Build long-term wealth with short-term rentals<\/p>\n\n\n\n
Vacation rentals can be an extremely lucrative way to boost your monthly income\u2014but only if you acquire and manage your properties correctly. This ultimate guide to analyzing, buying, and managing vacation rental properties will set you up for immediate success and long-term wealth.<\/p>\n\n\n\n
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\n <\/div>\n <\/div>\n<\/div>\n\n\n3. Evaluating demand<\/h3>\n\n\n\n
Demand ties into the local economy and tourism. You\u2019ll want to find data on the occupancy rates of the area you\u2019re looking to buy in. You can find this information on websites like AirDNA, which provides information on lots of useful metrics.<\/p>\n\n\n\n
Your target occupancy rate is completely up to you. While you may like to see 100% occupancy, that’s not a realistic goal. Markets with occupancy rates higher than 65% are generally seen as strong markets. An occupancy rate of 50% is about average, and anything below that becomes undesirable. Aim for a minimum to ensure your numbers work.<\/p>\n\n\n\n
4. Recession resistance<\/h3>\n\n\n\n
In real estate, nothing is \u201crecession-proof\u201d – no matter what you do. However, some properties are better at resisting economic pressures than others. Once again, whether or not a property is more recession-proof than normal will depend on the local economy, the strength and makeup of the tourism industry, and the demand in that region.<\/p>\n\n\n\n
As we\u2019ve seen in recent years, tourism can get bludgeoned badly when there\u2019s a downturn. Because of this, it’s extremely important to realize the risks when picking a certain market and property type.<\/p>\n\n\n\n
For example, established tourism markets with strong year-round attractions, like Walt Disney World or other theme parks, might be more resistant to recessions when compared to small markets with tourist draws related to art, history, and culture. <\/p>\n\n\n\n
While the latter has a solid pull in normal conditions, traveling to these types of destinations might get put on the back burner when a recession occurs. On the other hand, many tourists will still go to Disney World because of how strong the pull is.<\/p>\n\n\n\n
5. Local regulations<\/h3>\n\n\n\n
Some markets will have tighter short-term rental regulations than others. For example, some counties have outright banned short-term rentals, while others have imposed licensing and permit processes that cost both time and money.<\/p>\n\n\n\n
Before you start your search for properties, make sure you read up on the local laws affecting short-term rentals in your target market. The best way to do this is to simply search for a term like \u201cshort-term rental laws in [market].\u201d When possible, always prioritize the search results for government websites to make sure you get accurate, updated information.<\/p>\n\n\n\n
Analyzing a Short-Term Rental Property<\/h2>\n\n\n\n
Once you\u2019ve zeroed in on a market – all the research has been conducted and you may have found a property that could bode well for you – you need to make an analysis of the quality of the property and how much revenue it can generate.<\/p>\n\n\n\n
Calculating revenue<\/h3>\n\n\n\n
Calculating revenue for an STR isn\u2019t as straightforward as it is with traditional real estate investing. When it comes to traditional rentals, you make the same amount of money each month, as long as you have an occupant. With STRs, you\u2019re constantly fighting for new guests. That\u2019s one of the biggest tradeoffs of going the STR route. But that\u2019s also why it\u2019s so lucrative.<\/p>\n\n\n\n
To calculate your potential revenue with an STR, you need two things: the occupancy rate and the average price. This type of data can be found on STR statistic websites like AirDNA. You can pull either the occupancy rate of the entire market or close in on the exact location in which you’re trying to buy.<\/p>\n\n\n\n
Once you have that information, you need to determine what you\u2019ll charge each guest per night. This number should be based on the property itself, your competitors, and any added value, such as amenities. Just be careful to not overprice, and try to stay within the realm of your competitors.<\/p>\n\n\n\n
When you have those numbers, input them into this equation:<\/p>\n\n\n\n
Occupancy Rate * Nightly Rate * 30 days = Monthly Revenue<\/i><\/b><\/p>\n\n\n\n
Here\u2019s an example: 75% occupancy * $300 per night * 30 days = $6,750\/month<\/p>\n\n\n\n
Isn\u2019t that attractive?<\/p>\n\n\n\n
But this is just revenue, of course – not profit. There are fees, maintenance, taxes, and other costs associated with managing an STR, but that number is a great start!<\/p>\n\n\n\n
You can also adjust this equation as needed. For instance, if I were trying to compare two months in two separate seasons, I might reduce the occupancy rate or the price to better reflect the conditions.<\/p>\n\n\n\n
The other half of estimating revenue is determining whether or not you\u2019ll charge cleaning fees. These are separate charges that you tack onto the night\u2019s stay to cover the expense of cleaning.<\/p>\n\n\n\n
Some hosts charge cleaning fees and some don\u2019t. Whether you choose to or not is entirely at your discretion. Just make sure to support your decision with data from the market. If your competitors don\u2019t charge cleaning fees but you do, you might lose out on some guests.<\/p>\n\n\n\n
