Beware: 3 Reasons A Two Bedroom Cape Town Airbnb Investment Can Fail!
Are you looking for a one or two-bedroom Cape Town Airbnb investment? Or do you already have such a small property you are considering renting short term?
Today, I’ll share why you should be careful and what to look out for.
It’s not all bad news. If you have not bought a property yet, take note. And if you are an owner already, be sure to make it unique and adjust.
Let’s consider the two very important criteria of location and features (and interior) before you invest in a one or two-bedroom place in Cape Town.
Then we consider the changeover cost vs daily rates ratio to be used as a measure. In short, I call it the cost vs daily rate ratio. It’s a simple but crucial ratio to determine “airbnb-ability” (profitability).
BTW: The advice applies to any number of bedroom accommodations. But I wrote this specifically to show owners the exaggerated risk of a high changeover cost vs (low) daily rates ratio for smaller Airbnb properties. More below.
Cape Town Airbnb investment Criteria: Location
We all know the cliché; location, location, and location as the three most important criteria for real estate investors.
The size of the property and other factors also matter. But because of various reasons, like budget, you are considering a one or two-bedroom to rent out via Airbnb.
A one or two-bedroom place is, in most cases, a winner if it’s located well with a unique design. But with small places, you have to be more critical in your scrutiny.
As a blanket statement about the ideal location…
On the beach or very close to the sea comes first.
But not everyone can afford this location. As we know, the best locations are in high demand, generating high Airbnb incomes.
A small Clifton beach cottage will rent for 5 times more than a similar cottage in Kommetjie or Fish Hoek.
And ten or more times for the same cottage in suburbia.
Tip: If you want to maximise your rental return on your Cape Town Airbnb investment, then always buy the best place you can afford, with the most rooms, in the BEST location. Even if it is smaller (in m²).
Let me repeat: The best location will allow you to maximise your Airbnb income a lot easier.
Okay, now for the next criteria…
Cape Town Airbnb investment Criteria: Features and Interior
Your Cape Town Airbnb investment can and should have the best possible features and interior.
For within reason, I believe it’s difficult to over-invest in functionality and prettiness.
Features And Interior Can Distinguish Suburban Airbnbs From The Rest
An average to good tourist neighbourhood one- or two-bedroom place (I call it the common place) can be a great Airbnb if the features and interior are unique and top-notch.
The best features are
- a pool, beach or
- great mountain views,
- a uniquely designed place with an exceptional interior.
- the number of bedrooms.
See FAQs for more…
If you have a small place in suburbia, with very little appeal other than an immaculate interior then add a pool or wood-fired hot tub. And get off the grid. This will not only save cost but people love uniqueness and (heated) pools.
Note: These additions will reduce risk, increase demand, increase Airbnb rates and therefore profitability.
I strongly advise suburban small place owners to throw everything possible at it to attract guests. Remember, these places don’t have any romantic (seafront location) appeal.
The Consequences Of Choices:
Small Airbnbs Can Fail Because Investors Ignore The Costs vs Daily Rate Ratio…
The Risk Of Being Common
Unfortunately, when you drop, along with the guest’s selection criteria, investing in a less popular area, it becomes a lot riskier buying a small Airbnb.
As you move away from the popular to the common areas, you’ll sacrifice income (daily rate). But the changeover cost stays the same. Therefore, the risk increases.
Okay, you may say that the investment is more at a prime location. Yes.
Unfortunately, the return on a suburban place is significantly lower. Have I said it? The cost to change stays the same.
The consequences …
Tourists are not willing to pay a premium for staying in a “common” suburb.
Why not? I am generalising for effect.
- It has very little or no bragging rights. It’s not instagramable. Like it or not.
- The market is flooded with “common” area Airbnbs.
- Budget-conscious tourists stay here.
- All the above deflate rates.
The opposite is true for prime accommodation spots.
The Change Over Cost vs Daily Rate Ratio Double WHAMMY
Let me repeat: The cost to clean and manage a small Cape Town Airbnb investment on the beach is like the same place in the suburbs. The suburban place has lower daily rates while costs don’t decrease; like a double whammy.
Let’s take it further; other than the linen change cost, the changeover fee for two or one bedroom is not much different from a 3 or 4 bedroom Airbnb.
But the daily rates are very different. With beach accommodation getting at least 5 times more per day (rough estimate).
Let’s use a money unit of 1 as an example.
- Daily rates (guests will pay) per day at the 2 bedroom beach house are 5 money units per day.
