Short-term rentals: What to know before you invest
Short-term rentals can be an attractive investment thanks to the potential for greater cash flow. But they also bring new challenges for investors more familiar with traditional long-term rental properties, from fast turnover between guests to extra regulations.
Experts say the short-term rental market has also grown more competitive, making it even more important to do your homework and develop a strategy before diving in.
Here are six points to consider before making your first short-term rental investment.
1. Do your homework on local regulations
As popular as short-term rentals have become, they aren’t welcome in every city. Some, like Santa Monica, California, prohibit rentals of less than 30 days unless the resident stays in the property along with the guest. Others, like Chicago, allow unhosted short-term rentals but require property owners to register and pay a fee.
Rules can change, so if you’re considering investing in a new area, pay attention to proposed legislation and local officials’ general attitudes toward short-term rentals, says James Carlson, co-owner of Colorado-based real estate firm Erin and James Real Estate, which specializes in short-term rental properties.
Particularly in areas where policies seem unsettled, investors may want to have a “Plan B” strategy for the property if new restrictions are imposed.
Even if you end up investing only in long-term rentals, it's smart to stay up to date on local regulations in case renters express interest in posting your unit on a short-term rental platform.
2. Estimating potential income
Unlike a long-term rental unit where you have a fixed, predictable amount of rent coming in each month, income from a short-term rental varies based on the nightly rate and number of bookings you secure.
Online tools like AirDNA and Rabbu provide data on short-term rental prices and occupancy rates in various markets. But don’t stop there, says Avery Carl, CEO and founder of real estate sales team The Short-Term Shop, which specializes in vacation rental market in the Smoky Mountains and Gulf Coast.
Spend time scoping out competing properties’ listings on platforms like Airbnb and VRBO to get a better feel for the rate your property may earn, says Carl, who is also the author of “Short-Term Rental, Long-Term Wealth.” If there’s a luxury unit with swanky perks, you may not be able to match its nightly rate, but if a competing property looks run-down, you may be able to charge more for yours.
“Zoom in on the neighborhood you plan to buy in, look at the properties and use that to see what you can expect,” she says. “The data might tell you what price someone got, but it won’t tell you the price is low because they have bad photos.”
If you’re considering investing in an area where tourism is seasonal, like the Colorado mountain towns many of Carlson’s clients invest in, he recommends accounting for the fact that your rates and bookings will vary throughout the year.
3. Extra cash flow — but also extra work
Higher per-night rates mean short-term rental properties tend to generate more cash flow than long-term rentals, but the extra revenue comes with additional costs.
Unlike typical long-term rentals, short-term rental units must be furnished. Those furnishings and amenities don’t need to be over the top, but if you have the budget, hiring a designer can help improve the look of the unit, making it an attractive place to stay, Carlson says.
Short-term rentals also tend to require more hands-on management. Units must be cleaned and prepped for a new guest after each stay, and you’ll need to field bookings and questions from guests.
Property managers specializing in short-term rentals can take over those tasks, but they also tend to charge higher fees than long-term rental managers, Carl says. If owners want to self-manage, online tools such as OwnerRez, Hospitable or Guesty can help automate tasks like managing listings across multiple platforms, fielding bookings from guests or scheduling cleanings.
There is one advantage to more frequent turnover: When a professional cleaner visits a property a couple of times a week between guests, it’s easier to catch maintenance issues or other problems before they turn into major headaches, Carl says.
4. Create listings that lead to bookings
Posting professional-quality photos of your property is one of the easiest ways to elevate your short-term rental’s profile on a platform like Airbnb or VRBO, Carlson says.
“I’ve seen people spend $15,000 or $20,000 to furnish a property, then just pick up an iPhone and snap a few photos,” he says. “If you’re trying to maximize returns, hire a good photographer.”
You’ll also need to pay attention to your reviews. A low rating from an unhappy guest can make others think twice before booking a stay.
Negative reviews are tough to avoid altogether, but you can reduce your risk by anticipating problems renters may face, Carlson says. If your property has a wonky light switch or finicky faucet, either fix it or be upfront about it and let renters know how to deal with it.
“Setting the right expectations goes a long way,” he says.
Investors also should pay attention to the questions potential guests ask before booking. It’s an opportunity to make sure your property is a good fit for them, Carl says.
For example, some people will love staying in a rustic cabin, but the person inquiring about the sheets’ thread count may not — and that person probably won’t leave a rave review. If you don’t think a potential guest will be happy, be honest, even if that means losing the booking, Carl says.
5. Consider ‘medium-term’ rentals
Vacationers aren’t the only people looking for shorter-term stays. Corporate employees relocating to a new city, travel nurses, nomadic remote workers and people doing construction on their primary home all might seek rentals that let them stay a month or two.
“Medium-term” rentals can be a middle ground between traditional yearlong leases and short-term rentals, both in terms of the rents generated and amount of property management work, says Angela Healy, CEO and co-owner of Denver-based AvenueWest Managed Corporate Housing. They also may be permitted in areas that restrict shorter-term rentals.
If you’re considering a medium-term strategy, look for amenities popular with traveling employees, like parking, in-unit laundry, workout facilities and proximity to the major employers in the area, she says.
To find renters, property owners can advertise units on corporate rental marketplace websites. But landing business from big companies looking to house a lot of of employees can be tough for owners with only a handful of units unless they work with a property manager who specializes in helping companies find housing for employees, Healy says.
That means paying property management fees, but bigger companies also tend to pay higher rents than individuals seeking medium-term rentals on their own, she says.
6. Think twice before mixing short- and long-term rentals in one building
Long-term renters looking for a peaceful home may not be thrilled to learn the unit next door hosts a steady stream of strangers letting loose on vacation.
Jessica Ryan, principal and head of the Landlord Tenant Department at Chicago-area law firm Kovitz Shifrin Nesbit, says she rarely sees multifamily investors operate short- and long-term rentals in a single building.
“I don’t think landlords want to jeopardize their long-term rental tenants,” she says.
By Lauren Zumbach from Story by J.P. Morgan