Dateline: Elounda, Greece
I was recently in Montenegro and was reminded of the great development boom going on in the country. Just a couple of years ago I decided to visit one of the new real estate constructions down by the seaside. I wanted to take a look at the sexy buildings all the Russians and other international investors were pouring their money into.
The particular building I visited in Budva was a nice building with average construction and incredibly nice views. One of the things the building developers were offering was a 5% rental guarantee.
For instance, if you were to buy a unit for $500,000, you were guaranteed to get $25,000 a year, plus some use of the property. The company would take the hit for having to rent out the property, but you would get the lower end of the returns.
While I know people in the US making less than 5% yield, in the offshore world 5% yield isn’t much. For managed long term rentals, I expect to get at least a 9-12% yield. I have a very basic set up with a property manager and I can just set it and forget it and still expect a check in the mail each month. And all this, accompanied by actual ownership of an underlying piece of property, not just a unit in someone else’s development.
Increasing yield through Airbnb
While 9-12% yield is great, there’s always the instinct to ask yourself how to increase that number. For many people, Airbnb is one possibility that deserves consideration.
But is it even possible to increase yield through Airbnb?
I’ve definitely seen it done. I know one guy who got his Airbnb yield up to 31% (e.g. for a $100,000 property he was making $31,000 a year). A former employee has also had great success with his Airbnb rental in Vienna. He has a model that involves getting people in the door and getting lots of five-star reviews that has his place constantly booked and allows him to raise prices, especially since Airbnb introduced the instant booking trend.
So he’s doing alright.
Of course, in his case, he already owned the property. It had been in his family for a long time. If you were to go out and buy a property today it would be hard to get good yields, even with good reviews and booking success.
So, yes, there are some success stories. There are guys making 31% and guys who are constantly booked. However, I tend to think that such success stories are rarer for a couple of reasons. One, there is a lot of supply on Airbnb. Secondly, Airbnb seems to service certain destinations more than others. As a result of both of these factors, there is a lot of competition in the Airbnb market that drives down prices and decreases yield potential.
Go to unsaturated locations
That doesn’t necessarily mean that Airbnb isn’t a good option. It just means that you should be more strategic about your location choice when choosing to purchase a property to rent on Airbnb.
My number one recommendation is to look at markets where the vacation rental and hotel market just isn’t up to snuff. Target cities where the inventory isn’t as good.
To be honest, I’m not a fan of staying in Airbnb’s all the time. One of the reasons for that is that some places just don’t have a great selection. You could convince me to stay at an Airbnb in Berlin, Vancouver or Washington DC because there are people in those locations who are part of a chic, modern, — perhaps even nomadic — mindset, and they have the Airbnb set up perfectly.
Not so in Tbilisi.
Tbilisi is a city that, by some folks’ admission in the real estate business, just doesn’t have a good sense for decorating… or no one’s really gotten around to it. That, or there hasn’t been much competition.
My girlfriend, who grew up in a formerly communist country, suggested that some of the older folks who own real estate still have the communist mentality that the person who has the supply is the one who wins, rather than the person who has the money. Because of that mindset, supply is not optimized.
Consequently, in countries like that, you have ugly Airbnbs. You could not convince me to stay in an Airbnb in Tbilisi or in Arevan or probably even in Montenegro. Heck, most of the hotels in Montenegro are less than desirable and the five-star hotels aren’t knock-your-socks-off five-star hotels, either.
So take advantage of these gaps in the hospitality market and offer the best service in town.
Challenges & benefits investing off the beaten path
There are, of course, challenges to going to less trafficked locations. For one, it usually means fewer tourists. This creates a little bit more work, but I’d rather be the guy with more properties (greater risk diversification) purchased at a lower entry point in an area that has long term potential — even if it isn’t on the radar yet — and take my chances as the best product in town on Airbnb.
The other downside is that it’s more difficult to buy property in these markets. If you go online and try to find a western-directed website for property in Georgia, you’ll have a hard time with it. While there used to be one or two sites if you happen to find one I can guarantee you that the prices are high.
