Short-Term Rental Investments
Potential investors know the story
well: A property is purchased, advertised on Airbnb or VRBO — and quickly reaches
maximum occupancy rate, earning thousands of dollars in revenue each month. It’s
what all real estate investors hope to achieve. But what factors should you consider
prior to making the investment?
Here’s a quick guide that helps reveal
the answers and provides a useful tool for finding the most lucrative property faster.
Short-Term vs. Long-Term Rental:
Which is Best for You?
You may have purchased a beautiful
property in a prime location, where demand for both short-term and long-term rentals
is high. So what arrangement is best? Here are a few details to consider.
Long-Term Rentals
The benefit of a long-term investment
property is that you can sign a lease with renters that spans months, or even years.
With this lease, you can be certain that a specific amount of income is received
each month. Plus, you’re still earning equity on the property, so when you sell
it, you’ll have income from the sale.
But the downside is that renting
the property long term can leave money on the table. It’s easy and requires fewer
ongoing expenses, but generally it’s not as lucrative as a short-term rental.
Short-Term Rentals
With a short-term rental investment,
you may not walk into the month with a set amount of money (at least not in the
beginning, when you’re still working on generating bookings), but keep the big picture
in mind and this can change. In fact, most individuals can earn 1.5 to 2.5 times
more money on a short-term rental than a long-term rental.
However, with a short-term rental,
you must also factor in additional expenses such as utility bills and higher maintenance
costs. But many investors find that they still earn significantly more income
with a short-term rental.
Major Perks of Investing in a
Short-Term Rental Property
Investing in a short-term rental
can be lucrative, if you carefully select the right property. Here are a few of
the major perks of these types of investments.
Many of the ongoing tasks can
be outsourced. Perhaps
you’d like to invest but simply do not have the time to manage a rental. A property
management company that specializes in these types of rentals can handle ongoing
tasks such as new bookings, check-in details, cleaning and any issues that might
occur during a guest’s stay. The cost for a vacation rental property manager, however,
is typically higher than for a long-term unit, so carefully weigh these costs in
your profit analysis.
Flexibility to quickly increase
profits. As outlined above,
you can earn significantly more from a short-term rental investment. Plus, you have
the flexibility to adjust rates as market demands change, unlike a long-term rental
unit (which may require a more gradual adjustment, based on local rules and regulations).
For example, let’s say you have a
95 percent occupancy rate at $125 a night, earning about $43,343 per year. When
demand is that high, you’ll likely have some wiggle room to raise rates. So you
decide to increase rates to $175 per night and see what happens. The occupancy rate
declines to 80 percent, but you then earn $51,100 per year and have use of the property
20 percent of the time. Not to mention that your operating expenses decrease in
certain areas, such as utilities, cleaning and maintenance.
Vacationers gravitate toward short-term
rentals. Traveling families
like the idea of spreading out instead of packing everyone into a single room with
two queen beds and a microwave. Plus, they can cook, which saves money. As a result,
your rental will have a natural advantage over the alternatives.
Personal use. Long-term rentals provide you with
no use of the property, but a short-term vacation rental allows you to enjoy the
property when it’s not booked. Or perhaps you’d like to use it exclusively during
your retirement years. A short-term rental property offers this flexibility.
There are many reasons to invest
in a short-term vacation rental, but before getting started, it helps to have a
few tips for selecting, purchasing, and marketing your property.
Getting Started with Short-Term
Real Estate Investing
Nobody wants to make a poor investment,
and the good news is there are many actions you can take and tools you can use that
will ensure maximum success and profits. Here are a few critical factors to consider
when getting started:
Find the best location and check
demand. Location is the
most important factor when purchasing a property. There are plenty of resources
that can help in this area. To start off on the right foot, check out our guide
on the
Top 10 Most Profitable Cities for
Real Estate Investing
and learn which cities you should keep an eye on.
Seasonal demand.
If you purchase a property in a coastal
community, the demand may be strong during the summer months but weak in the off-seasons.
Maybe when you pencil it out, that’s alright. Those profitable months pay for the
rest of the year. But it’s something to carefully consider ahead of time, or better
yet, select a location with multiple peak seasons to drive higher income.
Time constraints.
Do you have time to manage a short-term
rental? This type of investment isn’t passive and requires a significant time commitment.
If you don’t, no worries. As mentioned above, you can outsource this task to a skilled
property manager.
Once you work out these considerations,
it’s also wise to research and study local regulations. These rules have the ability
to throw a wrench in your short-term investment strategy.
