Return analysis for Buy & Lease property for Airbnb

Few weeks back, my best friend and I explored the option of buying out a studio property in one of the Emirates in the UAE (name not disclosed) and then fully renting out on Airbnb. With the help of excel, I built out a model to assess the returns that can be expected in the UAE market which gives one of the best real estate yields across the globe

Below is the summary of the key inputs I used to build out the model and the output of the same. Please feel free to download and use the excel for your own analysis purpose.

Key Inputs:

1) Buying Price- Assumed average of selling price listed on some of the marketplaces for the studio property we were looking into.

2) Registration fee- 4% on the buying price as per market

3) AirBnb commission- 3% of the revenue as per market research

4) Average revenue per night - AED 235 for a night based on the rental listed for similar properties on AirBnb on usual days (not included national, religious holidays etc. when the prices are significantly higher compared to the usual days)

5) Manager Cost- Assuming we will hire a full time manager to manage the property for us. Assumed to be 15% of the revenue based on market research

6) Additional Operating cost- 2% of the revenue

7) Bank financing- 78% of the total investment required (Buying price + Registration fee + Bank admin fee)

8) Tenure of bank financing and average interest cost- 15 years & 5.25% average interest cost

9) Cleaning charge- Not included in the model as it would be borne by the customer directly. The additional operating cost of 2% includes maintenance, cleaning etc. which is needed to keep the property in a good & clean condition

10) Other expenses such as furniture cost, electricity, Wi-Fi, building maintenance based on the desk research and our previous experiences living in the UAE

11) Duration of return analysis- 5 yr, 10 yr and 15 yr. Assumed that property will be sold at the end of this duration with moderate level of property price appreciation.

Summary of output:

At 75% occupancy the property was able to generate moderate amount of positive cash flow after adjusting interest and principal amount giving 8 to 12% of IRR for a duration of 5 to 15 yrs.

Below is the summary of IRR at 75%, 60% and 50% occupancy

Excel File link:

My final take on this. Ultimately buying a property and renting out for Airbnb is worth it if you can maximize the occupancy (in my case at least 75%) along with a decent price appreciation, which is only possible if you buy a property in a prime location. Also this kind of side business requires few hours of efforts per week despite you hiring a full time manager. Also you have to consider the fact that the competition is high and maintaining occupancy over 75% is a tough task

The overall IRR of 8 to 12% is not exciting to me personally considering that some of the stock indices (such as Nifty 50 or Nifty) or passive funds give better returns than this on longer term requiring minimal efforts from our end. AirBnb as a business for generating lucrative returns is good for people who want to manage multiple properties and take this as full time/primary source of income.

Disclaimer: I personally don't take responsibility for all the assumptions, it is based on primary and secondary market research and can change at any point of time. Feel free to use this excel file for your own analysis purpose

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