Short Term Rental Investments: Are They Right For You?
The classic, “short term vs long term” for rental investments is a never-ending debate among real estate investors. The truth is, some investors are better suited for one, while some are better suited for others.
Even once they gain a deep understanding of how to invest in real estate, investors still usually like to pick one or the other, as it’s easier to scale an investing business when you do this.
This post is going to do a deep dive into short term rental investments, including their risks and benefits, and things to consider before committing to this form of investment.
Investing Vs Hospitality: Pick One (Or Both)
Remember that there’s a difference between investing in short-term rentals and being in the hospitality business. If you invest, and then pivot to renting these short-term rentals out, there’s a mindset shift that needs to happen - the mindset shift to the hospitality business.
On the other hand, it’s entirely possible to invest in short-term rentals, and then sell them to people interested in getting into the hospitality business. This is much of an “investor” mindset.
Things to Consider Before Investing In Short-Term Rentals
1. Get financing
- Find out how much money you need and what kinds of loans are available, like traditional mortgages or short-term loans for rental property.
- Consider the possible rental income and costs, such as property taxes, utilities, and maintenance costs, to make sure the investment is financially feasible.
- Check out the terms and interest rates of different loans to find the best one.
Protip: Your rental income should always exceed your mortgage payments, and still live a bit of profit. Keep this in mind as you’re eyeing the short-term rental market, as cities and zones continually change regulations for short-term rentals which could cut into your profit margins.
2. Really understand local regulations and laws
- Find out about zoning laws, building codes, and licensing requirements that may affect short-term rental properties in your area.
- Find out if there are any rules or limits on short-term rentals, like the number of days allowed or the types of properties that can be rented out for short periods of time.
- Make sure you follow all local regulations to avoid fines or other legal problems.
Protip: Many areas require short-term rental owners pay a Lodging tax. This cost can and should be passed on to the guests, and every site has it’s own portal to set this up. STR owners are usually required to pay this Lodging tax quarterly.
3. Familiarize yourself with insurance requirements
- Think about what kind and how much insurance is needed for short-term rentals, such as liability insurance or protection against damage.
- Find out if the property is in a high-risk area, like a flood zone, and make sure you have the right insurance for that.
- Do some research on insurance companies to find the ones that offer the best coverage for the best price.
4. Market demand and competition
- Look at the local short-term rental market to find out how much people want short-term rentals and how much competition there is.
- Find out what kinds of short-term rentals are in high demand and change the features or amenities of the property to meet those needs.
- To get the most out of your rental income, think about things that could affect demand, like the time of year or big events in the area.
The Big Picture: Risks & Rewards Of Short Term Rental Investments
The Risks
- Vacancy Rates: Rates of vacancy may be higher for short-term rentals than for traditional long-term rentals because of seasonal demand, market saturation, or other factors. This can lead to less money from rent and could hurt how profitable the property is.
- Property Damage: Because there are always new guests, short-term rentals may be more likely to get damaged or worn down. This can lead to higher costs for repairs and maintenance as well as a possible loss of rental income.
- Legal Compliance: Short-term rentals must follow local rules and laws, which can change over time. If you don't follow these rules, you could get fined, get in trouble with the law, or lose the right to use your property as a short-term rental.
The Rewards
- Higher Rental Income: Because of their higher prices and ability to fit more guests, short-term rentals can bring in more money than traditional long-term rentals. This can give the property owner a better return on their investment.
- Appreciation Potential: Short-term rental properties in high-demand areas may gain value over time because of their location and the chance that their rental income will grow. This can lead to more equity and the possibility of capital gains.
- Tax Advantages: Properties that are rented out for less than a year may be eligible for tax advantages like deductions for mortgage interest, property taxes, and maintenance costs. Also, owners may be able to take advantage of tax breaks for rental income and gains on the sale of a property.
