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Airbnb Profit Margins: How to Calculate and Estimate

Airbnb profitability depends on the type of property, going rate, maintenance costs, taxes and licensing fees. To determine profitability start by estimating the average daily rate and working backwards.

Careful investment can bring in a high income when you list your short term rental property on AirBnB. Assuming that there is no financing and that upfront costs such as furnishings are already taken care of, you stand to turn a tidy profit. It’s essential to do your homework and research your local market carefully, as profits in short term rentals are all about location, decor, and guest experience.

Start by Finding Your Rate

AirBnB offers a Smart Pricing tool which can calculate a rate for you that will automatically adjust to market rates and never fall below the minimum price that you set. However, a more hands-on approach is likely to yield better results.

The Awning Airbnb Income Estimator is completely free and allows you to select comparables in your area that best match your property. Using the Airbnb calculator is simple and requires no previous investing experience.

Look at comparable properties to yours in your area to get a sense of how much they charge. It’s best to look at properties with many reviews. Check their monthly bookings and notice if some months are more booked ahead than others. You’ll also want to see if their rates change at different times of the week or year. What months are likely to be your peak season? You want your rates to be tied to the actual market in your area. Keep in mind that markets can be hyper local, so make sure you look at multiple properties to get a sense of how much this can vary, even within the same area.

Once you know your market, consider how you are going to adjust for seasonality. Some markets have a relatively stable seasonal booking rate, while other markets will have a limited but highly profitable busy season.

You may wish to start at a lower rate than you are aiming for. It helps to get early guests and good feedback, and you can raise your rates as you start gaining positive reviews.

Extra amenities and premium furnishings can help you to raise your rates further and set you apart from your competitors. You can also raise rates with improved decor. Consider the needs of your target guests. Families with young children have different needs than single business travelers. Be sure to list all of your amenities on the listing. If you have a playpen for guests, or if there’s a selection of fancy coffees, include them in the listing. 

Listing and Hosting Fees

It’s free to list your property on AirBnB, but you still have to think about fees. Most hosts pay a flat 3% booking rate. This covers the booking subtotal, which includes the rental rate, cleaning fees charged to guests, and any additional guest fees, but excludes taxes or AirBnB fees. You should consider your booking fees when you set your nightly rate.

AirBnB has a lower booking rate than some of its competitors. Vrbo charges a 5% commission fee and an additional 3% processing fee.

Ongoing Expenses 

AirBnB pays insurance premiums on your property, but you’ll probably still need more coverage. Expect to pay between $1,000 and $3,000 a year for short-term rental insurance.

You’ll also need to regularly restock consumables such as toilet paper, spices, shampoo, conditioner, coffee and tea. The costs on these products vary, as does the rate of consumption, but many hosts spend between $50 and $100 a month on items their guests will use up.

Longer term products such as bed linens and towels don’t need to be replaced as often, but you will need to replace them as they wear out. Clean and fluffy towels and soft linens make for good reviews. Towels need to be replaced most often, around every 3 to 6 months, while bed linens will likely need to be replaced every 6 to 12 months. Blankets generally only need to be replaced every few years. If you have multiple rental properties, you can save money by buying in bulk.

You can plan to pay around $1 a square foot or 1% of your property value for yearly upkeep. Obviously, this will vary depending on the property, so be sure to include an estimate of the cost in your planning. If there are areas or appliances you know require extra care, you’ll need to plan for that.

Repairs are less predictable than other ongoing costs, so check your property regularly and make repairs as soon as you notice deterioration.

Hiring Help and Property Management 

Although hiring help is optional and will cost you money, it can result in higher revenue. Professional cleaned and managed sites stand out over the competition, and hiring help frees up your time and energy.

You can charge your guests a cleaning fee on the property. Check the fees charged by similar local properties. You don’t want to set this too high, but it will help to offset the cost of hiring professional cleaners. The rates for cleaning companies depend on the size of your property, but you can expect to pay between $30 and $250 for most properties, and up to $500 for a very large property with more than five bedrooms.

There are services that offer help with pricing and analytics. These are often subscription services, and rates can range from $3 a month to $75 a month for investors seeking data about many properties.

Property management for short term rentals is a specialized and relatively new field. It’s more hands-on than long term property management and can be more expensive, but it will also save you a lot of time and can increase your bookings. Property management companies generally work on commission, although some offer a fixed-fee rate, and many offer a combination of the two. For companies offering a combination, commissions are lower, around 20%, with additional fixed fees. Commissions are usually 25% to 50%. This is a very high price, but professional management tends to get more bookings, better reviews, and in many cases it can ultimately make you more money.

Awning offers full-service vacation rental property management for only 15% of revenue, well below the competition. This includes listing optimization, pricing, cleaning, amenity maintenance, and guest communications, just to name a few. 

Paying Taxes and Licensing Fees 

Some of the short-term rental expenses are deductible. Cleaning and property management can be deducted as business expenses, as well as some furnishings. Repairs and improvements can be deducted as depreciation.

Licensing fees vary considerably at the state and local level. They range from under $20 to close to $500.

AirBnBs are taxed as regular income tax in most states, and you’ll likely need to pay a self-employment tax as well. This varies depending on your income bracket, which includes income other than that from AirBnB. If you don’t provide AirBnB with a W-9, they will automatically withhold 28% of your rental income, although for most hosts the tax rate is lower than 28%.

Be sure to consult a tax professional about your individual situation. This does not represent tax advice.

Calculating Profitability

In peak locations, AirBnB can make an 8% profit, while in more modest locations, the profit can be closer to 4%. Be sure to do research on your particular area. Some locations are money losers, and it’s important to know before you get in over your head.

Rental properties require a larger down payment than personal housing, and they tend to have higher interest rates. Revenue varies hugely; in popular locations, AirBnBs may be booked 70% of the time, but in some locations and seasons that can drop to 40% or lower. AirBnB’s company profits come almost entirely in the summer months, and they tend to lose money in other quarters, which reflects the seasonality of most locations. Income can vary by more than 90% seasonally in the most volatile locations.

Some markets don’t change much by season, but a volatile market can still be a profitable market and may make more money than a steady market in their hot season. Strive for knowledge of seasonality in your area and plan ahead to raise rates in the most profitable months.

Be careful in making your plans. A small percentage of AirBnB hosts make the most money, so the average income is artificially weighted by these outliers. The majority of AirBnB hosts earn under $500 a month, so do your homework and consult with a professional in your area. Smart planning will help you to maximize your revenue. 

Takeaway 

As in any hospitality business, the key to success in short term rentals is location, location, location. Research properties in your area before you get started, and plan for the income you want. Knowing what you are aiming for is key.

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