October 13, 2022
Airbnb, part of the travel industry, has some remarkable statistics. With 5.6 million global listings, more than 900 million stays were booked through the application with an average host earning $9,600 annually.
Airbnb finished one of their hardest years on record, 2020, with an IPO worth an impressive $100 billion. The global pandemic hit the travel industry especially hard with all of the stay-at-home orders around the world. A 2020 survey revealed that 70% of guests were afraid to stay at an Airbnb while 47% of hosts were hesitant about renting out to strangers.
However, a more recent report by Mashvisor shows the industry is on the mend. As we continue to fight the global pandemic and the stay-at-home orders lifted, more people are hoping to take a vacation. In fact, a survey revealed around 62% of people are planning on traveling.
With the travel industry healing from the pandemic, this article will outline how to start an Airbnb business and get a piece of the pie with a particular focus on our Airbnb financial forecast. You can also check out our video on how to create financial projections for an Airbnb business or property.
The Steps to Start an Airbnb Business
- The first and one of the most important steps is to start with a budget which will include property investment, furnishing, maintenance, repair, and outfitting such as kitchen and bathroom necessities.
- Choose the best real estate market which will include research into the area where you plan on purchasing a property. Hunt down areas big on tourism through attractions and activities.
- Study local laws and regulations concerning hosting an Airbnb in the area in which you’re going to make the investment.
- Name the business and start a legal entity such as an LLC to protect your personal assets.
- Post a listing on Airbnb which will require some information about the property, but the host is able to choose their own price.
How Much Does It Cost to Start an Airbnb Business?
The average cost to start an Airbnb business is $6,000.
- Minimum startup cost for an Airbnb Business = $3,900
- Maximum startup cost for an Airbnb Business = $30,000
- Average startup costs for an Airbnb Business = $6,000
The cost to start an Airbnb business will likely vary in different areas, but there are some costs to keep in mind while preparing to start the business. Below, is a broader list of the categories of expenses to think about when beginning an Airbnb business.
- Purchase Cost: $0 and up
- Insurance: $500 and up
- Furniture Cost: $2,000 - $3,000
- Utilities and Various Subscriptions: $40 - $70
- Home Outfitting: $200 and up
- Consumable Goods: $50 and up
- Services (ex: photographer): $100 and up
Starting an Airbnb with No Money
Now let's say you can't afford the startup costs of an Airbnb and you don't already own a property and can't afford to buy one, are you just out of luck?
Hostfully wrote an article outlining 5 ways to become an Airbnb host without owning property. A couple of my favorite ideas were:
- Make use of your unused rooms in your existing home or apartment
- Become a property manager for other Airbnb units as a way to get your foot in the door
- Rental arbitrage - you can sign a long term lease on a space and rent it out on Airbnb (hopefully for more than you paid for your long term lease).
How much can an Airbnb make?
The average Airbnb Host in the US makes $41,026 per year in revenue according to AlltheRooms.
Of course the potential for revenue with an Airbnb business is dependent upon a variety of factors. These are all key factors to think through and discuss before beginning the Airbnb journey.
The Right Price
The most important part of determining how much your Airbnb can make you is setting the right price per night. In part, this will be based on whether you want to make this spare monthly income or make it your full-time job, but the general idea is the same.
First, start with calculating the out-of-pocket monthly costs you’ll accrue as a result of listing your Airbnb. Some of the most common expenses will include:
- Subscriptions such as cable and streaming services
As an example, let’s say your monthly expenses will be $1,000 in rent, $200 in utilities (water, electricity, and heat), and another $75 in streaming and cable. You’ll want to take these expenses and divide them by an average of 30 days in a month to get an estimate of daily costs. The equation will look something like this:
$1,000 + $200 + $75 = $1,275 / 30 = $42.50
Of course, charging $42.50 a night in this circumstance will only allow you to break even, therefore, further research might be needed to determine the best price.
Armed with the minimum nightly price, take the time to review the Airbnb market in the area. This is what’s called market-based pricing. To stay competitive, you’ll want to ensure you are staying within the rough ballpark of what others are charging in the area for a similar space, while still staying above the minimum amount you’ve determined earlier. A quick Google search will help with this estimate.
Another way to set the price is using target-based pricing. Rather than worrying about the market, you take into account the amount you want to make at the end of the month or year. For example, if you know you’d like to make $1,000 a month from your Airbnb listing and your expenses are $1,275, you’ll want to ensure you bring in $2,275 every month, or a charge of $75.83 a night.
The demand for Airbnb’s continues to grow the longer the global pandemic has raged on and expects to catch up to pre-pandemic numbers quickly. Throughout the year or even month, demand will ebb and flow as normal, despite the pandemic.
Vacation months tend to remain around the summer months as well as holidays, making those times of the year the most in-demand. You’ll find more bookings throughout those times, which are likely to fall away around back-to-school season.
Demand has to be taken into account when determining potential annual revenue and the setting of the price for the Airbnb listing.
The location of the Airbnb listing will make all the difference when it comes to the potential revenue. If you’re located in the heart of a tourist area, you’ll find more bookings throughout the year at very competitive prices. You might even be able to raise prices around certain more heavily traveled times of the year.
Of course, locations off the beaten path also get bookings, but they might be fewer with a less competitive edge. Depending on how much you’d like to make from your investment, this is something to pay particular attention to as you set a budget for the Airbnb you’d like to purchase before you settle on the ultimate location.
Airbnb business revenue potential
The revenue potential of an Airbnb business can be calculated by the expected number of customers throughout the year multiplied by the nighty charge.
