Short-Term Rentals

Short-term rentals (STRs) have gained attention over the past decade with the rise of platforms like Airbnb and VRBO. These rentals have become a popular choice for real estate investors looking for profitable opportunities. If you’re considering entering the world of short-term rental investing and need guidance, this guide is here to help you navigate the process and make informed decisions.

KEY TAKEAWAYS

High Profit Potential: Short-term rentals can generate significantly higher monthly income compared to traditional rentals, especially in popular tourist destinations. Platforms like Airbnb and VRBO have made it easier for real estate investors to capitalize on the growing demand for vacation rentals.
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Flexible Management and Pricing: Owners of short-term rentals have control over their property’s calendar, allowing them to decide when to rent out and when to use the property themselves. Additionally, short-term rentals offer the flexibility to adjust pricing based on demand, seasonality, and market trends, optimizing revenue.
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Considerations and Challenges: While short-term rentals can be lucrative, they come with higher management and maintenance demands. Property owners need to be aware of inconsistent cash flow, potential neighborhood disapproval, and strict regulations. Thorough research, market evaluation, and understanding local laws are crucial for success in this investment sector.

Understanding Short-Term Rentals

Understanding Short-Term Rentals

Short-term rentals are similar to hotels in that they are rented out to guests on a nightly basis rather than through monthly or annual leases. These properties are fully furnished and equipped with all the necessities for a comfortable stay. Typically, stays of 30 days or fewer qualify as short-term. Owners usually purchase short-term rentals as secondary or vacation homes without the intention of living in them. With the rise of platforms like Airbnb and VRBO, real estate investors have tapped into the substantial profit potential of short-term rentals. What once was considered a side-gig for generating passive income has evolved into a thriving industry with significant profit opportunities.

Why Invest in a Short-Term Rental Property?

Very Profitable

First and foremost, short-term rentals can be incredibly profitable. Due to their nature, STRs can generate significantly higher monthly income compared to traditional rentals, especially if you choose a property in a popular location. For instance, charging $250 per night for a property booked 18 nights a month can result in $4,500 of monthly income with a 60% occupancy rate.

Of course, you need to account for higher management expenses, along with the cost of furnishing the rental, among other added costs, which might render the increased revenue generated by the STRs a moot point. However, even with these added expenses, short-term rentals often provide a much higher return for investors than long-term rentals. This is likely the case in areas with lots of tourism and unmet demand for short-term rentals.

High Demand

Acquiring a property in a desirable tourist hotspot at a reasonable price can be a game-changer for short-term rental investments. Demand for vacation rentals is high, with platforms like Airbnb and VRBO outperforming the hotel industry. By conducting thorough research and selecting a well-situated property, you’ll have little trouble attracting a steady stream of guests, making it a highly profitable investment.

More Growth Potential

Properties in prime vacation spots often appreciate significantly over time. Investing in an area experiencing substantial growth can be a wise decision. Additionally, short-term rentals allow for flexible pricing, enabling you to adjust rates in response to market trends immediately, rather than waiting for a lease to end to increase prices. This flexibility helps you capitalize on market-wide price appreciations more effectively.

Advantages of Short-Term Rental Properties

The potential for higher income is just one of the many reasons why owning a short-term rental property is worthwhile. Here are a few additional benefits:

High Maintenance Requirements

Without a property manager, overseeing a short-term rental can become a full-time job. You may need to handle:

Scheduling bookings
Screening renters
Collecting payments
Maintaining the property
Managing all marketing efforts

If you don’t have experience in customer service and marketing, the learning curve can be quite steep. Although you will gain valuable skills, the amount of effort required may exceed your expectations.

Unpredictable Cash Flow

You have full control over your vacation home’s calendar, allowing you to decide when to rent it out and when to use it yourself. Whether you want to spend a week at your summer beach house or take two weeks to renovate the porch, you can easily adjust the schedule to suit your needs.

Flexible Pricing Options

You have the flexibility to adjust your rental rates as needed. If your property is in a popular ski destination, you can raise the price during the winter season. It’s also common to increase rates on weekends and holidays, allowing you to take advantage of these peak times to boost your income.

