Short Term Rentals - what are they and why they’re the best place to invest your money.
What are short term rentals?
Short Term Rentals (STRs) are residential hotels where you charge guests on nightly basis. While hotels and motels are also rented out on a nightly basis, short term rentals differ because they tend to be less of a commercial-type relationship - typically allowing guests to have 1 on 1 communication with the owner of the property as well as many STRs being single-family homes. Short term rentals are often completely furnished with all the amenities you’d find in a regular home such as a fully stocked kitchen, washer and dryer, bedrooms and living spaces, sometimes even extras like bikes and surfboards. Short term rentals that are single family homes are becoming increasingly popular alternatives to hotels because they can offer these more home-like accommodations for a similar price.
Why are STRs a good investment?
Short term rentals have historically always been a profitable endeavor - more so than long term rentals. When you purchase a single family home you already made a good investment with your money long term because historically, housing prices go up over time, so your assets also grow. The fixed cost of a mortgage rate allows you to maximize inflation - as rents and nightly rental prices go up, your fixed expenses stay the same. The cashflow that you will make on a well-run STR should be in the positive from the start, and over time with nightly rental prices increasing, profit margins should increase as well.
Short term rental profits can be extremely variable depending on things such as location, maintenance costs, insurance and supplies. However, even with the added expenses for supplies such as furnishings and supplies like toilet paper, STRs provide a much larger return on investment than long term rentals. A well-marketed short-term rental will always outperform a comparable long-term rental in earnings.
Short term rentals are also a good investment because of the increasingly flexible work culture of the world due to Covid. Remote work is becoming more accessible and popular as more and more people are looking to work on vacation in a home-away-from-home situation.
Short Term Rental Pros and Cons
PROS
Higher Profit Margins. Short term rentals will always out-perform similar long term rentals.
Better Maintenance. With guests checking in and out frequently, it’s easy to keep your property up to date on maintenance and cleaning.
Flexibility. You have control over when guests can stay and when they cannot - giving you freedom to use your property for other reasons like having friends/family stay, doing renovations, or switching up your rental situation if your needs change.
Tax Benefits. When you are renting out a property as a short term rental, it’s a business - meaning that you can write off things like your property insurance, the interest on your mortgage, all the supplies you buy, cleaning costs, lawn maintenance, pest control, etc can be a tax write off!
CONS
Management. The logistics of an STR definitely take some getting used to and require much more work than long term rentals. Management companies can take a load of this off of your plate, but will also cost you typically 15-20% of your total rent revenues. Even with that cut, STRs tend to be more profitable than LTRs.
Communication. Communication with guests can take time, and response times are pretty important to the ratings you get while using platforms like Airbnb and VRBO. This can also be taken care of by management companies.
Repairs. While you get to view your STR more often, it’s not uncommon for STRs to be treated a little more poorly than LTRs by their guests. There are definitely going to be rainy days requiring some extra clean up while running an STR, however, the profits definitely make these occasions worthwhile.
Things to Know Before Buying a Short Term Rental:
Local Laws & Regulations. Not every city allows STRs. Do your homework with a local realtor to know what you are allowed to do per local laws. Some cities only allow minimum 30 day rentals, some require STRs to be registered with the city, and some require certain regulations like fire extinguishers, exit plan, first aid kid, etc.
Start up costs. Purchasing furniture, appliances, towels, bedding, toilet paper, pots and pans, decor, etc to make the place feel like a home and have the amenities your guests will be expecting.
Reviews are KEY. Communication, cleanliness, amenities, and setting clear expectations are key to getting good reviews on your STR. Without the ability to stay on top of these things, your STR will likely struggle to get rented compared to the competition.
Research nightly rents in the area. One way to do this is to go on sites like Airbnb and VRBO to research what similar properties are getting on a nightly basis. Rents can differ from weekdays to weekends, peak season, local events like festivals, concerts, or sporting games can all change the rent prices. Do your homework to get an idea of your ability to rent.
Management takes time. If you are planning on managing your STR by yourself, expect to spend time running your business. Weigh the cost/benefits of your situation if you manage it yourself vs hiring a management company.