How to Start Investing In Short Term Rentals
1. Research properties and locations
- Find possible places for short-term rentals based on things like the number of tourists, how close they are to attractions, and local rules.
- Find out about the properties that are for sale in those areas, such as their rental history, market demand, and potential for appreciation.
- Look at a property's potential rental income, costs, and return on investment as a whole.
2. Find & vet potential properties
- You can use Leadflow’s Ai-powered lead gen software to find properties with high rentability scores.
- Get a property inspection to find any problems and come up with your repairs estimation.
- Check the rental history and income of the property to see if it meets your financial goals and expectations of returns.
3. Secure your financing
- Look into different ways to fund your deal, such as traditional mortgages, short-term loans for rental properties, using a HELOC to purchase rental properties and more.
- Find out how much money you need and the terms of the loan, such as interest rates, when you have to pay it back, and any other costs.
- Submit a loan application and all of the necessary paperwork to get funds.
4. Close on the property
- Check the property one last time to make sure it meets all the requirements and is in good shape.
- Work with a title company to get all the legal paperwork done and to change who owns the property.
- Make any payments, like a down payment or closing costs, that are needed to close the deal on the purchase.
How to Keep Short Term Rentals Vacancy Down
For short-term rental investments to be successful, they must have low vacancy rates. Here are some of the best ways for investors to keep their properties rented and making money:
1. Set competitive rental rates
- Research the local market to find out what other rental rates are like and change your prices to stay competitive.
- Set prices that will attract renters and give you a good return on your investment.
- Keep an eye on rental rates and make changes as needed to stay competitive and make money.
2. Market the property
- Make sure to solidify your understanding of real estate marketing to market the property on online rental marketplaces, social media, and other places to get the word out to people who might be interested in renting the property.
- Make listings that are interesting and show off the property's unique features and benefits.
- Use good photos and other visuals to show off the property and get people interested in renting it.
3. Provide high-quality property management
- Respond quickly and professionally to renters' questions.
- Keep the property in good shape and take care of any problems right away.
- Set up a way to respond quickly and effectively to requests from renters, such as for maintenance or repairs.
4. Build a solid reputation
- Encourage happy renters to write reviews and give feedback.
- Use feedback from renters to make changes to the property and the rental process.
- Always try to go above and beyond what renters expect and build a good name in the community.
Best Locations For Short Term Rental Investments
Investing in short-term rental properties can be a good way to make money, but it's important to choose the right location. Here are some of the most important types of places investors should think about when buying short-term rentals:
1. Tourist destinations
- Places that get a lot of tourists can be great for short-term rentals.
- Tourists are likely to pay a lot for properties that are in or near popular tourist spots like national parks, museums, and other cultural or historical landmarks.
- Investors might look at properties near airports or train stations to make it easier for tourists to get to the property.
2. College towns
- Short-term rentals can be a great choice in college towns, especially near well-known universities or colleges.
- Properties near colleges or universities are likely to be in high demand from students, faculty, and visitors to the campus.
- Also, investors may want to look at places near popular off-campus student housing, since short-term rentals may be in high demand there.
3. Urban areas with high demand
- Investing in short-term rentals can be a good idea in cities where there is a lot of demand.
- Properties in or near popular neighborhoods, business districts, or cultural attractions in cities are likely to be in high demand by travelers and visitors to the city.
- Properties located near major transportation hubs, like train stations or airports, are always attractive to potential travelers.
4. Popular vacation spots
- Tourists are likely to be interested in homes that are on or near beaches, ski resorts, or other places where people like to spend their vacations.
- Investors may want to buy properties near big tourist spots, like amusement parks or natural landmarks, to bring in vacationers.
Are Short Term Rental Investments For You?
Short term rentals can be one of the most rewarding ways to invest in real estate - as long as you’re up for the challenge.
And for investors looking to find potential properties to create a short term rentals business, there’s Leadflow’s Ai-powered lead gen tool. Grab your 7-day free trial below!