Sometimes, lowering your pricing can help you stay competitive. For instance, Michael from the earlier example could offer a special rate for a month-long stay. Instead of charging $4,900 for 30 days, he could price it at $4,000. This way, he would still earn more than if he rented the property for just 20 days, while remaining competitive. Additionally, this approach reduces the likelihood of attracting guests who only want to stay a couple of days midweek.

Ideal for New Investors

Your short-term rental is likely to appreciate in value over time. The longer you own and maintain the property, the more its value can increase. While it may not experience the same level of appreciation as some historic examples, it is still highly probable that your rental will become more valuable year-over-year.

Tax Advantages of Short-Term Rentals:

Short-term rental properties offer numerous tax advantages! Here are some key benefits:
Maximize your deductions: Deduct expenses related to marketing, management, upkeep, and insurance, as well as business meals, educational costs, and an eligible home office.
Track your trips: Deduct travel expenses if you frequently visit your rental to manage and set it up. Additionally, if you purchase a vehicle primarily for rehabbing, staging, and managing your short-term rental, you can deduct its full purchase price. For example, writing off $24,000 on a car could save you around $8,000 in taxes.

Leverage depreciation:

If you invest $7,500 in furniture, appliances, and entertainment for your rental, you can deduct that amount right away in the first tax season. Be sure to keep an itemized receipt for your records.

Disadvantages of Short-Term Rentals

No investment strategy is flawless, and short-term rentals are no different. Here are the main disadvantages of owning a short-term rental property:

Inconsistent Cash Flow

Short-term rentals can often yield two to three times more income than long-term rentals. However, they lack the predictability that long-term investments provide. For example, events like the pandemic drastically reduced demand for vacation properties, causing many businesses to fail.

While the pandemic is an extreme case, common issues such as last-minute cancellations and seasonal vacancies can also impact your income. Some months, your property may be fully booked, while at other times, you might struggle to secure even a single weekend booking.

Less Rigorous Screening Processes

For long-term rentals, landlords and property managers typically conduct a thorough screening process for prospective tenants, which may include:

Rental history
Background check
Credit check
Proof of income
Verifiable references

Short-term rentals, on the other hand, often don’t have this luxury. Sometimes, the only information available is online reviews. Additionally, with more frequent guest turnover, the risk is higher compared to long-term rentals.

Covering the Bills

Typically, long-term tenants cover utility bills as they consume the services. However, with short-term renters, the property owner is responsible for expenses such as water, sewage, garbage, electricity, and internet.

Possible Neighbor Discontent

People generally seek a peaceful and safe environment, especially families with children. Frequent turnover from short-term rentals can lead to neighbor frustration. Not all guests will be ideal; some may be noisy, host parties, or partake in activities that disturb the community.

Stringent Regulations

Your neighborhood could have a homeowners association (HOA) that imposes specific rules on short-term rentals or might ban them altogether. Before purchasing any property, thoroughly investigate the neighborhood and carefully review the HOA bylaws. Ignoring these rules could result in legal consequences. It’s crucial to be aware of local laws and regulatory hurdles related to short-term rentals.

Identifying the Ideal Property

Conducting thorough research is crucial before making any investment. When it comes to short-term rentals, it may be necessary to explore beyond your local market to find the best opportunities. Areas with strong tourism sectors usually offer the highest demand from vacationers.

Securing good deals can be challenging, but a strategic approach to research can improve your chances. Here are key steps to position yourself for success:

Assessing the Market

Before you start searching for specific properties, evaluate whether the market you’re considering is worth your investment. Popular tourist destinations like Austin, Texas; New York, New York; and Charleston, North Carolina have strong tourism industries but also come with intense competition and high prices. Finding a good deal in these areas can be challenging, and properties might need more improvements and repairs than expected.

Begin by assessing the number of visitors to the market over the past year. This information is often published online and can be easily found with a Google search, such as “Charleston tourism stats.” Cities frequently release tourism data to attract investors and tourists.

Once you have the visitor numbers, examine year-over-year growth. An increasing number of visitors each year suggests that the real estate market will continue to appreciate, boosting your equity margins. This information can also help you anticipate and mitigate potential vacancy issues.

Next, investigate the local economy. Look for news articles or announcements from local government websites about new developments, such as hotels, clubs, restaurants, sports venues, and concerts. These developments indicate a strong investment in tourism infrastructure, making the area more attractive for short-term rentals.

