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At Foothold we have invested in markets where expected tourists visits surpass the current capacity (Bariloche in Argentina, Saint Thomas in the USVI are two examples). Such markets are exceptions. Where there is competition for the same number of customers, and customers have options you have to find the right property to have high levels of occupancy.

In a competitive market you are looking for property with a unique characteristic that helps it stand out from other competitors. This unique characteristic might be a great view, large balcony or place within the property where guests can spend time and build great memories. Professional photography and great decoration alone are not enough. When selecting between properties to buy, always prioritize by unique features. As you will see in the following research for Miami, we focused on properties with a view OR waterfront.

Regarding the asset type, you need to pick one. In our case we focus on studio apartments. This is our preferred choice for solo travelers or couples, business travelers and urban explorers who do not require a lot of space and have activities throughout the day.

Step 1: let airbnb show you where customer already prefer to stay

When deciding where in Miami to begin looking for a studio apartment it’s best to reverse the approach and look for where Airbnb predicts this traveler profile would stay. Make a search for an apartment in Miami, with 1 bed and 1.5 bathrooms using the filters. Input “Miami” on the search bar and write down the neighborhoods Airbnb recommends for you to stay.

Airbnb will display neighborhoods with the highest occupancy rates in town (averaging between 70%-80%). The price for these recommended locations will vary, but not its occupancy.

Recommended neighborhoods for Miami are: Brickell, Coconut grove, Wynwood, South Miami Beach and Bal Harbor. This is where tourists are more likely to stay, and this is where you should focus your research.

Step 2: calculate average nightly price and GRI for those neighborhoods

Next step is to zoom in on each neighborhood and write down the night price for the apartments as filtered before and calculate the median price. The easiest way to do it is to write down the prices on a list or excel in one.

You will then multiply the median price for 30 nights and 80% occupancy to calculate the expected Gross Rental Income (GRI). This number will come in hand in the next step, when trying to understand if the available apartments are being sold at a fair price.

For example, in the case of Brickell, the median price for the studio apartments listed on Airbnb is $189 per or $4,530 gross rental income (GRI) per month. We need to build our list for all the target neighborhoods:

  • Brickell: $189 per night or $4,530 GRI
  • Coconut grove: $129 per night or $3,096 GRI
  • South Miami Beach: $183 per night or $4,117 GRI
  • Bal Harbor: 134 per night or $3,168 GRI
  • North Beach: 142 per night or $3,160 GRI

Step 3: order neighborhoods by GRI to average property price

To calculate the average property price we will focus on the area delimited by Airbnb on the previous step and use the exact same filters (in this case, 1 bed, 1.5 bathrooms, under 750 sq ft, with a view or waterfront) in Zillow or Redfin. Again, we will take the sample directly from the real estate marketplace and use the median price.

Once you have sampled property prices for each neighborhood the next step is to calculate which neighborhood present the best price in properties with regards to the expected property average price.

According to this Analysis both Brickell and South Beach present you with the best opportunities for investment overall. This analysis will give an order to your research. Each apartment that you select has to be classified by its unique characteristics to understand if it will stand out. If none of your candidates look like they would stand out on Airbnb, in our experience, your return will suffer.

Step 4: select properties with unique characteristics

To guarantee high occupancy in Airbnb is to have a property with a unique characteristic that helps it stand out from other competitors. A guest will scroll through multiple properties on Airbnb. if your listing has something that catches their attention the user will stop scrolling to view your listing. Make a list of the properties that meet this requirement and rule out the apartment buildings where short term rentals are not allowed.

Step 5: calculate the cap rate for your the properties you’ve selected

Once you have your lists of properties that meet these standards, the next step is to calculate the Capitalization Rate (Cap Rate) for each property. The cap rate is the net operating income (NOI) divided by its purchase price. If you intend to use debt to leverage the purchase of the property the CAP rate includes the interest rate the costs associated with financing a property. When interest rates are high, you may want to limit the amount of financing as this will damage your CAP Rate.

To analyze the cap rate you need to list all the expenses related to managing the property. You can use our calculator for free at getfoothold.com/calculator or build your own excel file to analyze the return. Your analysis should include:

  • Property taxes
  • Insurance
  • Utilities
  • HOA
  • Airbnb commission (3%)

Maintenance, repairs and cleaning fees can be charged to the guest though the “cleaning fee”. When performing this analysis this approach is good for simplification.

At Foothold we rule out properties with less than 8% cap rate. Investing in short term rentals for investors sets up a higher standard regarding the expected returns of the properties. Managing short term rentals is hard work, to set up a minimum profitability standard for your investments is something that can help you rule out properties.

Step 6: Interviewing other hosts in the neighborhood

Before making a purchase, we rent on airbnb apartments with similar characteristics from successful hosts. This helps us gain insights about that particular market. We keep straight forward with the host by saying that we are looking to invest in the area and it might be possible to chat for 20 minutes to ask for feedback. You do NOT need to actually stay at the place to interview the host on the phone. In many cases, we just have the interview and later on inform the host that we will not be staying. We pay for the stay, of course.

Interviews will help you confirm occupancy rates and how to adjust prices throughout the year. Also, the host will have a clear profile of the average guest and why they decide to stay in their place in particular. Guests may decide to stay at a given place because of proximity to popular events, transportation options or safety. Interviews will give you a deeper understanding of the guests you will be expecting and will help confirm if the property you’ve selected meets their needs.

Conclusion

We have reviewed thousands of properties and purchased multiple short term rentals in markets we didn’t visit before the actual purchase. We have followed this procedure in every case to ensure returns to our investors. Each time we have strayed from this process, like selecting a property with no unique characteristics or one that is close but not within the delimitation of the geographical area we decided on originally, our margins have suffered. A part of being a successful investor is to decide not to invest in a market if any of the conditions before listed are not met.

We advise against using tools like Airdna or buying market research analysis for particular neighborhoods. Such tools present information on averages and may not reflect the opportunities available at a given time. Also, keep in mind that what makes a great stay is defined by the uniqueness of the place. No software app can help you assess that. Finding vacation rentals the hard way and being able to wait for the right property will prove to be a better approach in the long term.