A Creative Way for Investors to Cash Flow in Expensive Cities

We have quite a few friends here on BiggerPockets from expensive West Coast cities like Los Angeles, San Francisco, and San Diego, and we frequently see these would-be investors look for out-of-state investment opportunities because of the relatively high price to rent ratios seen in their local markets. There just don’t seem to be any properties that even come close to matching the mythical 2% rule in these pricey cities, and investors often complain about the relatively low cash-flow these properties generate compared to similarly sized investments in other areas.

In this article, I want to challenge the assumption that folks in expensive cities need to look for out-of-area properties. I’m going to challenge that with some data provided by our friends at Mashvisor and look at how AirBnB can make an impressive difference in rental cash-flow in certain cities. In some cases, the data suggests that investors in certain markets may be able to cash-flow at double, triple, or even four times the rate of their traditional landlord competitors by swapping traditional tenants for AirBnB guests.

The Data

You can check out the full dataset in this file, found at the BiggerPockets Fileplace. It’s got neighborhood data from each of ten major cities and is a great case study on the usefulness of AirBnB as an alternate form of cash-flow generation from rental properties.

This study looks at four pieces of data for various neighborhoods in ten U.S. cities:

Median Rents
Median Single Family Home Prices
Median AirBnB nightly rates
Occupancy Rates for AirBnB Properties

Those may not be the most useful data points for some investors, and this study should be treated as just a start in your own market research. I’m using the aggregate data simply to challenge the assumption that cash-flow properties don’t exist in expensive cities.

I went ahead and adjusted nightly AirBnB rates by average occupancy rates to compare annual price to rent ratios of fully traditional rentals to potential AirBnB income. It turns out that in certain cities, the cash-flow potential of properties appears to increase dramatically with AirBnB.

Check out the chart below to see the comparison:

All of the sudden, San Francisco and Los Angeles seem a little less forbidding. In fact, from a revenue perspective, AirBnB makes properties in these cities more attractive by a factor of 3-4! While property in these cities still may not cash-flow at the same rate as properties in Milwaukee, WI or Memphis, TN, this data may at least give resolved investors a glimmer of hope that the extra work that comes with AirBnB tenants may actually mean that properties in their city can cash-flow at reasonable rates.

A Case Study

This data gets even more useful when you delve into specific neighborhoods. A great example of this is Westchester, Los Angeles, where median rents are about $2,118 vs. AirBnB nightly rates of $319 per night. Assuming that this beach neighborhood is only rented out for 110 days per year (30% occupancy), then landlords can expect to bring in $35,090 per year through AirBnB vs. $25,416 per year from traditional rental income.

While AirBnB tenants are likely to require far more work and are likely to increase the operating costs of your rental property over time, that extra $10,000 in cash-flow might be great recompense for the added effort. That’s a decision that will have to be left to you as an individual to weigh. Just remember that in order to run your business using AirBnB, you may have to clean, make repairs, and contact guests more frequently than you would with a traditional tenant — or you’ll have to pay a property management company to do those things for you.

Conclusion

Personally, I think that this data could be most useful to house hackers living in expensive cities and looking to get started in real estate investing. House hackers benefit from appreciation more than the average investor (assuming that they are heavily leveraged using FHA financing) and may therefore be willing to take on the burden of managing ever-changing AirBnB guests in exchange for the opportunity to experience appreciation in a popular neighborhood they know well and would enjoy living in. Further, because they live in the property, managing tenants might be less of a burden for a motivated house hacker than for remote landlords looking for more passive returns.

The other folks that might benefit most from this data are vacation rental owners. That said, these folks are likely already aware of the benefits of AirBnB or have other means of finding guests.

Finally, I wanted to thank our friends at Mashvisor once more for providing the data used in this study.

What do you think?
Would you be willing to take on the added management costs of using AirBnB regularly in exchange for increased cash-flow potential?
Do you think that this data changes your opinion of certain markets?

Voice your opinion in the comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.