Purchasing property to rent out on Airbnb can be a great investment if done right. But there are many factors to consider before taking the plunge. Follow this 10-step guide to properly analyze an Airbnb property purchase.

Step 1. Decide the type of property that you want to buy

The first step is determining what type of property you want to invest in. Will it be a small apartment, condo, townhouse, or single family home? The number of bedrooms and bathrooms? Standalone building or multi-unit? Urban, suburban or rural location?

Narrow down the criteria based on your budget, target demographic, and local market conditions. For example, a 2-bedroom condo may attract solo travelers and couples. While families and groups would prefer 3-4 bedrooms.

If buying in a tourist hotspot, a centrally located apartment could see heavy demand. But a big house further out may allow longer stays and host events.

Step 2. Compare the purchase price to properties in the area

Once you know the general property type, start looking at recent sales prices in the neighborhood. Check sites like Zillow and Redfin to see what similar homes have sold for recently.

Compare the list price to the final sold price. A property priced well above others that recently sold is likely overpriced. You want to aim for a competitive price relative to comparable homes.

Also research the price per square foot. Multiply this by the home’s total square footage to estimate a fair market value. If the asking price is far above the estimated value, it’s likely overpriced.

Step 3. Observe nearby Airbnbs

In addition to checking comparable home sales, you also need to look at other Airbnbs in the area. Search Airbnb and VRBO for rentals nearby that match your target property type and features.

Pay attention to their nightly rates, occupancy rates, ratings and reviews. This will give you an idea of the local market demand and potential income.

For example, if nearby Airbnbs with 4 bedrooms are renting for $300 per night with 90% occupancy, that’s a good sign. But if they are struggling to get bookings, it may indicate lower demand.

Step 4. Review your liabilities

Before getting too excited about projected earnings, it’s important to objectively assess your financial liabilities:

- Mortgage payments – Calculate the monthly costs based on a realistic down payment and interest rate. Don’t forget property taxes and insurance.

- Maintenance and repairs – Older homes often require more upkeep. Budget for issues like plumbing, electrical, roof, etc.

- Utilities – Will you cover all utilities, or charge guests? Factor this into operating costs.

- Cleaning and maintenance – Will you handle all cleaning and maintenance between guests? This takes time and effort.

- Property management fees – If you plan to outsource management, fees typically range from 10-15% on Airbnb.

- Restrictions and regulations – Make sure short term rentals are legal, and you comply with taxes, licensing and zoning.

- Slow seasons – Most markets have slower periods with lower occupancy. Make sure you can still cover costs.

Accounting for all these expenses will give you a realistic idea of potential net profit, and how much you can truly afford.

Step 5. Seek professional advice on taxes

Owning an Airbnb involves paying taxes on the income generated. While some taxation is straightforward, other areas may require professional guidance.

A certified accountant can advise you on:

- Federal, state and local occupancy taxes
- Business and personal income taxes
- Sales and hotel taxes
- Home office deductions
- Depreciation

Getting clear on the tax implications upfront will avoid headaches later on. The costs can be substantial, so make sure to include them in your projections.

Step 6. Factor in the mortgage payments

One of the biggest ongoing costs of owning an Airbnb is the mortgage. This includes principal and interest payments, property taxes and home insurance.

When calculating cash flow, tally up the total monthly mortgage payment, along with an estimate for utilities, maintenance, etc. Then look at the nightly rate and occupancy rate for comparable Airbnbs.

For example, if your total monthly costs are $3000, and you can realistically charge $150 per night with 75% occupancy based on other local listings, you could earn $4500 per month in rental income. That results in $1500 in positive monthly cash flow.

Always be conservative in your estimates for income and expenses. Don’t rely on best case scenario projections that may not reflect reality.

Step 7. Calculate cash flow vs appreciation

Two ways of making money from an Airbnb are cash flow and appreciation. Experienced investors look at both.

Cash flow is the difference between rental income and expenses. Positive cash flow puts money in your pocket each month to pay the mortgage and generate profit.

Appreciation refers to the property increasing in value over time. This accumulates as home equity that you can tap into later via a refinance or sale.

When analyzing a deal, run the numbers to see if it generates enough cash flow first and foremost. Relying solely on appreciation is risky. The combination of both is ideal.

Step 8. Work out how much setup is involved

Some Airbnbs require minimal preparation to start renting out. A professionally decorated and furnished condo may only need some minor cosmetic updates.

But a dated or rundown home could require major renovations and new furniture before listing. These setup costs really impact your budget.

Walk through the property and make a list of any fixes, cleaning or staging required. Get contractor quotes to estimate costs for renovations or repairs.

Factor these startup costs into your analysis to determine the total investment required to get the property rent-ready.

Step 9. Decide whether to self-manage or outsource

Managing an Airbnb yourself requires time and effort, but results in higher profit margins. Or you can outsource to a property management company for convenience.

Self-managing duties typically include:

- Communicating with prospective and current guests
- Setting rates and availability
- Writing listing descriptions and taking photos
- Cleaning and restocking between guests
- Handling maintenance issues
- Laundering linens

Some homeowners enjoy the hands-on approach. But others prefer to hand over the day-to-day in exchange for a percentage fee.

Decide which model suits you best based on your time, abilities and lifestyle. Just make sure to factor any fees into your projections.

Step 10. Brush up on local laws

The laws around short term rentals vary significantly across different cities and states. Some municipalities have tight restrictions, while others are more lax.

Before buying an Airbnb, thoroughly research the regulations in that location:

- Are short term rentals legal and compliant with zoning?
- Do you need a permit or license to operate?
- Are there any duration limits for stays?
- What are the tax requirements? Hotel tax? Occupancy tax?
- Are there restrictions on the number of guests allowed?
- Are their safety requirements like fire extinguishers and smoke detectors?

Ignoring local laws can result in hefty fines. So consult with an attorney and local regulatory agencies to ensure you comply.

The Bottom Line

Buying property for Airbnb is more complicated than a typical investment. By following these steps, you’ll analyze all the key factors to make a smart and informed decision before purchasing.

Carefully consider the metrics like cash flow, taxes, regulations, expenses, setup costs and your own time commitment. Then you can determine if the deal truly makes sense, so you can maximize your rental income and return on investment.