In summary, seek out markets with strong economic and tourism growth. The more robust the growth, the more likely your investment will be successful.

Assessing Seasonality

Seasonality is a vital consideration in short-term rental investing. Tourism levels can fluctuate dramatically throughout the year in various regions. For instance, beach destinations may see fewer visitors during the winter months, while mountain cabin retreats often enjoy a consistent tourist presence year-round.

In some areas, harsh winters with heavy snowfall can deter tourists. However, the same locations might experience a tourism boost in the autumn due to vibrant fall foliage. To identify markets with strong year-round potential, it’s essential to analyze monthly tourism data, weather patterns, and geographical characteristics.

Consider Asheville, North Carolina, as an example. Located in the Blue Ridge Mountains, Asheville draws tourists in both summer and fall. Although winter tourism slows somewhat, the area’s unique mountainous terrain supports steady cabin and chalet rentals, and ski resorts help sustain winter tourism. This makes Asheville a strong year-round tourist destination.

Conversely, cities with flat landscapes may lack winter attractions like skiing, leading to a significant drop in tourism during colder months. Thus, tourism patterns in these locations differ significantly from those in areas like Asheville.

The ideal investment is in a market with consistent year-round tourism. Nevertheless, even markets with strong seasonal demand can be lucrative with an effective investment strategy.

Assessing Demand

Demand for short-term rentals is strongly influenced by the local economy and tourism levels. To evaluate demand in your desired market, investigate occupancy rates.

Establish a practical occupancy rate target. While 100% occupancy is the dream, it’s not realistic. Markets with occupancy rates over 65% are generally seen as robust, while around 50% is average. Occupancy rates below 50% can be problematic. Strive for a minimum occupancy rate that ensures your investment will be profitable.

Recession Resilience

In real estate, no investment is entirely immune to economic downturns. However, some properties are better equipped to withstand recessions than others. The resilience of a property during a recession depends heavily on the local economy, the strength of the tourism industry, and regional demand.

Tourism is particularly vulnerable during economic downturns, as recent years have demonstrated. Therefore, it’s vital to assess the risks when choosing a market and property type.

For example, established tourism destinations with year-round attractions, like Walt Disney World and other major theme parks, typically show greater resilience during recessions compared to smaller markets centered around art, history, or culture. While the latter may thrive under normal circumstances, they often experience a drop in visitor numbers during economic slumps. On the other hand, places like Disney World continue to attract tourists due to their strong and consistent appeal.

Local Regulations

Short-term rental regulations can vary significantly from one market to another. Some areas have completely banned short-term rentals, while others require extensive licensing and permits, which can be both time-consuming and costly.

Before beginning your property search, it’s crucial to thoroughly research the local laws governing short-term rentals in your target area. Start by searching for terms like “short-term rental regulations in [market]” to find relevant information. Whenever possible, prioritize information from government websites to ensure you receive the most accurate and up-to-date details. This due diligence will help you avoid legal issues and ensure your investment is compliant with local regulations.

Evaluating a Short-Term Rental Property

After thoroughly researching and identifying a promising market, and potentially finding a suitable property, the next step is to evaluate the property’s quality and revenue potential.

Calculating revenue

Determining revenue for a short-term rental (STR) is more complex than for traditional rentals. Unlike long-term rentals, where you receive a steady monthly income, STRs require continuous efforts to attract new guests. This challenge is offset by the potential for higher earnings.

To estimate potential revenue for an STR, you need two key pieces of information: the occupancy rate and the average nightly rate. Websites like AirDNA offer valuable data on these metrics, allowing you to analyze both market-wide and specific location statistics.