- Rates at the common suburban place are only 1 money unit per day.
- Assume the changeover fee between stays is 1 money unit.
The changeover cost to daily rate ratio is 0.20 (20%) and 1.00 (100%) for Clifton and the common place, respectively.
This means the prime (Clifton) accommodation’s daily rates are 5 times higher than the changeover cost. Or the cost is only 20% of one day’s rate.
In contrast, the common place’s changeover cost equals the daily rate for one night.
The Scary Ratio Investors Ignore
Assume the Clifton Airbnb allows one-night minimum stays. After a one night stay, and paying for the changeover, the Clifton owner still makes more than the common place owner makes in 5 days. Ouch!
How To Establish Your Cape Town Airbnb Investment’s Risk?
Before you decide on your Cape Town Airbnb investment, do some deep digging…
- Calculate your changeover cost per reservation.
- If your changeover cost to daily rate ratio is close to 0.75 or less, it can work. At 0.20 you have a winner.
- The closer the ratio approaches, 1 or beyond you will be in for a squeeze.
- Choose your Airbnb investment location well and invest a lot in the interior.
FAQs On Cape Town Airbnb Investment
How Does This Cost To Rate Ratio Affect An Airbnb Agency’s Qualifying Of An Airbnb
As an Airbnb Management Agency in Cape Town, there is no reason for us to promise an owner, with a small place, with few features, and or a poor location that we will be able to generate a fair return.
During winter, with low rates, these places will generate little income. The changeover cost will be out of proportion to income.
We are therefore strict in qualifying small Airbnbs in common areas.
This does not mean that we don’t do small Airbnbs. We have a few. Like this Vredehoek one bedroom penthouse with a pool and amazing views.
What are the criteria for buying the best Airbnb in Cape Town?
- Pool or hot tub
- Unique 5 star exterior
- Unique 5 Star interior
- No maintenance issues
- Uncapped high speed Internet
- Of the grid – limited load shedding
- Tourist suburbs
- A positive kitty to work through the initial launch.
- A flat is another story we can talk about at length. For example: Who wants to walk up many stairs, or not having a balcony?
What are the prime Cape Town areas to invest in for smaller Airbnbs?
- Obviously, the Atlantic Seaboard comes first. The further you move away from it the perceived value reduces.
- Touristy suburbs are great. Like the more expensive areas in the Southern Peninsula, the Western Atlantic, and Green Point to the Waterfront and city bowl areas against Table Mountain.
- Suburbia has its appeal; expensive suburbs like Constantia, and Steenberg. And proximity to wine farms, golf estates and highly popular secure estates. There are others.
- It depends; The one-bedroom penthouse I mentioned above is in the mostly residential Vredehoek. (The cost to rate ratio is 0.75 which is not bad for a one-bedroom).
How Does Your Cash Flow Influence My Cape Town Airbnb Investment decision?
Your cash flow is a critical factor.
If you are in a cash flow squeeze, you need a guaranteed return from your investment, and your cost to rate ratio is wrong, you will be in a compromised position. It will not be fun.
Rather, consider other options, like long-term rentals. Or if you must do short-term rentals, then read the following.
How Do You Fix A Bad Airbnb Investment With Poor Cost To Rate Ratio?
It depends on the severity of your situation. But if you sit with a cost-to-daily-rate-ratio of 1 or worse then reduce changeovers:
- Increase your short stay rates a little.
- Set a minimum stay of 7 days.
- Give people pro-rata discounts for 7 days, 14, 21 and 28 days.
You need to do proper discounts which will encourage guests to stay longer. This will reduce your number of changeovers and, obviously, the associated cost.
Should I Invest In A Small Airbnb In The Cape Town CBD?
Obviously, you may. You’ll have a unique demographic staying with you. It will be young people looking to join the Bree Street fun, business people, and people visiting parliament.
I would rather invest in a place in the Southern Peninsula, or Blouberg.
A fancy and small bachelor in the CBD will be as much as a nice two-bedroom in the peninsula.
Should I Invest In A Cape Town Bachelor Flat To Airbnb?
Depends. If it’s a penthouse with a pool and really fancy, then consider it. But a nice batchelor is not ideal. The cost to rate ratio is normally bad.
I would rather try to find a two-bedroom in another area by the sea. Normally, these are older flats and may need an excellent interior. As long as it has a view. But again, establish the cost to rate ratio.
Brought To You By CapeHolidays A SuperHost Airbnb Agency In Cape Town
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