I break down the exact system I used to buy a profitable Airbnb. If you’ve been trying to get started investing in short term rentals, this will help you see the step by step process with a real-life investment property, so you can do it too.
I cover each step of the LAPS funnel for this one property - Leads, Analysis, Pursue and Success, and show you what you’ll need to find a profitable Airbnb.
Resources
Here’s the link to the FREE property analysis spreadsheet I used in the video to analyze the leads along the way to find the ones that were worth putting offers on.
For a high level overview of the LAPS funnel for buying profitable real estate investment properties, including short term rentals, check out this video: Start Investing in Real Estate With Just 4 Steps
For tips on finding an Investor-Friendly Agent, check out this video: Get More Deals with Investor Friendly Agents
Once you find your first, or next, short term rental, you’ll want to start building your team. Check out this video - The First Hire for Your Short Term Rental Business
Transcript
Have you considered investing in an Airbnb property but don’t know where to start?
I’m breaking down the exact system I used with an actual property I ended up buying. I’ll show you how I did it so you can use this exact process to replicate buying a profitable Airbnb.
In my last video I broke down Brandon Turner’s workflow for finding real estate deals worth investing in.
If you haven’t watched that one yet, I’ve linked to it in the description below so that you can check it out and understand what this workflow looks like at a high level.
This system is the same system that we use to acquire rental properties in our own rental portfolio, and I wanted to show you what that really looks like with a real world deal.
Successful real estate investors all use some form of this workflow. Brandon Turner happened to give it the acronym of LAPS, but the backbone of this system is the same no matter what type of real estate you are investing in.
Before you start running these LAPS, you need to know your investment criteria. So here was the criteria we had for this deal. My partner and I were looking to acquire a vacation rental property in a market that had a solid vacation rental history, a place where single family vacation homes have been a part of the community for at least 30 to 50 years.
We also had plans to self-manage this vacation rental and wanted it to be in a market where we would actually enjoy visiting when we went out to work on the property or otherwise use it in the off season.
As part of the market selection, we did research on what size of property worked well, what amenities were necessary to remain competitive and which specific areas had the vacation rules and regulations that would work for our strategy.
To figure out the history of vacation rentals in these markets, we used Google and the Bigger Pockets forums.
To learn what sizes of properties did well in terms of revenue, we used AirDNA. We also used AirDNA to compare amenities, but this was also something we were able to find by comparing Super Host listings directly on Airbnb.
As for the rules and regulations regarding short term rentals, many cities and counties actually list this information online.
Besides just online searches, we also networked with investor friendly agents in these markets who were familiar with the short term rental strategy so that we would not miss anything regarding the rules and regulations in our search.
Over the course of a few weeks of research and discussions, we continued to reach out to more investor friendly agents in those markets until we found the ones that we wanted to work with.
If you want to learn more about finding an investor friendly agent, check out the description below, I’ve got another video on that topic that you can check out later.
For this vacation rental deal, our plan was to use the MLS as our lead source. We were searching for on market properties that were as close to turnkey as possible because we weren’t located close to these markets and our networks were quite new in them.
It didn’t make sense for our timeline to try to do a large renovation as part of the criteria for this project. We began our search in the winter with the intention that everything would be ready in time for the spring season.
Since we had already began networking with investor friendly agents, we started setting up our search on the MLS for the property characteristics we had researched would do the best for that market.
Once we knew what sort of financing we were going to use, we had our search criteria complete. We were looking for properties that were under $1,000,000, had at least four bedrooms, were located within walking distance of a beach and were located within the short term rental zoning for that specific market.
We were looking in several beach markets, so we had this MLS search set up in the same way across different markets. We would get email notification and whenever a property would show up in this search matching this criteria, and that’s when we would go on to the next step.
The next step is to analyze the leads as they come in. I’ll walk you through the way we did it for this rental, and I’ll leave a spreadsheet copy for you down in the description below so that you can use a copy of it for your next deal.
Analyzing the leads is where the bulk of the work went into finding this property. The most important parts of the analysis was coming up with reasonable estimates in terms of the yearly expenses, including the debt service, the yearly income that the property could generate, and the initial investment, including the down payment, any repairs and any furnishings or decorations that would need to be added for this to be an Airbnb.
You need these estimates in order to understand whether this property could be a decent investment. For each lead, we added in the purchase price and the financing terms first.
We were going to be utilizing a 10% down payment portfolio loan and had been quoted at a 3.5% interest rate. Because the down payment wasn’t 25%, we also had to factor in private mortgage insurance into our financing equation.
For each market that we were analyzing leads, we needed to estimate what the revenue potential of that property was. If a lead had already been used as a rental property, this can be fairly easy - and we would ask our realtor to ask the listing agent for any rental history. Many were happy to provide rental revenue reports for us and that was helpful.
However, analyzing a lead’s potential means that you have to actually look at not only the current income based on what the current owner is managing and operating the rental like, but also with its pro forma income. Pro forma income refers to income potential, what a property could earn based on if it’s managed at its best. For our pro forma income, we would look at PriceLabs and AirDNA and analyze the top 60% of performers in that market for this type of property, averaged that out and compared it to what the property was currently earning. Overall, we would take our estimate and put it somewhere in between the pro forma income as well as the current income, to create a more conservative estimate of what we could potentially earn as revenue with this property.