Determine Occupancy Rate and Nightly Rate:
- Research the occupancy rate for your market or specific location.
- Set a competitive nightly rate based on your property’s features, amenities, and comparable listings.
Calculate Monthly Revenue: Use the formula:Occupancy Rate×Nightly Rate×30 days=Monthly Revenue\text{Occupancy Rate} \times \text{Nightly Rate} \times 30 \text{ days} = \text{Monthly Revenue}Occupancy Rate×Nightly Rate×30 days=Monthly RevenueFor example, with a 75% occupancy rate and a $300 nightly rate:0.75×300×30=$6,750 per month0.75 \times 300 \times 30 = \$6,750 \text{ per month}0.75×300×30=$6,750 per month
Adjust for Seasonal Variations:
- Modify the occupancy rate or nightly rate based on seasonal demand to get a more accurate projection.
Consider Additional Fees:
- Decide if you will charge a cleaning fee. This fee can be added to cover the expense of cleaning between guests.
- If you opt to charge a cleaning fee, decide whether you will clean the property yourself or hire a cleaning service.
Incorporate Cleaning Fees into Revenue:
- Calculate the number of guests based on your minimum stay requirement and add the cleaning fee revenue.
- Example: If the minimum stay is 2 nights, and you have 30 days in a month: 30 days/2 night minimum=15 guests30 \text{ days} / 2 \text{ night minimum} = 15 \text{ guests}30 days/2 night minimum=15 guests 15 guests×$75=$1,125 per month15 \text{ guests} \times \$75 = \$1,125 \text{ per month}15 guests×$75=$1,125 per month

Your actual monthly revenue will fluctuate based on guest turnover and seasonal demand, but this approach provides a solid estimate. Adjust these figures conservatively to ensure a realistic projection.

Estimating Expenses for Short-Term Rental Properties

Calculating expenses for short-term rental properties is similar to traditional real estate investments, with a few additional considerations. Key expenses still include PITI (principal, interest, taxes, and insurance), but there are other costs to account for as well. These include:

Monthly Mortgage Payment

To begin, consider the monthly mortgage payment if you’re financing the property. For example, if you purchase a $350,000 property with a 20% down payment and secure a 30-year fixed-rate loan at 3% interest, your base monthly payment (excluding taxes and insurance) would be approximately $1,200.

When you factor in private mortgage insurance (PMI) — usually required if you have less than 20% equity — along with property taxes, the monthly payment could increase to around $1,500 or more. This comprehensive calculation is crucial for accurately estimating your total monthly expenses.

Insurance

Insurance expenses for your short-term rental also need to be factored in. To get a precise estimate, reach out to multiple insurance brokers and compare quotes online.

Keep in mind that insurance rates for short-term rentals can be higher than those for traditional properties. Some insurers offer policies that cover damage to furniture and other household items, which can be particularly beneficial if a guest causes significant damage to your property.

Property Management

Most short-term rental owners choose to manage their properties themselves due to the high costs associated with property management services. While hiring a property management (PM) company can be appealing, it can be quite expensive for short-term rentals, often taking up to 35% of the gross revenue. This significant expense can drastically reduce your positive cash flow.

Self-managing your short-term rental is generally more profitable. Modern technology makes this easier, as various short-term rental management tools can help you handle everything from bookings to guest communication right from your smartphone.

However, if you decide to hire a property management company, make sure to factor in these costs and understand how they will impact your overall profitability.

Tax and Permit Considerations

It’s important to investigate if local governments impose tax levies on short-term rentals. In some regions, STR owners are obligated to pay occupancy taxes or obtain necessary permits and licenses. These potential costs should be factored into your overall expense calculations.

Maintenance and Repairs

Allocate a portion of your revenue, typically 5-10%, for these expenses. Remember, guests on vacation are likely to use amenities extensively, leading to quicker wear and tear. Regular maintenance can help prevent small issues from becoming major problems, ensuring your property remains attractive and functional for guests.

Utilities

Unlike traditional rentals where tenants typically cover utility expenses, short-term rental (STR) owners are responsible for these costs. Research the average utility costs in your market and budget for higher expenses.

Vacationers often use utilities more liberally, leaving TVs on, running hot tubs, blasting speakers, using multiple appliances simultaneously, and neglecting to turn off lights. This increased usage can significantly drive up your utility bills.

Listing fees

When listing your short-term rental on platforms like Airbnb or VRBO, it’s important to account for the commission fees associated with each booking. These fees, which vary by platform and location, are generally a small percentage of the total booking price. Be sure to include these costs in your financial planning to ensure a clear understanding of your net revenue from each booking.

Calculating Your Return

To determine your net income, factor in all variable expenses along with the fixed costs we’ve already covered. Subtract these expenses from your projected revenue to get a clear picture of your net income.

