Investing in short-term rentals is on the rise. Across the world, online marketplaces like Airbnb and VRBO, as well as vacation rental management companies like Vacasa and Turnkey, have enabled investors to efficiently list their properties, find renters, and manage the in’s and out’s of short-term rentals. Today, these companies have become household names on par with global hotel chains — and revenue in the vacation rentals segment is projected to reach $19.5 billion in 2023.
Although the hospitality industry took a hit in 2022 due to a weakened economy, overall, short-term rental properties actually performed surprisingly well. AirDNA’s 2023 U.S. Vacation Rental Outlook Report backs this up, noting that travelers still prefer entire homes, full kitchens, and outdoor spaces when they travel — and yes, they are still traveling.
With most COVID-19 restrictions lifted, leisure travel is returning to near pre-pandemic levels — and short-term rentals are positioned to become even more popular.
Looking to make the leap into this potentially lucrative real estate asset? Here are some key factors to consider before investing in short-term rentals.
One of the biggest perks of investing in short-term rentals is the financial payoff. Demand rises during peak tourism seasons, meaning landlords can charge higher rates, resulting in better margins and more cash flow. For example, you can potentially get $1,200 of rental income per week on a short-term rental property that would have collected $1200 per month for long-term tenants — especially when renting during busy windows, like holiday breaks.
Short-term rentals also afford landlords added freedom and flexibility. By investing in short-term rentals, you can block off time throughout the year to use the property yourself.
Want to rent your Grand Cayman unit out for 11 months of the year, then spend all of February swimming in the Caribbean Sea? With short-term rentals, that’s not a problem — as renters aren’t the only ones who can enjoy your property.
Of course, nothing comes without cons. Here are five potential drawbacks to consider when investing in short-term rentals and why you might choose to rent your property long-term:
While prices may spike around busy travel holidays like the Fourth of July and Christmas, seasonality can also mean higher vacancy rates and inconsistent cash flow. For instance, a New England beach town rental may get fewer guests during the snowy winter months, and a Houston apartment may see more vacancies during the stiflingly humid summer season.
A long-term lease ensures a relatively steady, predictable source of income throughout the year. If stability is important to you, it might be a better idea to simply rent your property to one tenant on a 12- or 24-month contract.
If you’re looking for a hands-off investment option, the short-term rental market may not be for you. As the landlord, you’ll be dealing with renters, cleaning, and maintenance on a more regular basis — unless you hire a property manager to take this responsibility off your plate, which would cut into your profit margins (more on later in this article).
Increased guest turnover and higher expectations from vacationing visitors mean short-term landlords will incur more rental expenses to keep their property in tip-top shape. To this end, many landlords investing in short-term rentals must build these costs into the listing price by charging higher rents or additional cleaning fees.
Alternatively, long-term rentals typically require less maintenance, cleaning, and time spent dealing with tenants. That said, once your long-term tenant does leave, you’ll likely have to do a small renovation to the unit like repainting or new carpets from the everyday wear and tear long-term tenants inflict on a property.
By inviting a larger pool of people into your property, you’re also opening the door for potential problematic renters. With short-term rentals, you may come across irresponsible guests who mistreat your facilities, are especially noisy, or otherwise leave a bad impression on your neighbors. Avoid these situations by looking at potential guests’ reviews from other short-term rental hosts and creating house rules that all guests must agree to.
Many states and cities have implemented strict regulations and zoning laws for short-term rentals.
For example, San Diego caps short-term rentals at 1% of the city’s housing stock — making an exception only for the highly popular Mission Beach neighborhood, which is capped at 30%. Condo owners must also be especially careful, as short-term rentals may get them in trouble with homeowners associations (HOAs). Some HOAs set maximum rental periods — for instance, two weeks — to minimize potential disturbances, while others choose to ban short-term rental services like Airbnb entirely.
It may soon be that you won’t have the option to lease your property short-term in your town or city — for that situation, it may be beneficial to purchase a property that works in a long-term rental capacity. After all, a retro-inspired camper trailer is a great weekend getaway but might make for a terrible long-term living situation.
Ready to invest in short-term rentals? Here are nine tips for successfully managing your properties and maximizing your investment:
If you’re using a vacation rental management platform like Vacasa or Turnkey, you should be all set on the property management front. But if you’re listing your rental using a booking site like Airbnb or VRBO, you may want to hire a reputable property manager. Otherwise, be prepared to handle the day-to-day responsibilities yourself — including creating online listings, booking guests, coordinating check-ins, managing tenant communication, collecting rent, scheduling cleaning and maintenance, and more. Remember, build your property management costs into your rent price so you can achieve positive cash flow right away.
Photos are among the top reasons guests choose to book a certain short-term rental. Transport prospective guests to your property with detailed descriptions and high-resolution photos featuring clean, well-lit rooms. Don’t underestimate the power of photography — and consider hiring a professional photographer to capture your property in the best light. Airbnb reports that hosts with high-quality photos tend to earn 40% more money than other hosts in their area, and can charge higher nightly prices after upgrading their photos.
Free parking, a stocked kitchen, complimentary wine, Netflix access, local guidebooks, high-quality towels, and other amenities go a long way to driving repeat visitors and positive reviews. Make your guests feel welcome with small but meaningful touches.
For example, if you’ve got a beach rental, consider providing free beach chairs and toys — with the guidance that guests must hose them off after each use.
Great reviews can make all the difference between a potential guest staying with you or choosing a nearby competitor. To get the best ratings possible, prioritize clear and fast communication, accurate descriptions and photos, and amenities and features that make guests feel at home. Going above and beyond to ensure early renters have an excellent experience (and leave five-star reviews) will pay off in the long term.
No one wants to rent a unit with leaky faucets, chipped paint, musty bathrooms, or a broken air conditioning system. Make maintenance a priority, or risk your short-term rental reputation — and profits. Guests who are turned off by a bad experience will be sure to give others a heads-up in their reviews.
Make efforts to try to keep utility bills down — after all, you’re the one paying for them when you manage a short-term rental. A few simple and resourceful steps include replacing incandescent light bulbs with LEDs, choosing Energy Star appliances, regularly changing air filters (which can collect dust and stress your HVAC system), and installing low-flow shower heads in bathrooms.
Plan and budget for the many costs that come with managing a short-term rental property — including utilities, furnishings, a regular cleaning service, entertainment subscriptions (cable, Netflix, Hulu), landscaping maintenance, repairs, basic supplies (toilet paper, bath products, laundry detergent, etc.), and welcome baskets. These expenses typically aren’t part of managing a long-term rental.
To reduce your liability risk, consider setting up an LLC for your short-term rental business. In addition, make sure you have the right rental property insurance coverage to protect your property and furnishings against potential damage or loss. To take things one step further, create renter guidelines and house rules to prevent damage and complaints from neighbors.
Ensure a stress-free tax season by creating a rental property accounting system to track income and expenses and generate accurate financial reports. Consider opening a dedicated bank account for your short-term rental that you use to receive rent payments and pay all related bills. This will make it much easier to track your properties’ performance while avoiding co-mingling with personal or other business accounts.
For example, Azibo’s all-in-one financial platform allows landlords to collect rent, pay vendors, and manage bookkeeping. You can also tag expenses by Schedule E category and assign them to specific properties. With everything in one place, you’ll maximize the real estate tax benefits and won’t have to track down a year’s worth of transactions come tax season.
With the right research, preparation, and attention to detail, landlords who manage short-term rentals can turn around quite a profit.
Wondering how to manage short-term rental property finances? Azibo is here to help. Try our free, all-in-one financial platform for landlords today.
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