One of the first steps on your way to developing a successful business with Airbnb implies selecting the best area for your future entrepreneurship. Knowing the exact parameters of your future property is also crucial for making all the necessary research beforehand. Today, we will cover the essential metrics you have to consider when choosing an Airbnb location as well as suggest some useful tools to help you out.
Key Indicators and Metrics
Just like employees of a company, Airbnb locations have their KPI metrics. Calculating these parameters may be quite time-consuming, but as it will determine the success of your future vacation business, it is worth the effort. In this section, we will cover the main metrics you will need to know to invest smartly.
Like the previous metric, the occupancy rate was initially designed for hotels. Similarly, it is applicable to vacation rentals. It represents the percentage of nights you get booked and it is an essential parameter for your further research. Once again, you will have to find the occupancy rate of similar properties in your city in order to have a perspective on your future experience.
Airbnb Standard Daily Price
As its name implies, this metric represents the average price of a night booked on Airbnb. There are several variations of the standard daily price you can find online. Some of them represent the global average price per night, while the others only include data from specific regions.
In general, the more detailed your data is, the more accurate the results of your research will be. In case you won’t be able to find any data for your city and the type of place you’re about to buy, you can browse through similar offers on Airbnb. This metric will also be needed to analyze the performance of your future business, so it is worth it to calculate it accurately.
Revenue is a general financial metric you also have to keep in mind. It represents the total amount of income you will receive over the selected period of time. Airbnb owners have only one source of income, which relates to accepting guests and receiving rent. To calculate it, you will need to use the parameters we have already reviewed.
The first step to projecting your revenue implies multiplying the occupancy rate on the number of nights in the period you’re analyzing. Then, you will need to multiply the resulting number by the average daily rate. The resulting value is also often referred to as RevPAR, which means revenue per available rental.
Costs and Expenses
Knowing your expenses is also crucial to determining the profitability of any investment. In contrast to the revenue of Airbnb property, the expenses are formed from a variety of components. Some expenses are fixed, while the others may vary depending on which location and type of property you choose, so it is also necessary to make your research specific. The general list of expenses includes:
- Airbnb’s commission
- marketing expenses
- services of cleaners and other team members
- loan payments
- other running expenses (e.g. paid software)
- renovation costs (long term).
Knowing the basic details about the property you’re considering will allow you to calculate most of the mentioned parameters. For example, you will be able to specifically check the prices of cleaning companies for properties of the same type in your area.
Appreciation or Depreciation
Depreciation relates to the concept of a fixed asset losing its value over time. At some point, even a building wears out, so it is an important aspect to consider as well. Normally, to calculate the depreciation of your property, you will simply need to divide its cost by its useful life. The useful life period for buildings is different in every legislation, so make sure to check up on the laws of your area.
In the case of Airbnb property, however, the situation might be very different. Until the building is demolished, its price can easily go up. Thus, there will be an appreciation instead of depreciation. While some fixed assets just depreciate over time, the graph of depreciation for vacation rentals has an inflection point. In most cases, the property will grow in price at first and only start depreciating as its useful life period comes closer to its end.
Net Annual Cash Flow
Net annual cash flow is essentially the profit you will receive during the selected period. To calculate it, you will need to subtract all your costs from your revenue. In case you’re going to resell the property at some point, you need to include appreciation in revenue. Otherwise, you will need to add depreciation to your costs.
Airbnb Payback Period
The average payback period is a parameter that is used in almost all industries when it comes to considering a significant investment. As its name implies, it allows you to project how much time you will need to reach the so-called breakeven point. This is the moment when your profits cover your initial investment.
To determine it, you will need to divide the cost of your investment by net annual cash flow. Assuming you have calculated all the previous metrics, this step should be easy to take. The resulting value represents the number of years needed to reach the breakeven point.
Example of Calculations
For a better understanding, let us overview the research process on an example. Let us assume we’re considering purchasing a studio in Athens, Greece for €52,000 and are planning to rent it out for its full period of useful life. According to AirDNA, the average occupancy rate there is 71%. The standard daily price for similar listings is around €16. Thus, our annual revenue would be:
Let us assume that our fixed and variable expenses are €1,100 per year. Let us also assume the useful life of the apartment is 40 years, meaning its annual depreciation will be:
Now we need to sum these values up to get our total annual expenses, which will be €2,400.
This allows us to calculate our net annual cash flow by subtracting the value we got from our total revenue. It will be:
This finally allows us to calculate the annual payback period by dividing the total cost of €52,000 by our net annual cash flow of €1,746. The result is 29.78, meaning we will need almost 30 years to reach the breakeven point.
Useful Tools for Analytics
Performing such a comprehensive analysis might be tricky, especially when it comes to finding some region-specific data. Thankfully, there is software designed specifically for these purposes. In this section, we will have an overview of the most popular tools that will help you out.
AirDNA is a decent tool that will perform most calculations for you. The calculator tool developed by this company is called Rentalizer, and it is capable of presenting you with most metrics we have mentioned in this article. Rentalizer can create individual projections for the following parameters:
- annual revenue
- average daily rate
- occupancy rate
- seasonality impact
- competitive analysis for your area.
MashVisor is another comprehensive tool that will also offer you automatic calculations of several key metrics. It will present you with median prices, some rental income metrics specific to your region as well as some absolute values like the number of similar listings in your area.
The best point about MashVisor is the comfortable interface it offers. Every parameter and metric is represented in an intuitive way, making them easy to read and comprehend. It is worth noting that MashVisor is a paid tool with three billing plans that all have 7-day trial periods available.
AllTheRooms is a free platform with several useful tools you can use to simplify your research. The most useful of them is the calculator. You will only need to enter the area you’re considering, and the number of rooms, bathrooms, and guests on your property.
As a result, you will see the region-specific average daily rate, occupancy rate, and projected revenue for your region. It also provides you with some data on average operating expenses for the area you’ve selected.
The Best Locations for an Airbnb Investment
Our team has prepared for you the lists of the best cities for Airbnb business around the world.