For example, if your monthly expenses total $4,300 and your projected revenue is $6,750 (excluding any cleaning fees), the calculation would be:$6,750−$4,300=$2,450 per month\$6,750 – \$4,300 = \$2,450 \text{ per month}$6,750−$4,300=$2,450 per month

With this information, you can evaluate the viability of the investment. A net income of $2,450 per month indicates a strong return, making the investment potentially worthwhile.

Buying a Short-Term Rental

So, you’ve completed your research and are ready to invest in a property. Where do you start? The process is similar to any other real estate transaction:

Finding an Agent

Connecting with a reputable real estate agent who specializes in short-term rental transactions is often the most effective approach. If you’re looking to buy in a market outside your local area, conducting online research to identify brokers with expertise in STRs is essential.

Here are some steps to find the right agent:

Research Online: Look for agents who are prominent in the area for short-term rentals. Check their reviews and track records.
Seek Referrals: If you have a real estate agent you trust for other transactions, ask them for referrals to agents who specialize in STRs.
Network: Reach out to real estate forums or local real estate groups to gather recommendations for experienced STR agents.

Touring the property

Touring a potential short-term rental property can be challenging, particularly if the property is located outside your local area. Nevertheless, it is crucial to visit the property in person before making an offer, as pictures and descriptions often do not capture the full essence of a home. An in-person visit allows you to assess the property’s condition, identify any issues, and evaluate its suitability as a vacation spot. If visiting the property yourself is not feasible, ask your real estate agent to tour it on your behalf and provide detailed feedback. You can also request a video call during their visit or explore the possibility of a 3D virtual tour if available. Regardless of the method, ensure you closely examine the property to uncover any potential problems and assess the overall space. This thorough evaluation will help you make an informed decision about the property’s viability as a short-term rental investment.

Making an offer

In a hot market, there is often less flexibility when making offers, as sellers frequently receive multiple bids, many of which are above the asking price. To gauge your leverage, check how long the property has been listed. If it has been on the market for a month or more, you might have a better chance of negotiating a lower price, even in a competitive market. Additionally, observe the property’s price history. If the seller has lowered the price multiple times or made significant reductions, it usually indicates a desire to sell quickly, suggesting they may be open to reasonable offers. Conversely, minimal price changes and extended time on the market often suggest a seller who is either unmotivated or inflexible. Understanding these dynamics can help you craft a more strategic offer.

Lining up financing

Sellers appreciate knowing that you are a serious and capable buyer, so including a pre-qualification letter with your offer is a good initial step. If your offer is accepted and you plan to use a mortgage loan for the purchase, you will then need to initiate the full approval process. Collaborate closely with your lender to submit all necessary documentation, ensuring that the underwriting process is smooth and efficient. While the mortgage process for buying a short-term rental doesn’t differ significantly from other real estate purchases, it’s important to note that you won’t qualify for an FHA loan or other government-backed loans, as this type of purchase is considered an investment property or a secondary home. You could utilize the Live-In-Then-Rent strategy to get access to owner-occupied financing options.

Due diligence and the road to closing

Once your offer is accepted, you’ll enter a brief period known as the due diligence period. During this time, you have the opportunity to back out of the deal without losing your earnest money deposit. This is the ideal time to initiate property inspections. A general home inspection is usually sufficient for purchasing a short-term rental, but if specific concerns arise, consider arranging additional inspections to address those issues. This thorough evaluation ensures you are fully aware of the property’s condition before finalizing the purchase.

Closing

Closing is the final step in the real estate transaction where you sign the necessary paperwork, complete the purchase, transfer titles, and receive the house keys. The specifics of the closing process can vary significantly depending on the state. In many states, the buyer is required to bring an attorney, while in others, the process may differ. Understanding the local requirements is critical for a smooth closing. Once this process is complete, you can begin generating income from your new short-term rental property.

Promoting and Overseeing Your Short-Term Rental

By now, you should have decided whether you will manage the property yourself or hire a property management company. If you choose to use a property management company, now is the time to engage their services and begin setting up operations.