A quick look through a search engine might provide some insight into current trends throughout the location of the Airbnb. However, as an example, we can look at a potential for 20 nights booked throughout the month, at 12 months leading to a rough estimate of 240 nights booked. If you use the price of $75 a night, that leads to revenue of $18,000 a year, or around $1,500 a month.
Of course, there are also months where there are fewer bookings and those should be accounted for. If only 10 nights are booked throughout a month, that’ll lead to 120 nights booked. At $75 a night, that will yield around $9,000 in potential revenue.
Airbnb Business Annual Revenue Per Unit
The average annual revenue per Airbnb unit is $11,000 per year.
- Minimum revenue for an Airbnb Business = $5,280
- Maximum revenue for an Airbnb Business = $22,000
- Average revenue for an Airbnb Business = $11,000
What are common expenses for an Airbnb business?
Operating expenses are a part of any business, no matter how big or small. Expenses are split into two categories: variable expenses and fixed expenses.
Fixed expenses are those a business can expect no matter the amount of work performed during the month. Variable expenses will be subject to change from month to month and are a little more difficult to predict.
Airbnb Variable Expenses:
- Professional cleaning services
- Soft products such as toiletries
- Repairs and maintenance
Airbnb Fixed Expenses:
- Rent or mortgage
- Listing through Airbnb
- Renter service fee of 3% when your listing is rented
- Subscriptions and TV
Airbnb expenses can be broken down between expenses that you will only incur when someone stays at your Airbnb unit and expenses that you will incur whether you are fully occupied or completely empty. You can see some example Airbnb expenses in the screenshot below from our free Airbnb cash flow calculator.
Airbnb Business Profit Margin
The average Airbnb host generates a profit margin of 4 to 8% according to Awning.
Although this might be the average, we think there are tons of variables that could make a significant impact on your profits. Using our Airbnb cash flow calculator we are going to demonstrate potential Airbnb host profits for different common scenarios. First we need to come up with an example property and some default assumptions. We are assuming the following:
Airbnb Property Assumptions
- Cost to Acquire Airbnb Property - $250,000
- Monthly Mortgage Payment - $1,000
- Property Taxes per month - $100
- Weekday Daily Rental Rate - $125
- Weekend Daily Rental Rate - $185
- Cleaning Fee Charged to Guest per Stay - $100
- Weekday Occupancy - 35%
- Weekend Occupancy - 85%
- Average Length of Stay - 3 days
Airbnb Expense Assumptions
- Lawncare, Landscaping, and Snow Removal - $100 per month
- Utilities - $500 per month
- Security - $75 per month
- Internet, cable, streaming services - $125 per month
- Parking - $100 per month
- Insurance - 100 per month
- Other Costs - 100 per month
- Cleaning Cost - $100 per stay
- Consumables - $10 per stay
With these as our base assumptions we will look at the potential cash flow and profitability of 5 different scenarios:
Airbnb Host Profits when Hiring a Property Management Firm
According to Hostaway the average Airbnb property management firm will charge between 25 and 50% of the fees collected. Let’s assume that fee includes the cost of cleaning, repairs and maintenance and lawncare and snow removal. If we take our example scenario above and a 35% property management fee you can see that the property is not generating positive cash flow. It forecasts a negative cash flow of -$7,125 for the first year.
Your primary opportunity for generating a profit in this scenario is the appreciation of the value of the property itself, but it will be really tough to cash flow.
Airbnb Host Profits when Hiring a Cleaning Company
Assuming that you are managing the property yourself so you don’t have a revenue share, but you still hire a cleaning company to clean the property after each stay, you would still show a small negative cash flow in the first year of -$1,800.
Airbnb Host Profitability when Managing and Cleaning the Unit yourself
Now if you can manage the property and clean the property yourself, you can generate a profit in this example. We see a positive cash flow of $4,400 for the first year.
Airbnb Host Profitability and Mortgage Rates
Another item that has the potential to have a major impact on your ability to cash flow your Airbnb is the interest rate you are paying on your mortgage. In the example we assumed a $1,000 monthly payment for a property worth $250,000. With interest rates rising, if you don’t have a fixed interest rate, or you purchase your property now, 30 year mortgage rates have increased to roughly 7% in the US as of fall of 2022. The same property with a $230,000 mortgage at a 3% interest rate would have a monthly payment of $970. At 7% interest, that monthly payment jumps to $1,530.
When we adjust the monthly mortgage payment to $1,530, even if you manage the property and clean the property yourself, we still project a negative cash flow of roughly $700.
Airbnb Host Profitability and Home Price Impact
We know that the change in the value of the Airbnb has been a major support in recent years for Airbnb hosts. If you include a 5% annual increase in the value of the Airbnb property, this might be the path to profitability for many host; however, keep in mind that home prices can also work against you too. A 5% increase in the value of a $250,000 home would add an additional $12,500 in value creation. Even though the property won’t cash flow if you hire a property management firm, if the value of this property increases by 5% you would basically breakeven when you add the cash flow + the change in property value even at the higher mortgage rate of 7%.
How to Forecast How Much Your Airbnb will Profit
You can see how much profits can vary, so I encourage you to grab our free calculator (which you can download down below) and forecast the potential profit and cash flow of your specific Airbnb unit.
If you’re looking to create full financial projections for your Airbnb property or you need to secure some financing/investment, you can use our CPA developed Airbnb financial projection spreadsheet which will work well for a single Airbnb unit or a multi unit Airbnb empire.