Your Guide to Vacation Rental Market Research
No matter how much you think you know your market, can you ever really guarantee an investment will be successful? You may end up buying property in an area with a prolonged off-season or where there’s little-to-no demand for what you purchased.
With the right tools, though, you can conduct data-driven vacation rental market research and calculate expected costs and revenue so you know you’re making the right investment decision.
Flo Stich, Director of Data Partnerships at AirDNA, walked us through their MarketMinder tool, which helps vacation rental investors determine where to purchase property and calculate estimated returns. On top of covering how AirDNA can help you conduct market research, we talk about:
The importance of conducting data-driven market research
Finding the right place to invest
Familiarizing yourself with short-term rental regulations
Doing a qualitative competitor analysis
Defining your ideal guest
Calculating revenue potential and projected expenses
Discover how to make informed decisions about where to purchase property and increase your chances of vacation rental investment success with data-driven market research.
Why is it important to conduct a data-driven market analysis?
With the supply and demand of short-term rentals in constant fluctuation, it’s no longer enough to make an educated guess about where you should buy a vacation rental property. While you may think you know your town or the area where you’re considering buying property, relying on instinct to make such a big investment is a risky move.
Conducting a data-driven market analysis is the best way to ensure your short-term rental investment is a profitable one. Though investing in a tool like AirDNA won’t replace the research you have to do on the ground, like visiting properties and analyzing target guest profiles, it certainly helps eliminate any uncertainty about whether your investment is likely to be successful.
Find the right town or city to invest in
When it comes to deciding where to invest, some people may have a specific location in mind, while others are willing to purchase wherever they find a good opportunity. And depending on which of these two cases you identify with, there are different approaches you can take to make sure you make the best choice.
1. If you already have a location in mind
Perhaps you’re looking for a drive-to destination close to your permanent residence when investing in a vacation rental. Or maybe you’ve always dreamed of buying a second home in your favorite city in the world.
When people purchase a vacation rental with the idea of using it themselves from time to time, their locations are more restricted than if they’re open to investing in any location. But this isn’t an issue if you use a solution like the AirDNA MarketMinder platform to discover just what type of property you should purchase in your dream location.
With the MarketMinder tool, you can dig deeper into the existing properties in your dream location so you know just what type of vacation rental to purchase. Maybe you’ll discover this area offers lots of opportunities for beachfront vacation rentals. Or perhaps you’ll find there are only large properties in the area, so purchasing a one or two-bedroom home can make you stand out from other vacation rental offerings.
With MarketMinder, you can gain valuable insights into exactly what type of property you should invest in wherever you have your heart set on purchasing.
MarketMinder shows you which type of property you should choose in your dream destination.
2. If you’re open to any location
If you have money to invest and want to do it wherever you find the best opportunities, AirDNA has a resource for you: The Best Places to Invest report. This report divides properties by location type and provides a list of the best short-term rental markets in the United States so you know just where your investment will get the best returns. And if you are interested in learning about the short-term rental markets in other countries, you can purchase reports for different countries from AirDNA.
To make its recommendations, the report analyzes KPIs like revenue potential, supply, seasonality, revPAR, and more. It then aggregates this data and provides you with the AirDNA score, which accurately predicts future demand.
For example, let’s take the small town of Slidell, Louisiana, with an average annual revenue of $69,000. It has an investability score of 100, which “compares the expected income of a property relative to the cost of buying it”. With an occupancy rate of 62% and a typical home value of $225,000, this location has an AirDNA investor score of 85/100.
Analyze and compare key metrics with the Best Places to Invest report
Once you’ve found a promising town or city on the Best Places to Invest report, head to MarketMinder to further analyze the area there and decide which type of property you should purchase.
It’s worth mentioning that AirDNA’s MarketMinder tool can also be useful for investors interested in a rental arbitrage model, as you don’t necessarily need to purchase a property in order to reap the benefits of running a short-term rental in a profitable area.
Narrow your search down by neighborhood
Once you decide on the city or town you want to invest in, it’s time to get even more specific and pick a neighborhood. If you’re looking at investing in a big city, you can search MarketMinder by neighborhood and calculate annual revenue potential and average daily rate so you know exactly where to buy.
But even if you’re investing in a property in a small town, it’s still a good idea to look at numerous locations in the area. For example, in a small town like Mauston, lakeside properties may be more expensive but offer a higher revenue potential than inland homes.
MarketMinder helps you decide on the best neighborhood for your vacation rental investment.
Familiarize yourself with short-term rental regulations in the area
Before you get any further into your vacation rental investment journey, you need to research one of the key investment success factors that will determine whether you have a viable vacation rental business: Local regulations.
Short-term rental regulations vary significantly by city and county, so be aware of any local regulations and avoid areas where rental vacation businesses are restricted or outright prohibited.
Do a qualitative analysis of competitors in the area
Once you’ve carried out your data-driven research to decide where to invest, it’s time to dig a bit deeper. Head to a booking platform like Airbnb and take a look at the existing properties in your target area.
Do you see any gaps you could fill in the market? Maybe there are few pet-friendly properties, or you don’t see any locations with scenic views. This is an opportunity to purchase and develop a property that fulfills a need other properties don’t.
But also consider that if there are no large properties in an area, it might be because it’s not a popular destination for big groups of people and consequently large homes have low occupancy. Think critically before making any decisions that aim to set you apart from your competitors.
Define your ideal guest
The next step in the market research process is to define your ideal guest. Any successful vacation rental targets its listing towards a specific type of guest, whether that be young couples, large families, or groups of friends.
Your listing won’t be appealing to everyone, and to determine your ideal guest profile, you should take a look at successful rentals in your target market and see what type of guest they target their property towards. This can tell you if the area is especially kid-friendly or a popular destination for romantic retreats.
At this point, you can choose to make your property fit into the desires of the common type of guest in the area, or design it for a group that hasn’t yet been tapped into. But again, think critically and ask yourself why a guest profile is or isn’t common in your market before deciding to target it.
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Discover the revenue potential of a specific property
Once you’ve homed in on a city and neighborhood, it’s time to look at specific properties. With MarketMinder, you can estimate the revenue potential of existing homes and apartments using AirDNA’s Rentalizer feature.
Enter the address and characteristics of any property in the world (it doesn’t have to be listed on a booking site), and the tool will analyze similar listings to calculate its potential short-term rental revenue on an annual basis. Plus, you’ll get insights into average daily rates and occupancy rates, as well as get an overview of busy and slow months. That way, you can estimate the seasonal variations of any particular property to make accurate predicitions and set prices and availability accordingly.
Get an inside look at how much you could earn with your vacation rental property using the Rentalizer tool
Calculate your expenses
Finally, it’s time to discover how much your vacation rental investment is going to cost you and, more importantly, whether it will bring you the revenue you expect. At this stage, you need to do independent research regarding local taxes, homeowner’s association fees, maintenance and cleaning costs, startup expenses, and more.
Once you’ve collected this information, you can use the Financial Calculator within the MarketMinder Rentalizer tool to estimate your net operating income and cap rate (aka rate of return on your investment) given your annual operating expenses and startup costs. For reference, a cap rate of around 10% is ideal, but this varies depending on the location and type of property.
Get rid of the guesswork and realistically estimate expenses and revenue
Discover the power of data-driven vacation rental market research
Why make educated guesses when you can calculate the risks and potential earnings of any property in the world? If you’re going to invest money in a vacation rental property, make sure you’re doing it the right way.
To get the most out of a vacation rental investment, start with data-driven market research. A tool like MarketMinder lets you know where to invest and what returns to expect so you can maximize the benefits of that second home or investment property you dream of.
