Friday, 20 October 2017

Investing for the Short-Term Rental Market

Written by Posted On Tuesday, 11 April 2017 16:26

 

When people think about investing in real estate, they often think of two main strategies: flipping and rentals. However, there are many others including wholesaling, REIT, liens and deeds, and commercial to name a few. Recently, the short-term rental strategy has taken hold of the market.

What Are Short-Term Rentals?

Short-term rentals are a type of buy-and-hold property, but rather than finding a tenant for the long term, you look for short-term rentals. Although many investors have held vacation properties as short-term rentals in the past, apps such as Airbnb and VRBO have increased their popularity considerably.

Of course, buying a property for short-term rentals is significantly different from buying a property for long-term rentals. For instance, how do you handle tenant turnover? Does the location you are considering have good occupancy rates? Are occupancy rates seasonal? Are there laws regulating short-term rentals?

Let's look at four things to consider before purchasing a short-term rental property.

1.     Location

Short-term rentals rely on tourists. This means that a good short-term rental property will need to be right in the heart of whatever attracts them to the area. Properties on the outskirts of town will not be as attractive to tourists, nor will they be able to charge premium rates. This means that when you look at the property, you should consider things such as:

  • The view
  • Proximity to amenities
  • Walkability

You'll also want to consider the seasonal nature of your location. Ski resorts do great in the winter but not as good in the summer. Beaches do great in the summer but tend to show lackluster performance in the winter.

What you need to do is determine where you will have high occupancy as well as high monthly rates. Statistics show that the top five areas for Airbnb are New York City, San Francisco, San Diego, Miami, and Austin. However, there are many locations across the US that can provide you with high returns.

2.     Property Management Is Different

As with all rental properties, you will have to determine if you want to manage them yourself or hire out the management. Managing yourself lets you keep a larger percentage of the profits, but it also takes more time.

With short-term rentals, you can expect to spend more time:

  • Managing reservations
  • Cleaning and preparing the residence for new arrivals with things such as a thoroughly cleaned property, fresh linens, and welcome materials.

For those that do not live close to their short-term rentals, hiring a management company may be the right move.

3.     Determining the Returns and the Costs

Understanding you potential returns as well as your potential costs is absolutely necessary when deciding if a property will make a good short-term rental.

For short-term rental properties, you will be paying for things not typically paid for with long-term rentals, such as:

  • Utilities
  • Weekly or monthly cleaning
  • Welcome materials
  • Repairs for damages or broke goods
  • More vacancy periods

On the other hand, you will be able to get more for your property per month by renting it out on a short-term basis. A property that could rent for $1500 a month on a long-term lease could produce more than that per week in the right location.

The key is to determine if the returns outweigh the costs.

4.     Short-Term Rentals Are Less Passive

In addition to increased property management, short-term rentals have many other aspects that make them less passive than their long-term cousin.

  • You may have to collect sales and/or occupancy taxes and deal with those on a quarterly or yearly basis.
  • You'll have to continually market so that guests can find your property
  • You'll need to make sure good reviews are posted
  • You'll need to make sure your property has everything guests need such as towels, basic toiletries, kitchen items, etc. These will have to be checked between every visit.

Although short-term rentals can be lucrative, they are not passive.

As technology improves, the short-term rental market is likely to increase, along with other possibilities not even on the horizon yet. As you think about real estate investing, be sure to consider the many different possibilities that exist to find the strategy or strategies that work best for you.

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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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