However, simply having your property available for booking is not enough to ensure it will be occupied. Effective marketing is necessary. Fortunately, platforms like Airbnb and VRBO simplify this process. Here’s a general outline of what listing, marketing, and managing your short-term rental entails:

Preparing and Furnishing the Property

Before creating your listing, it’s essential to furnish the space and make it more than just livable—aim to make it a destination. Ensure you have enough beds, a comfortable living room area, and tasteful decorations. While you can choose any design direction, clean and fresh is the safest bet. Tailor the interior design to attract your target guests. For instance, if you have a cabin rental in the mountains, a rustic, outdoor feel is ideal. Conversely, if the property is in the Hamptons, a more elegant and coastal style would be appropriate.

Crafting your listing

Your listing should include detailed descriptions, professional photos, and all essential information, similar to what you would provide when selling a home. This includes details such as maximum occupancy, minimum stay requirements, and any other pertinent information guests need to know. Additionally, be sure to highlight your amenities, as they can significantly influence booking decisions. Most guests expect conveniences like free Wi-Fi, clean laundry facilities, kitchen utensils, TV access, and other comforts.

Boosting Your Listing’s Visibility

Listing your property on Airbnb with professional photos, a detailed description, and a comprehensive list of amenities will attract some bookings. However, to significantly boost your marketing efforts, consider running online ads on platforms like Facebook, Instagram, or Google that link directly to your listing. Creating dedicated landing pages and websites with a sales funnel can also enhance visibility.

One of the most effective ways to ensure a steady stream of guests is by earning 5-star reviews from former visitors. These reviews provide social proof, enhance your profile, and increase your chances of securing more bookings. Regardless of your marketing strategy, make sure to budget for advertising costs and always encourage guests to leave reviews.

Buying a Short-Term Rental

So, you’ve completed your research and are ready to invest in a property. Where do you start? The process is similar to any other real estate transaction:

Finding an Agent

Here are some steps to find the right agent:

Research Online: Look for agents who are prominent in the area for short-term rentals. Check their reviews and track records.
Seek Referrals: If you have a real estate agent you trust for other transactions, ask them for referrals to agents who specialize in STRs.
Network: Reach out to real estate forums or local real estate groups to gather recommendations for experienced STR agents.

Touring the property

Making an offer

Lining up financing

Due diligence and the road to closing

Closing

Promoting and Overseeing Your Short-Term Rental

Preparing and Furnishing the Property

Crafting your listing

Boosting Your Listing’s Visibility

Starting a Short-Term Rental Business

Purchasing a vacation property is a significant investment, so do adequate research and preparation before making a purchase.

Understand Daily Rates and Charges

While you can’t predict the future, analyzing average daily rates (ADR) and occupancy rates can provide a reasonable estimate of your potential gross monthly income. ADRs can fluctuate significantly from one rental to another, even within the same neighborhood. For instance, a property listed on Airbnb might charge $300 for one night and $400 the next. Fortunately, several data platforms can help you estimate ADR more accurately. These platforms include:

These sites also offer valuable insights into occupancy rates, such as the average occupancy rate for a particular area and even specific properties (usually for a fee). However, calculating accurate occupancy rates can be challenging due to various factors:

Blackout dates
Property listings on multiple platforms
How far in advance bookings are available
The length of time the property has been listed

To ensure reliability, compare the property’s booking schedule with the occupancy rates provided by these data platforms. If they align consistently, the source is likely trustworthy.

One-Time Fees: Furnishing and Rehab Costs

It is important to estimate the costs involved with furnishing your Short-Term rental. Furnishing expenses can vary widely based on the size of your home and the items you choose to include. Generally, for mid-grade, budget-friendly furnishings, you can expect to spend:

$5,000 – $10,000 for 1-2 bedrooms
$12,000 – $20,000 for 3-4 bedrooms

Rehabilitation costs also fluctuate, depending on the property’s condition and the extent of renovations and repairs you plan to undertake.

Your Ongoing Operating Expenses

Operating expenses for a long-term rental are similar to those of a primary residence. However, short-term rentals come with additional costs. To manage these effectively, update your operating expenses spreadsheet regularly. Your estimates will become more accurate over time. Create a spreadsheet with the following items, and estimate the costs based on the size and location of your vacation property:

Booking fees
Cleaning fees
Occupancy tax
Property taxes
Insurance
Management fees
Maintenance fees
Cable and internet
Electricity/gas
Water/sewer/garbage
Supplies/inventory
Unique features (e.g., security systems, pools, hot tubs)

Research Common Laws and Regulations

Before purchasing a short-term rental, it’s crucial to understand the laws and regulations specific to your city and neighborhood. Most cities with licensing requirements will have this information available on their planning and zoning website, typically in a section dedicated to ordinances and regulations for short-term rentals.

