As their popularity grows, short-term rentals can be a potentially lucrative real estate asset. Here are some key factors to consider before investing in short-term rentals.
Investing in short-term rentals is on the rise. Across the world, online marketplaces like Airbnb and VRBO and 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 $15 billion in 2021.
Although the hospitality industry took a hit during COVID-19 overall, short-term rental properties actually outperformed hotels throughout the pandemic. As noted in a 2020 article from AirDNA, “Short-term rentals have shown more resilience and stronger performance amid the crisis.” AirDNA’s COVID-19 Short-Term Rental Data Report backs this up, noting that travelers preferred entire homes, full kitchens, and outdoor space during a time of strict social distancing protocols.
Now, with COVID-19 restrictions steadily lifting, travel is on the rise — and short-term rentals are positioned to become even more popular. Looking to make the leap into a 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 and enjoy better margins and more cash flow. For example, you can potentially get $1,000 of rental income per week on short-term rental property that would have collected $900 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’re able to 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 — guests 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:
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.
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 (more on that in the next section).
Increased guest turnover and higher expectations from vacationing visitors means landlords will have more expenses to keep your short-term rental property in tip-top shape. To this end, many landlords investing in short-term rentals build these costs into the listing price by charging higher rents or additional cleaning fees.
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. Try to 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 also need to be especially careful, as short-term rentals may get you 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.
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 simply using a bookings 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, collecting rent, scheduling cleaning and maintenance, and more. Remember, build your property management costs into your rent price so you can maintain a 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 are able to 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 drive 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 will make 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. A few simple and resourceful steps to take include replacing incandescent light bulbs with LEDs, choosing Energy Star appliances, regularly changing air filters (which can collect dust and put stress on 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, taxes, rental insurance, furnishings, a regular cleaning service, entertainment subscriptions (cable, Netflix, Hulu), landscaping maintenance, general repairs, basic supplies (toilet paper, bath and laundry products), and welcome baskets.
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 system to track rental income, expenses, and other documentation. Open 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 and pay vendors in one place. 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 will no longer have to track down a year’s worth of transactions come tax season.
Wondering if investing in short-term rental properties is right for you? Azibo is here to help. Try our free, all-in-one financial platform for landlords today.
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This article and the Azibo Blog in general is intended for informational and educational purposes only. It is not investment, tax, financial planning, legal, or real estate advice. Please consult your own experts for advice in these areas. Azibo provides information believed to be accurate, but Azibo makes no representations or warranties about the accuracy or completeness of the information contained on this article or blog.