Happy Tuesday! Today we're doing something different and taking a close look at an Airbnb property that's currently up for grabs. The 5,400 square foot property we're focusing on is listed for $2.2 million, boasts 5 bedrooms and 4.5 bathrooms, and is located in Scottsdale, Arizona.
Scottsdale is popular destination well-known for its shopping, golf, and nightlife. For the sake of this analysis, let’s assume that we purchase the home at the asking price. The interior looks to be in top-notch condition, so we won't budget any upfront costs for repairs or renovations. We’ll need to budget for furnishings, but for now we’ll leave that out of the calculations.
We’re going to make the following assumptions:
20% down with a 30-year fixed mortgage at 7.5% interest rate
0.51% annual property tax rate (based on Scottsdale’s current rates)
$770/mo home insurance
$180/mo HOA
10% reserve for capex and maintenance
2% annual revenue and expense increase
This property is currently listed on Airbnb for $457 / night, but the rate varies depending on the time of year and the days you book. There’s only 2 reviews and both are relatively recent, so it doesn’t seem like this property has been on Airbnb for too long. That means we don’t have much historical data to go off of to estimate revenue.
We’ll use rabbu.com to estimate the Airbnb’s potential revenue - we can assume there’s going to be a fair bit of seasonality since people flock to Scottsdale in the winter and spring. Plugging our property’s data into Rabbu, we get the following results.
As expected, there’s a lot of seasonality in revenue. The estimated daily rate and occupancy are $799 and 35% respectively, with an annual revenue estimate of ~$160k. We can’t take these numbers as fact, but it’s a good starting point.
Airbnb charges a 3% seller fee on all bookings so we’ll use that number in our calculations. We’ll assume that we break even on cleaning fees, meaning whatever we charge guests for cleaning will go directly to cover the actual costs of cleaning the property. This ensures a consistently high standard of cleanliness and guest satisfaction but doesn't contribute to our profit margins. Additionally, we’re assuming that we'll be self-managing the property. If we decide to hire a property manager, we can expect a 20-30% management fee, which would proportionately increase our monthly expenses.
After plugging in all our numbers, here’s what we get.
Our monthly outlay for mortgage + insurance + property tax comes out to $14,011 and we’re bringing in $12,990 in monthly Airbnb income. Subtracting the two and accounting for our $180/mo HOA fee, we’re losing $1,201/mo in our first year. Not a good start!
We’re also putting aside $1,300/mo in the first year for capex and maintenance. Rolling that into our calculations, we’re losing $2,500/mo on this property ($30k in the first year). We accrue $16,224 in home equity in our first year, so our net loss in the first year comes out to $13,778.
These are pretty poor numbers, especially since we’ve ignored some of the general costs of running a luxury Airbnb, like furnishings, utilities, and pool maintenance. Additionally, we’re not accounting for the amount of time we’ll have to invest in managing this property and all of the guests that come through. Even considering potential add-ons like concierge services or partnerships with local businesses, it’s unlikely that we’ll be able to add enough incremental revenue to make this a profitable investment. On top of that, we evenly divided the annual Airbnb revenue across each month but in reality it’s very lumpy - you need deep reserves to weather the summer months where little revenue is coming in.
So, is this property worth pulling the trigger on? I don’t think so. On top of being unprofitable, there’s general risks of market downswings, regulatory changes, and unforeseen major expenses. The rule of thumb for Airbnb properties is that your annual revenue should be 15-20% of your purchase price to be a good investment. In this case, it’s only about 7% - we’d have to more than double our revenue to hit that benchmark. As tempting as it is to buy a home like this in Scottsdale, the risks far outweigh the benefits.
Thanks for sticking with me until the end - see you next week!
Who wrote this article? Can you do an analysis on my house on scottsdale?