Commonly, cities with regulations will require you or your property manager to obtain a license to operate a vacation rental, and you may also need a tax or business ID. While regulations vary, here are some of the most common requirements you might encounter:

Primary Residence Requirements: Many cities now mandate that your short-term rental must also be your primary residence. This can mean you can rent out the property while you are away, or you may be limited to renting portions of your home, such as an accessory dwelling unit (ADU), basement, or individual bedrooms.
Property Requirements: Some cities have specific criteria for the property, such as requiring a certain lot size or a number of off-street parking spots.
Operation Limits: There may be restrictions on the number of days you can rent out your property. For instance, a 240-day maximum (approximately 20 days per month) is common, though some cities may impose stricter limits.
License Fees: These fees can vary significantly. For example, Seattle charges a $75 fee for a one-year license, whereas other locations may charge several hundred dollars or more.
Lodgers Tax: Some cities and states impose a lodgers tax on short-term rentals. The tax rate varies by location and is typically paid by the property owner or manager.
Zoning Laws: You must comply with your city’s zoning requirements to legally operate a short-term rental.

Make sure to regularly check and update your knowledge of local laws and regulations, as they can change over time.

Build Your Power Team

Running a short-term rental is a collaborative effort. Even if you plan to handle most tasks yourself, you’ll still need to outsource some work. Here are a few key players in your power team:

Investor-friendly Real Estate Agent

Find an agent who specializes in short-term rental properties. A knowledgeable agent can save you significant effort and is well worth their commission. Your agent should:

Be well-versed in short-term rental laws and regulations in your city and state.
Have in-depth knowledge of the local market.
Possess connections with property management companies.
Understand the entire process from start to finish.

Having the right agent on your team ensures a smoother experience and better investment decisions.

Property Manager or Managerment Team

The right property manager can transform your high-stress rental into a low-maintenance operation. Depending on your arrangement, your property manager may handle some or all of the following tasks:

Furnishing your property or providing an itemized checklist
Marketing your property on platforms like Airbnb and VRBO
Managing scheduling and customer service relations
Handling invoicing and payment processing
Scheduling cleaners, landscapers, and other maintenance professionals
Setting up licensing and tax IDs for your rental

In some cases, your involvement may be as minimal as purchasing and preparing the property, with the property manager taking care of the rest.

Typically, property managers for STRs charge 25% – 30% of your gross rental income, depending on their fee structure. Airbnb property managers might charge between 25% – 50%, influenced by the location of the rental and the services provided.

Maintenance Crew

Having a reliable maintenance crew, including handymen/handywomen and other vendors, is essential for addressing any functional issues with your property promptly. Whether it’s a malfunctioning hot tub or a broken heater, quick repairs are crucial to maintaining high property standards and ensuring a positive guest experience.

Cleaning Crew

Reliable cleaners are in high demand and worth every penny. Platforms like TurnoverBNB can connect you with dependable short-term rental cleaners who gain immediate access to your booking calendar, ensuring they know precisely when to prepare your rental for the next guest. High-quality cleaners may also:

Restock supplies
Order and replace items, invoicing you for the cost
Wash and change linens
Inform you of any missing or broken items

Types of Short-Term Rental Markets

Short-term rental markets can be categorized into three main types:

Metro Markets: These areas offer the potential for the highest returns but come with high risks.
National Vacation Markets: These markets can provide high returns with medium risk levels.
Regional Vacation Markets: These areas typically yield modest returns with lower risks.

Each market type differs in terms of stability, volatility, renter demographics, and specific rules and regulations.

Metro Markets

Metro markets attract a diverse range of visitors and are not solely dependent on tourism. These areas experience varying levels of activity but generally maintain year-round demand, unlike seasonal destinations such as beach houses or ski resorts. Short-term rentals in metro markets offer a great alternative to hotels, particularly for extended stays. They often attract professionals on business trips, traveling medical workers, and locals seeking a “staycation.”

