3 Best and Worst Cities for Investing in Airbnb Properties

Over the past few years, Airbnb renting has emerged as a popular alternative to hotels for travelers who want the space and comfort that a home can provide. That’s opened the door for investors looking to cash in on the growing market for short-term rentals. But not all locations are created equal for this type of market.

Key Takeaways

• Renting out a property on Airbnb has become a popular way for people to generate extra income.
• As with all real estate, the main driver of profits will be location.
• But, for an Airbnb, location doesn’t just mean high demand from renters—it also means affordable housing since high costs can quickly eat into profits.

Key Profit Factors for Airbnb Renting

As with all things real estate, it’s location, location, location. Some American cities are able to generate hefty profits for those who list on the site. In other places, the quest for rental income has proven a little more elusive. A number of factors account for those disparities.

If the city has a relatively small supply of hotel rooms, for example, that tends to drive up Airbnb prices. But where hotels are plentiful and affordable, investors have little choice but to keep their rates low. The cost of housing is another big part of the equation. Places where investors can rent or buy for relatively little—but see a steady demand from tourists—represent the real sweet spot.

The Best Cities for Airbnb Renting

Using data compiled by Airdna, an analytics firm specializing in Airbnb data, here are the best and worst cities for investors (based on Airdna’s proprietary scoring system, which takes into account rental demand, revenue growth, and investability).

Slade, Ky.

The best city in up-and-coming markets is Slade, Ky. The city has an Airdna investor score of 96.6 and annual revenue potential of $39,124. Other scores from Airdna include 95 in revenue growth, 92 in rental demand, and 100 in investability.

St. John, U.S. Virgin Islands

The best city in mid-sized markets is St. John in the U.S. Virgin Islands. The city has an Airdna Score of 93 and revenue potential of $95,030. Its revenue growth score is 76, rental demand 96, and investability 100.

Palm Springs, Calif.

The best city in large markets is Palm Springs, Calif., with an investor score of 89.7. Its revenue potential is $64,571 and revenue growth score, rental demand, and investability is 99, 60, and 100, respectively.

Palm Springs, Calif., benefits from winter tourists seeking a warm, sunny destination. It’s also home to major music festivals Coachella and Stagecoach. Noticeably absent from the list are major cities such as New York City, Los Angeles, and Chicago, as these places tend to be saturated with Airbnb listings.

The Worst Cities for Airbnb Renting

The worst locations for Airbnb are in well-known cities in large markets, such as Charleston S.C. and Las Vegas, Nev. The top three worst cities for Airbnb rentals are Savannah, Ga., Sedona, Ariz., and Miramar Beach, Fla.

Hampering Savannah is the lack of rental demand, while Sedona is limited by its investability—despite having some of the best rental revenue growth. Some of the best places in terms of revenue potential are severely limited by home prices. Miramar Beach is great from an investability standpoint but severely lacks in rental demand and revenue growth.

The Bottom Line

If you’re going to invest in Airbnb properties, don’t look for the usual suspects. Some cities that appear to be great tourist spots can be duds if home prices are too high or there’s an ample supply of affordable hotels. As our list makes clear, some of the best deals out there are locations that don’t have a huge profile. Don’t forget to figure in the cost of managing the property, especially if you’re not going to live there yourself.

Read the original article on Investopedia.