7 Things You Should Know Before Investing In Short-Term Rentals
Even during a pandemic, short-term rentals are still a very competitive real estate niche to tap into. However, just because it is competitive does not mean you shouldn't invest in it.
If you are looking to start investing in short-term rental properties and would like an edge on the competition, check out these 7 things you should know before you start investing.
1. Use a Short-Term Rental Analytics Tool to Choose the Right Market
Location is everything! Regardless of your real estate investment strategy, a property’s location can either make or break a deal.
As a potential short term rental investor, you can do your due diligence on a market using tools like AirDNA, Mashvisor, and AllTheRooms. These rental analytic tools compile data related to occupancy rate, seasonality, rental rates, rental type, rental size, amenities, and rental activity for a particular location.
However, you should understand that these tools only work if the person who is using them understands what data elements are relevant for making a decision on a short-term rental market.
Most short-term real estate investors use rental analytical tools that focus on:
Occupancy rate
Seasonality
Average rental rate
The occupancy rate is a ratio of time a short-term rental is occupied to the time it is available for rent. It is heavily dependent on the seasonality of the market you are trying to invest in.
If a market experiences some seasonality, it means that the market is subject to have more tourists doing a particular time of the year. Simply explained, it is the reason the beach is more popular in the summer months than in the winter.
When a market is in season, it typically has a higher occupancy rate than in the offseason due to additional tourists.
The average rental rate is simply the average rate one charges for a particular property in the market. The average rental rate is directly tied to the occupancy rate in most markets. Usually, if the market’s occupancy rate is high then the investors in the market can charge more for renting out their properties.
The history of a market’s occupancy rate, seasonality, as well as average rental rate, can help depict the potential return on investment (ROI) for an investment property in the area. Therefore, smart real estate investors use rental analytic tools to gather data related to these three elements.
2. Check Both Local and State Regulations for Rentals
A part of your due diligence process is to ensure that you research rental regulations and legislation in the market you plan to invest.
Believe it or not, it may be illegal for you to rent out your property on Airbnb or Vrbo, depending on your city or state. For example, California has very strict regulations for short-term rentals, whereas Arizona or Alabama tend to be short-term rental friendly.
Completing this research process can be difficult because the information you need can be very hard to find, and if you can find it, you still run the risk of not knowing what the future holds for that market.
For example, you may buy a property in a market, and 3 years later, you find out that the city is closing down all tourism and attractions in your respective location, thus turning a good investment into a bad one.
You may never be able to eliminate this risk of future regulations, but you can always stay ahead of the game by networking with elected officials and by being citizens to help influence the future of the local cities and states.
3. Property Management is More Expensive for Short-Term Rentals
If you prefer to hire a property management company to manage your short-term rental, you should know that they will be more expensive because of the additional requirements to upkeep a short-term rental.
Those requirements will include additional cleaning of the property, organizing access to the property for the guests, and addressing any issues guests may have during their stay.
Typically for traditional long-term rentals, property management fees range from around 8% to 12% of the gross rent; however, for short-term rentals, it is typical for property management fees to range from 25% to 50% of the gross rent.
This dramatic difference in fees that the property management will charge for a short-term rental will definitely impact the rate of return on your investment property. Therefore, you must be intentional in the due diligence process to ensure you include the additional property management fees when running your property analysis.
4. Is The Market Too Saturated?
Yes, for some short-term rental markets, the area is too saturated!
Sometimes as investors, we tend to think that if everybody is doing something, we should be doing it too; however, using this logic is the reason why some short-term rental markets are too saturated.
You can find out if the market you are trying to invest in is saturated by looking at large listing platforms such as Airbnb or Vrbo.
There may be a few hundred listings for short-term rentals for some locations, but as you find the listings towards the last few pages may notice that these listings have very few, if any, stays.
This may indicate that the market is too saturated, and there is a supply and demand issue because there are more short-term rentals than people willing to stay in them.
But if you do still decide to invest in a saturated market, ensure that you complete extensive research on what properties elements are preferred within the market, such as amenities, number of bedrooms/baths, and nearby attractions within the market.
5. What Other Attractions Drives Tourism In Your Market?
When it comes to short-term rentals, investors typically invest in tourist hotspots like beaches, mountains, amusement parks, and national parks. However, most of these hot spots are somewhat seasonal, so what are you going to do to ensure that people want to stay in your short-term rental throughout the year?
A good option is to look into smaller attractions that drive tourism in your market year-round such as museums, shopping malls, hiking trails, popular restaurants, breweries, and wineries. These small attractions can be one or two-day trips that can be taken at any time throughout the year.
These attractions may seem small compared to the beach, and in most cases, they're not the main attraction tourists are looking to go to when they're planning a trip. However, finding a market that pairs big attractions like the beach with smaller attractions like shopping malls and popular restaurants showcases that the area may have tourists year-round.
As investors, we should focus on finding big attractions that drive tourists to our rental and look at the smaller attractions with year-round demand.
6. Utilize Tax Deductions and Credits
As a short-term rental real estate investor, you may be eligible for additional tax deductions and credits in addition to what is offered for traditional real estate investors.
Therefore you must speak with a certified public accountant (CPA) or financial advisor to understand what tax deductions, credits, and write-offs you may be able to take advantage of before you acquire your property.
Below is a list of tax benefits to consider from the Internal Revenue Service website.
Business Expenses
Depreciation Deduction
The 14-Day Rule
Pass-Through Tax Deduction
Mortgage Interest Tax Deduction
Travel Deductions
Restoration and Betterment Deduction
If you would like more information about these tax deductions and credit, check out this Motley Fool article on short-term rental.
7. Immerse Yourself In The Market
Regardless if you're going to be managing the property yourself or hiring out a property manager, you must immerse yourself into the market you are investing in.
If you are self-managing, you must know about local events in the area, allowing you to charge a premium for your short-term rental during these events. If you have access to a community calendar or a list of local events, you can plan out your pricing schedule in advance.
You can also use different built-in tools and software that automatically adjust your pricing based on the area’s demand. Depending on your listing service, these tools may not be available.
If you are using a property manager, in most cases, it is their job to stay in tune with what's happening in the market; however it is your responsibility to check and ensure they are not missing out on any opportunities to make you more money.
By knowing what's going on in the market, you can better serve your guests by providing them with additional information to make their stay more comfortable and convenient.
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