Understanding the Short Term Rental Market
At one time, “going on vacation” meant staying in a first-class hotel with a host of desirable amenities. Now, however, changes in the way we live and travel are making short-term rentals a popular choice for individuals and families of all sizes. In addition, the impact of COVID-19 has made many travelers wary of large spaces filled with people, which has led to a surge in demand for rental options. If you’ve been thinking of purchasing an investment property, read on to find out if a short-term rental is the right choice for you.
Location, Location, Location
For short-term rentals, location is even more important than it is for other real estate transactions. That’s because the short-term market depends on an influx of visitors to an area, generally vacation or resort destinations.
One thing you’ll want to consider is how often you want to monetize your rental. If you’re looking to use it part-time as a personal vacation home for you and your family, you may be happy renting it out only a few months each year or during specific seasons when demand is high. If you’re looking for year-round income potential, you’ll need to make sure that the market you choose is active year-round as well.
One consideration when it comes to location is the limitations that are sometimes placed on short-term rentals by state and municipal governments as well as individual homeowners or condo associations. Work with your real estate agent to do your due diligence and determine what restrictions may impact you and the location you are interested in.
It’s a good idea to sit down with your CPA or financial advisor to discuss your strategy for short-term rental ownership. Understand how this investment will affect your overall financial picture and what types of records you’ll need to keep to maximize the financial benefits. In addition, you may want to consider a corporate entity like an LLC for each of your investment properties. Your financial or legal advisor will be able to help you implement this as well.
Monetizing a Short-Term Rental
If you have decided where you want to invest, you’ll want to identify a local property manager or real estate professional who specializes in short-term rentals there. They can help you track rental rates and average vacancies for the area you are interested in so that you can determine how much you’ll need to charge and how often you’ll need to have your rental property rented to make a profit.
Financing a Short-Term Rental
If you’re purchasing your short-term rental with a mortgage, you’ll need to talk to your lender about the way you plan to use the property. Since you won’t be using the home as your primary residence, you’ll usually have to finance with a conventional mortgage. In addition, your interest rate may be higher when you’re financing an investment property.
If you are purchasing a home that needs work in order to optimize it for marketing, you may need to arrange for a separate loan to cover upgrades and renovations. Alternatively, you may be able to pull some of the equity out of your current home to cover these or to cover an all-cash purchase. Have your lender crunch the numbers and look at a variety of options.
Taxes and Short-Term Rentals
The classification of a rental property can be affected if you use it as a personal vacation home as well or if it is only rented out for part of the year. Talk with your financial advisor to find out how taxes will work for your property and how your overall tax strategy will be affected by this type of investment.
One of the most important ways to make your rental stand out is by adding value to it. Depending on the location, this could mean adding a pool or an elaborate outdoor living space, upgrading the interior, or adding an additional bedroom or bathroom.
When you are putting together the numbers for your short-term rental, be sure to add in property management, cleaning services, landscaping, and other professional services. You’ll also need to furnish the short-term rental from top to bottom with linens, dishes, cookware, and other items. Many rental owners also provide coffee bars, toiletries, and guest gift baskets, so factor in those costs as well.
Marketing Your Rental
Of course, you will primarily market your rental through online portals like Airbnb or Vrbo. However, before you can put it online, you’ll need to make sure you are prepared with professional photos, well-written descriptive copy, and other marketing materials. You may also want to have a videographer create a tour of the home for a standalone website or branded YouTube channel.
As you continue to rent out your home, you’ll need to gather testimonials and reviews from past guests to include in your marketing materials. This will help you build credibility and make your property more attractive to potential guests. You may also want to continue to reach out to previous guests through email or social media marketing to turn them into repeat visitors.
Short Term vs Long Term Rentals
If you know you want to invest in real estate but are unsure whether to pursue a short-term or long-term investment strategy, here are a few things to consider as you make your decision:
- Long-term rentals are better for less expensive markets and for creating work-force housing options. Short-term rentals are better for more expensive resort areas, offering higher potential ROI if they are priced correctly and filled regularly.
- Long-term rentals may be a better option if you are looking for a more hands-off investment approach. Short-term rentals require more time and attention. You may be able to outsource much of its management, although this will cut into your bottom line.
- Long-term rentals may be a better option if you are looking to finance your investment property or use some of the equity in it to finance other investments. Short-term rentals will need to be appropriately monetized and consistently rented in order to cover a mortgage payment and higher management costs.
- Long-term rentals may offer more consistent ROI over time since the short-term rental market can be impacted by changes in the economy, local policy, or even the weather. Take this into consideration if you need steady cash flow in order to make your investment work.
If you are determining which type of investment is right for you, talk to your trusted real estate professional. They can provide insight into the market you’re focusing on and explain the upside potential of an investment property there.