. With only a few hours of work, you’ll be able to determine if a deal is a go or no-go.

Step 4 – Secure Financing and Close the Deal

If your analysis checks out, then it’s time to finally secure financing and close the deal.

Since not all mortgage lenders are familiar with STRs, you might consider working with ones that specialize in the space. Here are a few to consider:

Once you have financing in place, your real estate agent will work with you to close the deal.

Step 5 – Stage Your Home

Once you’ve closed on the purchase, you’ll need to turn the home into a suitable STR. This will include furnishings and décor, and perhaps other elements.

Staging your STR is about creating an experience. Guests want something unique and memorable, and you can provide that with thoughtful staging.

Additionally, you should consider upgrades. Key amenities, like a pool, hot tub, or theater room can be a game changer (of course, make sure you included these upgrades in your budget above).

Once you’ve staged your home, you’ll also need to outfit it with the essentials for living. Guests will expect at least everything they would find at an extended-stay hotel (and usually more). It’s a good idea to stay in your property yourself for a few days so that you can identify any missing essentials. 

Step 6 – Setup Your Listing(s)

Your listings on Airbnb and VRBO (and potentially other websites) will be critical for converting guests.

When setting up your listing, here are a few core features to focus on:

  • Headline. The headline is critically important for grabbing the attention of potential guests. Remember to sell the benefits, not the features. Be sure to highlight the key selling points (“beachfront”, “ski-in, ski-out”, etc.).
  • Photos. Guests love photos. And lots of them. You should budget to have a professional real estate photographer come to your property. Aim to include >45 professional-quality photos on your listing.
  • Amenity Details. Make sure to take the time to include as many amenity details as possible. Guests love to use the “filter” buttons when searching for properties! The more amenities you list, the more likely you are to show up in the search rankings.
  • Description. Just like the headline, its important that your property description sells the benefits (as opposed to just listing out the features). Additionally, bear in mind guests want to skim — they don’t “read”. Try to break your description up into concise bullet points focused on benefits (instead of long, wordy paragraphs).  

Step 7 – Automate & Delegate

Once your listings are up and running, you’ll need to implement systems to ensure ongoing success.

To both minimize workload and maximize consistency, you should Automate & Delegate: automate everything that can be automated and delegate everything else you can’t or don’t want to do.

For starters, you might consider hiring a short-term rental property manager. These property managers make your life a lot easier, but they are often very expensive.

National, tech-enabled managers like Evolve or Vacasa might start their pricing at 10% of booking revenue, whereas local professional managers might charge 20-45% of revenue. Suffice it to say, these management fees can quickly erode your ROI!

It’s a common misconception that you must be local to your property to self-manage.

In reality, it’s very doable to self-manage from afar. Self-management requires some work, but it can dramatically improve your cash flow.

To self-manage you’ll need to setup a team and implement several software tools.

The two most important members of your team will be your cleaner(s) and your handyman.

With your team in place, you’ll need to implement several software solutions to automate your workflow. Notably, you’ll want a software solution for each of the following:

  • Channel Manager. A channel manager is the core software for an STR operator. Primarily, it will help you coordinate across your various booking channels (i.e. Airbnb and VRBO). Some of the best channel management solutions are Guesty, Hostfully, and Lodgify.
  • Dynamic Pricing Tool. If you aren’t updating your pricing in response to market demand, then you’re leaving dollars on the table. Luckily, there are various software solutions that use data & analytics to optimize pricing. Your channel manager software may include this functionality, but if not you might consider PriceLabs or BeyondPricing.
  • Scheduling Tool. Since you will have a cleaner take care of turning over your home in between guests, it’s critical to coordinate with them effectively. There are several tools specifically to help you find, schedule, and pay cleaners. Namely, TurnoverBnB and Automatebnb are the best two tools on the market. 

Once these systems are in place, the vast majority of the work associated with operating your STR will be automated or delegated. 

Soon, revenue will start coming in, and you’ll be on your way to financial independence. But this is just the beginning! Be sure to be thoughtful and put in the work necessary. With some hard work and some knowhow, you too can become a successful STR investor.

Takeaway: By following the outline in this guide, you too can become an STR investor and achieve financial independence.