9) A Beginner’s Guide to the Short-Term Rental Investment Strategy
Short term rentals (STR), such as AirBnB properties have gained a lot of popularity in recent years. Especially with the prices of properties being so high, in some markets, it may not be feasible for ordinary property owners to rent or flip properties to make a profit. We can see why listing a property as a short-term rental changes the equation. It allows a valuable property to become part of a database of distinct home rentals making them more profitable for the owner. As with all, there are pros and cons to consider so let’s dive in and review short term rental strategies from a real estate lens. Here are some tips and pitfalls to be aware of when devising a short-term rental strategy.
Evaluation and Set Up
Due diligence is still the most important aspect of any investment strategy and it’s no different when it comes to evaluating short term rental properties. With short term rentals, the starting point is a data report for the property you are looking at. You can purchase data reports from various websites such as AirDNA, Mashvisor or Evolve. These reports will provide information such as occupancy rates in your zip code and rental rates.
Once you’ve looked at the revenue numbers for the property you are evaluating, the second step is to determine what it will cost to set up the property in order to optimize the occupancy and revenue. This will entail creating a space with personality and character (i.e. paint, furniture, and amenities) by doing research of existing properties.
Using the data report to determine revenue along with your research to determine the cost of setup, you now have an idea of what kind of returns you can expect from the potential property. Don’t forget to add in your property taxes, utilities, and mortgage payment if you will be taking a loan for the property.
Now that you have your STR setup, it’s time to start making money. As STRs have increased over the years, it has become a hot item of discussion for city leaders and municipalities. Be sure to check with your city or municipality for short term rental license requirements before you list your property on AirBnB, VRBO and other sites. As you move forward in this venture, be sure to keep in mind that the ratings you receive from your renters/guests will make or break you. Start by building a network of professionals that you can lean on for maintaining your property that can respond to you within 24 hours. At the minimum, you will need a handyman for repairs needed during a guest’s visit or post (hopefully not), a cleaning crew, and other specialized professionals such as a plumber and HVAC tech- the list goes on.
As part of operating this property, assign a trusted person to maintain a guest schedule, coordinate with the cleaning crew, stock the unit, and ensure guests are checking out within the dates and times they have agreed to. While this can be done remotely with cameras, we’d still recommend sticking with an old school approach by driving by the property. This way you too can do your own due diligence and verify whether or not any damages are done to hold the guests accountable.
Short-term rentals are not all unicorns and rainbows and we’re sure you’ve heard your fair share of horror stories. They can also be time-consuming as customer service is a large and quintessential component of achieving the best ratings. Consistent income can also become unpredictable as was obvious during the pandemic when AirBnB’s were not being sought after with limited travel. Another potential issue is that there is no real thorough screening process for tenants, therefore, you don’t really know who is renting the property and what they are renting it for. Nonetheless, as a measure of protection to mitigate risks most AirBnB owners will require a 3-day minimum rental to prevent any 1-night partying. Some owners will install decibel monitors which will alert them if there is a loud party or loud music. On the other hand, as we’ve addressed, many US cities and homeowners’ associations (HOA’s) have their own rules with strict restrictions, new ordinances, and regulations they enforce to STR property owners- such as being subjected to fines and penalties for loud parties or other violations.
There is a lot of money to be made in short-term rentals and many regions across the US have seen great benefits from them. Local tourism economies are tremendously supported while STR property owners have a means to supplement or enhance their income, a win-win. Therefore, it is important to ensure they are professionally operated as a business and less like passive apartment rental. In order to be successful, you must designate time and tasks to check on the property yourself or hire a management company that will do it for you- which can run between 10%-12% of your gross revenue. Nonetheless, with the right amount of planning and building the right team, you can make this a successful venture.
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