Every real estate investor has pondered at some point, Why short-term rentals? Many get their start in real estate by purchasing a property and renting it out annually: the conventional method. But the evolving landscape suggests there might be a more dynamic way to invest. Let’s dive into the rising trend of short-term rentals and how they can help you achieve your goals.
Investing in real estate this way is relatively straightforward. You purchase a new property or turn your home into a rental property. Then you find a tenant to sign a lease. You still have to pay your mortgage and cover maintenance expenses. However, the tenant furnishes the home and (usually) covers all the utilities. Things may get hairy if you get a bad tenant, but good tenant screening can significantly reduce this risk. If you hire a good property manager, you probably won’t have to think about your property much at all. Your money comes in, and your bank drafts your mortgage payment. Whatever is left over is yours.
So, why would anyone deviate from this tried-and-true model?
The Rise of Short-Term Rentals
In the past decade, Airbnb has completely redefined the landscape of real estate investing. Now anyone can rent out their home as a vacation property without much effort. While there has always been a niche market for vacation rentals, they have traditionally been limited to tourist destinations. You’ve always been able to rent vacation homes in places like Vail, Colorado or Panama City, Florida. But now you can find them in Des Moines, Iowa and Scranton, Pennsylvania. As a result, Airbnb and its competitors have become viable substitutes for hotels.
This provides more options for traditional real estate investors. Now they can evaluate if a property would perform better as a short or long-term rental. And they can switch back and forth as the market changes. This allows investors to maximize their returns and lowers the barrier to entry to real estate investment.
Should You Invest in Short-Term Rentals?
The general rule of thumb is that your property must bring in twice as much revenue as a short-term rental than as a long-term one to make the STR option worth it. The reason for this is the extra expenses associated with operating a short-term rental. You have to pay for all the utilities, and you have to furnish the property. You’ll need to bring in double the revenue to account for these extra expenses.
In addition, short-term rentals are significantly more work than traditional rentals. Investing in short-term rentals means preparing for each new guest. That is, you must clean the property every time a guest leaves to prepare for the next one. It requires attention to detail and high-quality customer service. You’ll need a higher return to justify all this additional labor.
Short-Term Rentals Are a Service Business
Tenants in a long-term lease usually don’t expect much from their landlords. As long as the landlord fixes the air conditioner when it goes out and doesn’t harass them, they’re typically happy. Guests, however, are different. They expect an immaculately clean home, frequent and prompt communications, and excellent service. In short, they expect an experience. They think of themselves as customers, not tenants, and they expect to be treated as such.
With long-term rentals, if you provide a comfortable home at a reasonable price, you’re unlikely to have much difficulty securing a tenant. With short-term rentals, however, you have to ensure your guests are satisfied with their stay. Good reviews are essential in the short-term rental business. So, yo have to plan accordingly. If you get good reviews, you’ll get more guests, whom you must also please to keep things going. Otherwise, you’ll find it difficult to find anyone willing to book your place. Running a successful short-term rental takes constant vigilance and effort. On the other hand, if things go south with a guest, you probably won’t have to go through the eviction process.
Lightening the Load
Of course, you can always hire a property manager—like us—to take care of all these issues for you. If you do, you’ll simply have to cash your monthly check. Someone else will take care of the repairs, answer phone calls in the middle of the night, and ensure every guest is happy and satisfied. Even after paying the management fee, an excellent short-term investment property will usually leave you better off than going the traditional route.
Because of the increased workload, you should expect STR property managers to charge a higher fee than a traditional property manager. Typical management fees for long-term rentals are between eight and ten percent. We charge twenty-five percent, and you wouldn’t have to look far to find managers charging significantly more.
If you think managing a short-term rental property might be fun and don’t mind the extensive work it entails, you could make even more money. By self-managing, you avoid the property management fee, and you can also pocket the cleaning fee if you decide to clean it yourself. However, you’ll need to educate yourself about the business and pricing strategy. If you go with a set-it-and-forget-it approach to pricing, you’ll leave a lot of money on the table.
One of the significant advantages of hiring an experienced property manager is that you’ll have access to someone who can optimize your pricing to maximize your income. This can often more than make up for the fee they charge. But if you can commit to educating yourself and maintaining vigilance with regard to fluctuations in your local market, you could try to do it yourself. Tools like AirDNA and Wheelhouse can be beneficial in these efforts.
However, managing a short-term rental yourself becomes unfeasible quickly once you grow beyond one property. Even managing two properties, while perhaps doable for the most resilient, is exhausting. At some point, you’ll be spending all your time cleaning and doing laundry, and you’ll have little time for anything else, including growing your business. In addition, if you spread yourself too thin, you may find that your property’s quality suffers, hurting the guest experience, your reviews, and your business itself.
Multiplying Your Options
For careful investors, short-term rentals can be a real gold mine. Not only do they provide potentially larger returns, but they also open up more potential investment opportunities. In today’s hot market, in particular, investors may have a difficult time finding a viable investment property. Home prices have increased at a significantly faster rate than rents. It can be nearly impossible in many markets to find a quality investment going the traditional route.
However, many properties that would flop as long-term rentals would make excellent short-term vacation rentals. Having this as an option in your investment strategy opens up more doors for you and makes for greater potential returns for your portfolio.
Getting Started in Short-Term Rentals
If you’re looking to get started in short-term rentals, we have some tips to help you get started on the right foot.
#1 Evaluate Your Options
Carefully evaluate the income potential of your available investments as both long-term and short-term rentals. In most cases, if the potential short-term revenue is less than twice as much as the potential long-term, you should go the traditional route. Of course, you still need to determine if the property makes sense as a long-term rental. If not, it’s probably best to pass and move on to something else.
# 2 Evaluate Your Goals
If the property makes sense as a short-term rental, decide if the extra income is worth the extra work. Managing short-term rentals is a lot more time intensive than managing long-term ones. Is the additional return worth that extra work? Only you can answer that question for yourself. If the answer is no, you should go the long-term route if the numbers still work.
#3 Make Sure You Have the Appropriate Tools
If you decide to operate as a short-term rental, make sure to utilize a few tools to make the experience much more manageable. They’ll cost some money, but they are almost always worth it.
This will integrate your calendars so that you don’t have an accidental double booking when someone books the same dates on VRBO that someone else already booked through Airbnb. These tools also provide you with some auto communications tools to help reduce the time you have to spend on communications.
However, if you’re just going to throw your property up on Airbnb and leave it at that, you can probably forego such tools and the subscription fees they bring. While this will almost certainly cost you revenue, it does simplify things, and sometimes that’s what you want when you’re just getting started.
#4 Get Help with Pricing
We highly recommend that you use a pricing management tool. We prefer Wheelhouse, but Beyond and PriceLabs are good choices as well. These tools measure demand day-to-day in your area and optimize your pricing accordingly. This helps ensure that you aren’t missing huge payouts on busy weekends with big events in your area and that you aren’t overpriced on some random Tuesday.
We also like to use AirDNA to provide even more detailed market information that you can use to calibrate the other pricing management tools. There’s a bit of a learning curve with these programs, but if you take the time to master them, they will go a long way to maximizing your income. Too many owners of short-term rental properties simply set some flat rate for all of their days, which either results in full calendars because they price way too low or empty calendars because they price way too high. These tools can help you avoid this trap.
So, there you have it: a brief evaluation of the benefits of short-term rental properties and when it makes sense to invest in them. If you have any questions, please contact us. Or download our free guide, “5 Steps to Becoming a Successful Airbnb Host,” by providing your information below. We would love nothing more than to help you find success on your investment journey.