Investing in metro markets comes with high risk but also high reward. While these markets can provide significant cash flow, they are also subject to stricter regulations. Challenges include dealing with unhappy neighbors, building or HOA rules, hotel industry lobbyists aiming to restrict short-term rental zones, and a shortage of affordable housing driven by Airbnb investors.

In summary:

Metro markets: Potentially highest return, high risk
National vacation markets: Potentially high return, medium risk
Regional vacation markets: Modest return, low risk

National Vacation Markets

National vacation markets, such as Aspen or Hawaii, rely heavily on tourism. Short-term rentals are integral to these areas, though they can face resistance from permanent residents. These markets can be highly profitable, but their success is often closely linked to the broader economy. During a recession, securing renters may become more challenging, while during economic booms, bookings can soar for months on end.

In summary:

Metro markets: Potentially highest return, high risk
National vacation markets: Potentially high return, medium risk
Regional vacation markets: Modest return, low risk

Regional Vacation Markets

Regional vacation markets rely on tourism and are often accessible by car, such as Big Bear Lake, California, or Branson, Missouri. These markets typically feature smaller towns and are more affordable than national vacation markets, making them less susceptible to economic fluctuations. Additionally, they usually have fewer permanent residents, reducing potential conflicts for short-term rental operators.

In summary:

Metro markets: Potentially highest return, high risk
National vacation markets: Potentially high return, medium risk
Regional vacation markets: Modest return, low risk

Final Thoughts on Short-Term Rental Investment Properties

Congratulations! You now have the knowledge to identify, purchase, and manage a short-term rental property. Your next step is to start with your first property and gain hands-on experience.

This is an ideal time to enter the market, as short-term rentals are increasingly popular and demand is soaring. By finding a well-located property now, you are likely to see significant benefits and growth in the coming years.

Frequently Asked Questions (FAQ)

What is a short-term rental (STR)?

A short-term rental (STR) is a property rented out to guests on a nightly basis, similar to a hotel. These properties are fully furnished and typically rented for periods of 30 days or fewer.

Why should I invest in short-term rentals?

Short-term rentals can be highly profitable, often generating higher monthly income compared to traditional long-term rentals. They also offer flexibility in pricing and scheduling, making them attractive investments in popular tourist destinations.

What are the advantages of short-term rentals?

Higher Income Potential: STRs can generate significantly higher monthly income.

Flexibility: You control your rental’s calendar and pricing.

Tax Benefits: Numerous deductions and depreciation advantages.

Lower Maintenance: Frequent cleanings can help identify issues early.

What are the potential drawbacks of short-term rentals?

High Maintenance: Managing bookings, cleaning, and guest communication can be time-consuming.

Inconsistent Cash Flow: Demand can vary, leading to unpredictable income.

Screening Challenges: Less thorough screening processes compared to long-term rentals.

Utility Costs: Owners are typically responsible for utility bills.

Potential Neighbor Issues: Frequent guest turnover can disturb neighbors.

Regulations: Some areas have strict rules or bans on STRs.

How do I find a good property for a short-term rental?

Thorough research is essential. Evaluate markets beyond your local area, focusing on those with strong tourism sectors. Assess visitor numbers, year-over-year growth, and local economic developments to identify promising locations.

What should I consider when evaluating a market?

Tourism Statistics: Look for published data on visitor numbers.

Year-over-Year Growth: An increasing number of visitors indicates market appreciation.

Local Economy: Investigate new developments like hotels, restaurants, and venues.

Competition: High competition can make finding a good deal challenging.

How do I assess the seasonality of a market?

Analyze monthly tourism data, weather patterns, and geographical features. Look for markets with year-round demand or strong seasonal peaks that align with your investment goals.

What is the importance of understanding local regulations?

Local regulations can significantly impact the viability of your STR. Some areas require licenses, impose occupancy taxes, or even ban STRs altogether. Researching and understanding these rules before investing is crucial to avoid legal issues.

How do I calculate potential revenue for a short-term rental?

Calculate potential revenue by multiplying the occupancy rate by the nightly rate and the number of days in a month. Adjust for cleaning fees and other additional charges to get a more accurate estimate.

What are the tax benefits of owning a short-term rental?

You can deduct expenses related to marketing, management, upkeep, insurance, travel for property management, and depreciation of furnishings and appliances.

Learn about more real estate financing topics here.