In these kinds of markets, you’re going to have to put in some time on the ground or know someone there in order to get the best deals.
The benefit of doing more boots-on-the-ground work off the beaten path is that you can get in at a much lower entry point. Properties in less developed areas are naturally cheaper. So, instead of buying just one property with a $200,000 investment, you could buy six to eight properties in Georgia. You might not want to buy that many properties, and may be better off buying four or even three really good properties and putting money into making them top-notch.
However, I’ve looked at properties in the city center that only need cosmetic touches and would be in great locations. Plus, with all the extra money to invest, you can outfit them nicely and draw in customers willing to pay more.
The other benefit is that the governments in many of these countries are coming in and improving real estate at their own expense. Electricity, water, roads and other infrastructure projects are quickly making these areas more attractive, so you’ll be in a good position if you get in now.
The best locations for Airbnb rentals
Having said all this, what are my favorite locations for vacation rentals? Whether it’s Airbnb that targets the nomadic crowd, or VRBO and others like it that cater to the more traditional vacationer (and often charge more), these are my top locations:
The place with the most potential in South America is Medellin, Colombia. I’ve seen some people be successful there. In Central America, Nicaragua has the best potential. The beach towns like San Juan del Sur have a model that is a little bit different, which means you’ll typically want larger properties.
The problem with Central America is that those countries are intrinsically dependent on the US and Canada. I like Europe because you’ve got tourists from the US, Europe and Asia, as well as people moving there for immigration.
In reality, it comes down to Eastern Europe for me. There are more and more tourists from Western Europe going east these days. Flights from Ryan Air and other cheap airlines are opening up routes east every day. You’re even seeing more flights into Georgia. There is just so much happening in Eastern Europe right now that — even though it’s a bit off the beaten path now — it’s beginning to really open up.
For example, Bucharest, Romania is one place where everybody with properties on Airbnb is also on 20 different travel sights. As such, there’s never anything available. There’s short supply of good places to stay in Bucharest, which makes it a great place to invest. The same goes for a place like Varna in Bulgaria.
I’d also look at the southern Baltic states of Latvia and Lithuania and parts of Poland (if you know what you’re doing). Many countries in the Balkans — as much as I don’t want them to — may join the EU, which could increase property value there.
Serbia is right next to the EU member countries of Hungary and Croatia and may be next in line. Whether you like it or not, we’ve seen the value of property go up in these countries, which means they could be a great emerging market real estate play.
Another country in the Balkans that is greatly lacking in quality Airbnb supply is Montenegro. I booked the ONLY truly western apartment in Kotor Bay, Montenegro for when I’m renovating my house there. That’s a place to invest in Airbnb.
On the other hand, a place like Montreal, Canada — with its 100 nice places — is a good place to stay, but not to invest. Use competition to your advantage both ways.
The final locations on the list include countries in Western Asia, such as our beloved Tbilisi, Georgia and potentially even Turkey if you’re willing to gamble on what’s going on there politically right now.
Is it the right investment for you?
If truth be told, Airbnb is not for everyone — renters and investors alike. So, before you take the dive, ask yourself whether you should bother with Airbnb rentals at all? Run the numbers. You need good management and you need to be reliable. Can you offer that?
If you can and you’re looking to start a business, then Airbnb could be your business.
As a word of advice, if I were doing Airbnb, I’d do the kind of properties that I’m familiar with. I’m the kind of guy who would rather have eight homes that are all less than 1,000 square feet. I don’t need a ton of space. I don’t mind living in hotel rooms, but I do like the comfort of staying in my own home and having the amenities that I choose. I believe you’re going to see more of that in the Airbnb-type area in the future.
If you’re interested in that kind of investment and in running that type of business, then Airbnb may just be for you. If it is, try going a little off the beaten path to find the perfect market where you can be the best place available in an area that’s ready to grow.