Understanding Local Rules &
Regulations
Imagine the following:
You purchase an amazing condo in
a trendy district of San Francisco. You’ve done the research and found that your
investment could generate thousands each year. But once you start renting your condo,
something happens — neighbors complain. But they aren’t complaining because your
guests are too loud or disrespectful.
Your neighbors complained because
short-term rentals are not allowed as per the homeowners’ association rules. As
a result, you can only rent the unit for 30 or more days at a time, which significantly
decreases your pool of renters, and consequently your profits.
Prior to purchasing a property, ask
for a copy of the HOA rules. Maybe an HOA allows for short-term rentals, but also
has a fee that is much higher than similar properties because of the additional
wear on amenities, such as pools and playgrounds. If so, factor these costs into
your profit analysis.
Many cities also have restrictions
on short-term rentals. For example, in New York City, a residential property that
is located in a multiple-dwelling residential unit, such as an apartment, must be
used for permanent residential purposes. This means the renter must occupy it for
at least 30 days at a time. So check with local regulations to determine whether
this is required.
Airbnb has a list of the legal requirements
for 50 major cities.
If you don’t see your area, call your local city hall to find out who can provide
a copy of the regulations.
Finding the Right Property Using
Revestor
One of the most difficult challenges
with short-term investments is
finding the right property. The stakes are high, because nobody
wants to make a bad investment. Revestor is a flexible tool that simplifies and
speeds up this process.
Our tool focuses on the most relevant
indicators of a sound real estate investment, such as the property cap rate, cash
flow, cash-on-cash return, and overall return on investment. Revestor considers
a variety of factors, such as:
Acquisition price. Revestor automatically assumes that you
plan to pay list price, but you can play with the sliders to adjust the calculation.
This can also help you determine what you must pay for a property to ensure that
it’s profitable.
Rental income and expenses. Revestor starts with the purchase price,
estimates gross rental income, and the most common expenses associated with owning
the home (property taxes, insurance, HOA fees, occupancy rate and property management
fees), and quickly determines your net operating income and cap rate.
Financing. It also figures out how much you’re paying to finance the property.
Initially, Revestor estimates a 20 percent down payment; however, you can customize
this information.
Exit strategy (net profit/ROI). Revestor assumes that you’ll hold the short-term
investment property for five years. It estimates an appreciation rate of 4 percent
per year, but you can change this based on average appreciation in the specific
area. You can also change the strategy. For example, you may be using a fix-and-flip
strategy. If so, Revestor assumes that you’ll sell the property for 143 percent
of what you purchased it for, spend 10 percent on improvements and spend 8 percent
on closing costs.
Let’s check out Revestor in action. For
example, say you are looking to purchase a short-term vacation property in Hawaii.
First, you would type the address in the Revestor’s search bar, which will provide
a list of all of the homes for sale in that specific area.
If you select the property at the top,
Revestor instantly provides different types of valuable information.
It tells you that your estimated
monthly cash flow is $234 and your net operating income is $3,235. You can adjust
different assumed variables, and since this tool is tremendously powerful, you can
quickly view, sort and determine which property is the most valuable investment.
Tips for Making Money Off of Your
Short-Term Rental Property
Once you find and purchase the right
property, it’s critical to
market the property for the maximum occupancy rate. Two
major websites that are helpful are VRBO and Airbnb. When listing on these sites,
here are a few
helpful tips to capture more bookings:
Take amazing photographs. Potential guests are 83 percent more
likely to inquire about a listed property that has over 20 photos. Check out the
photos of major competitors. Who has great reviews? Review what features and benefits
they’re highlighting and take great photos of those items in your property.
Respond to potential guests quickly.
We’re in an environment
that is continuously connected, and people expect fast responses. In fact, travelers
are 22 percent more likely to book a property when the owner responds within four
minutes. Check out apps that Airbnb and VRBO provide to increase your response times.
Secure positive reviews. Word of mouth is powerful, and reviews
are another form of this type of marketing. In fact, 80 percent of people are more
likely to book a vacation rental that includes reviews from past guests. So actively
ask prior guests if they’re willing to leave you positive feedback.
Accept online bookings. Not only do people expect a fast response,
as highlighted above, but they also want to get things done online. Both Airbnb
and VRBO make this possible, so make sure to keep your calendar updated to make
booking online fast and easy.
Moving Forward with Success
The lucrative stories that highlight
the potential
income opportunities from a short-term
vacation rental are exciting.
These stories are completely possible for all investors when armed with the right
tools, strategies, and marketing.
But at the end of the day, people
are looking for an experience. A gap exists between what hotels provide and what
short-term vacation rentals offer. Fill this gap. Because when you hit the sweet
spot, you’ll achieve exceptional profits.