Next, we needed to understand each property’s expenses, things like the yearly taxes, average utility costs, HOA fees, landscaping and other regular maintenance.
Some things particular to short term rentals that you would need to know for your expenses are: short term rental property insurance management, software fees, short term rental licenses, platform fees for platforms like Airbnb and VRBO and more.
Coming up with these estimates often took a series of phone calls to real estate agents, utility companies, HOAs and various service companies.
After you’ve done this a few times in a particular market, you probably won’t have to do it every time. But you will want to verify things if a property becomes a serious contender that you may want to put an offer on.
For each lead, you’ll also have to consider if the property is going to be furnished when it’s purchased or if that’s something you’re going to have to budget for.
You’ll also want to estimate repairs, especially if the property is being listed “as is”. Never make the assumption that you’re going to start running this property and it’s going to have $0 in initial repairs. Something will likely come up while you’re setting up the property and it’s best to have some cash reserved for those instances.
Now that you have everything in the spreadsheet, it should be clear to you, based on your investing criteria, whether or not to move forward with this property.
Either the property falls into your investing criteria or it does not. Real estate investing relies on the numbers, and doing this analysis is a crucial part of being a real estate investor.
In this case, we were looking for better returns than the average return on the stock market. According to Forbes, the average return on the stock market is around 10% when somebody reinvests dividends.
Since running a short term rental is far more work than setting and forgetting an investment in the S&P 500, we wanted to get a better return than 10%. Ideally, we were targeting a 20% cash on cash return during this search as part of our analysis criteria, since many short term rental hosts were able to achieve that in the past.
During this analysis phase, we rarely saw a property cross over 15% cash on cash return.
After analyzing 110 leads, we came across a property that looked like it would average close to 18% cash on cash return. We dove deeper into this analysis, started discussing the property with our realtor, and began the next phase - pursuing the deal.
If a property comes close to matching your investing criteria and plenty of others have not, then it’s okay to start pursuing the deal.
Don’t be afraid to pursue it at this stage. That’s what we ended up doing with this property. We had found something that was the closest to our search criteria that we had seen during our search, and we spent time verifying our assumptions with bankers, other investors and our realtor to make sure we weren’t missing anything about this deal.
Since this property had been sitting on the market for some time, we worked with our investor friendly agent to submit an offer below asking price. Then came the waiting.
Over the last few years, it’s been very typical to submit offers above asking price. So it was a gamble going this route for this deal. However, the property had been sitting for some time and our offer was coming in around the holidays. We thought that we would have a chance, even with a lower offer.
The waiting stage of pursuing a property can be excruciating, especially if you’re only pursuing one property. It was rough at this stage and I remember second guessing sending in a low offer. I was wondering if we had blown our shot at this deal.
It’s hard to stick to your investing criteria at this stage, so be mindful if you’re newer to property investing that it’s okay to be flexible, but don’t be so flexible that you pursue something that won’t cash flow. It’s better to pass on an okay deal than to actually invest in a bad deal.
The next day, the seller’s agent came back and asked for our highest and best offer. This was a surprise for us because no one else had bid on the property up to that point. An offer had come in the night before that was very similar to our offer.
It was time to make some decisions and this is where the spreadsheet comes back. We use the spreadsheet to refine our income, our expenses and the purchase details to see what our best offer could be. In the end, we offered a little more than the asking price, but not much. We chose to make some other changes in our offer to try to make it more attractive: we added a higher earnest money deposit; we reduced our inspection period and we reduced our total timeline to close. That was the best we could do to feel comfortable taking on this deal.
Another day after submitting our new offer, we received a signed purchase and sale agreement from the seller’s agent. The sellers had decided to take our offer and now the real time crunch began.
We had to get our inspections done around their current Airbnb schedule, work with our lender to continue the loan process, get in touch with the HOA about some issues we had learned about, get estimates on repairs and do all of the normal due diligence that should be done with any property purchase.
During this time period we had two contingencies in our contract. The first was an inspection contingency and the second was a financing contingency. We had every intention to purchase this property and we wanted to be sure that the property had been represented as expected.
We ran into issues throughout the process. Flood insurance that we didn’t account for, repairs that were needed, permits that we did not know about, and a changing lending environment all while we were under contract.
Our resolve for staying in this deal was tested every single step of the way. We were questioning if we were going to keep going through with this deal. We had started to realize that we weren’t going to hit a home run with this deal, but with our conservative estimates, we were still comfortable with the cash flow potential and the cash on cash return we thought that this property could generate. We moved forward, closed on the deal and got to work.
Every time I’ve worked through the LAPS system, I’ve learned something new. From this deal, I’ve learned how to refine my conversations early on in pursuing a property to learn about things such as special permits or special insurance requirements, depending on the market.
The first time you do a deal in a new market, you’re bound to run into new things as part of the process. The key thing to remember is that this is a funnel. You want to be sifting through a lot of leads, analyzing them and pursuing just the ones that are the best of the bunch.
When you repeat this system consistently, you can get your first or next cash flowing, short term rental investment. And once you have that investment, you’ll want to hire the right team to run it. Check out this next video on hiring the most important team member on your short term rental crew.