In this article I am going to do analysis of an Airbnb opportunity in Virginia Beach, VA. I selected this location based off Virginia Beach’s rank in the article Best Cities to Buy Airbnb. Which claims the average annual profit is $33,208. This would include part time listings, small condos, as well as large beach houses in the average. This is enough profit to make me interested in exploring further.
So the idea was to find a beachfront or property extremely close to the beach that would cashflow as a vacation rental while taking advantage of likely long term appreciation in a popular beach community over time. I am analyzing it as 100% investment utilization, though being able to use it for family trips and have a place that feels familiar is a benefit that is harder to quantify in dollars.
Airdna Research
First stop on research is Airdna’s Market Minder tool. At this point, I am just using the free version to get a feel for the market to decide if I want to do further research in the area.
There are a few interesting parts of their dashboard with the free data.
The top part of the dashboard contains Average Daily Rate, Occupancy, and Revenue. It also shows the cyclicality of a market. In this case, it shows that Virginia Beach is a very cyclical market. This probably should not surprise anyone though. I wanted to look into a cyclical vacation market as the markets with year round demand are very few and far between.
The map is great for showing concentration of listings. You can see where the hotspots are. It doesn’t help too much with identifying parts of the market that may be more profitable than others.
The Rental Growth chart looks fairly similar to most locations I have seen. It seems to correlate a bit with the cyclical nature of the market, but in general is up and to the right. There is a decline in listings from last year to this, likely due to COVID. In my market, I know a lot of the listing owners exited STR rentals and moved to traditional leases.
This is a nice chart. It shows where the majority of the rental properties are as far as size. Again, not great for telling where the sweet spot is, but in general people continue listing or creating more listings in niches that are profitable. Here you can see that 2 bedrooms has the bulk of the market, but in comparison to my midwestern market, there is a lot of larger 3-5+bedroom rentals.
Next I Look to Zillow
I found a property that is listed at $710,000 on Zillow. It looks to be in good condition, ready to be a rental property. Looks like the sort of asset I would not feel bad about owning. Then I go back to Airdna to see what I could earn if this were a STR.
Airdna says it could earn about $100,000 a year. I have a feeling that it is blending in the average of homes that are actually on the water with this one, which is 3 houses inland from the water. Probably a huge difference in rental demand for waterfront. With a quick look on Zillow, it is the difference between being $700k and a 1.4mil+ house.
So I looked up the STR income potential on an address a that was definitely off the water.
I plugged in the same numbers for bedrooms, baths, and occupants. So now I can say that, even if 97k a year is overstated, it is likely somewhere between 70k and 97k.
What are the expenses?
This is a preliminary, back of envelope calculation at this point. Before actually purchasing a property, I would spend more time on due diligence by getting actual quotes lined up and determine the specifics of how things like property taxes are calculated in that location. I would also find others in the market and get their input from their direct experiences.
Mortgage: A mortgage payment for 80% of the value of the property at 4% interest is $2,712 a month, or $32k a year.
Property Management: At 20% of 80k a year, the annual property management fee is $16,000.
Property Taxes: It is currently being taxed $3,400 on a $340,000 valuation. This is right at 1% of property value. The sale of $710,000 will likely cause the taxes to change to $7,100 a year.
Insurance: Honestly, I am not sure what the insurance cost will be here. Zillow says $270 a month, I am going to say $350 to find a good policy that covers short term rental. $4,200 a year.
Cleaning: Unfortunately Airdna does not provide a breakdown between rent and cleaning fees. It is hard to say if the majority of the stays are week long, or 2 day rentals or what the breakdown is without doing some research. It is probably $120 per cleaning and maybe 80 cleanings a year or $9,600.
Maintainance: The house does not have overly high-end finishes. It is in a coastal area which means it would experience a lot more weather on the exterior. I will call it $5,000 a year.
Income:
$96,000 Gross Rental Income
Expenses:
$32,000 Mortgage
$16,000 Property Management
$7,100 Property Taxes
$4,200 Insurance
$9,600 Cleaning
$5000 Maintainance
Total Expenses: $73,900
Net Profit: $22,100
The Return
If the annual profit is $22,100, the next thing I like to find out is what the cash on cash return would be. The cash outlay is a $142,000 down payment, and say $20,000 in furniture and other rent ready expenses for a total of $162,000.
Cash on Cash = Cash income / Cash invested
$22,100 / $162,000 = 13.6%
Conclusion
A 13% cash on cash return in a short term rental property is not exactly the best cash on cash return out there. Being managed by a 3rd party, it is still unlikely that this investment would be completely hands off or “mailbox money.”
In this article, I have not tried to capture the value in the potential appreciation. I have also not looked into the specific market’s likelihood of appreciation. Though over time, any quality warm beach location has pretty good prospects.
The downside of such an investment instead of say, mid market multifamily is that there is more exposure during a recession. Beach vacations are definitively an activity that families cut down on when there is a recession.
The effect of a recession on rental income is definitely something that should be researched more before purchasing a beach house as an investment.