If you do decide to charge cleaning fees, you need to figure out whether you\u2019ll clean the property yourself or have a cleaning company handle it for you. Finding their rates is as easy as looking it up online or calling around.<\/p>\n\n\n\n
Once you have a rate, add it to your revenue by taking the total number of days in the month and dividing it by your minimum length of stay requirement. Multiply the result by the dollar amount of the fee you charge and add it to your revenue.<\/p>\n\n\n\n
Here\u2019s an example: <\/p>\n\n\n\n
30 days \/ 2 night minimum = 15 total guests<\/p>\n\n\n\n
15 guests * $75 = $1,125\/month<\/p>\n\n\n\n
You will almost certainly have a different number of guests from month to month, so these numbers are far from concrete. Still, it\u2019s a good estimate of what you could earn in a month, and you can always adjust the numbers if you want a more conservative estimate.<\/p>\n\n\n\n
Estimating Expenses<\/h2>\n\n\n\n
When it comes to estimating expenses for short-term rental properties, there is not too much deviation from traditional investing. In other words, PITI (principle, interest, taxes, and insurance) still dominates the expense category, but we\u2019ll talk about a few other expenses as well. These include:<\/p>\n\n\n\n
Mortgage<\/h3>\n\n\n\n
First and foremost, we need to account for the monthly mortgage payment if you\u2019re leveraging the property. Let\u2019s say you bought a $350,000 property with 20% down. Your terms are 30 years at 3% interest with a fixed-rate loan.<\/p>\n\n\n\n
Your monthly payment, excluding taxes or insurance, would be about $1,200 per month. Once we start accounting for private mortgage insurance, which is typically required on homes with less than 20% equity, and property taxes, this number could climb up to $1,500 per month or more.<\/p>\n\n\n\n
Insurance<\/h3>\n\n\n\n
You will also need to calculate in the costs of insurance for your short-term rental. To get an accurate estimate for your insurance costs, you should call different brokers and browse different websites to get quotes. <\/p>\n\n\n\n
Be aware, though, that STRs might have varying rates that are more expensive than traditional insurance. For example, some insurance companies offer coverage for damage to furniture and other items in the home. This type of policy can be useful when a rowdy tenant leaves your property in shambles.<\/p>\n\n\n\n
Property management<\/h3>\n\n\n\n
The vast majority of short-term rental properties are self-managed you can manage the rental yourself, and for good reason: the high cost of property management. <\/p>\n\n\n\n
While the services of a property management (PM) company can be enticing, STR property managers can be very pricey and STR rates are higher than normal rental pricing. Expect to pay upward of 35% of the gross revenue, which will eat into most of the positive cash flow the property generates.<\/p>\n\n\n\n
It is typically not worth the money to hire a property manager, as the real money in STR is remote self-managing. Everything can be done from a smartphone with a few short-term rental management tools to streamline it. That said, if you’re going to use a property management company for your short-term rental, you should calculate in the costs.<\/p>\n\n\n\n
Taxes, permits, and licensing<\/h3>\n\n\n\n
It\u2019s also important to take a close look at whether the local government charges tax levies on STRs. In some cases, STR owners must pay occupancy taxes or be required to get permits and licensing, which should be accounted for in your expense category.<\/p>\n\n\n\n
Repairs and maintenance<\/h3>\n\n\n\n
Expect to appropriate 5-10% of revenue toward repairs and maintenance. Keep in mind that your guests are most likely on vacation and are staying at your place to have a good time. Because of that, it\u2019s more likely that things will break, wear and tear will accelerate faster than normal, and costs will mount up.<\/p>\n\n\n\n
Utilities<\/h3>\n\n\n\n
Unlike traditional rentals in which the tenant typically takes care of utilities, the costs for utilities are your responsibility with an STR. You\u2019ll have to dig up some research on your market\u2019s average utility cost, but assume that your costs will be on the higher end of the spectrum. <\/p>\n\n\n\n
That’s because guests on vacation tend to throw environmental sustainability out the window. They leave TVs on, run the hot tub, blast the speakers, run every appliance at the same time, and forget to turn off the lights.<\/p>\n\n\n\n
Listing fees<\/h3>\n\n\n\n
If you decide to list your STR on a platform like Airbnb or VRBO, then you should account for the commission fee you pay when a guest books a room. These prices vary across platforms and destinations, but they\u2019re typically a small percentage of the total booking price.<\/p>\n\n\n\n
Figuring out your return<\/h3>\n\n\n\n
Add in other variable expenses as they come, but you shouldn\u2019t have much more than what we already covered. With that in mind, you simply subtract your expenses from your revenue to get your net income.<\/p>\n\n\n\n
Let\u2019s say we calculate expenses and they add up to $4,300 per month and we’re doing the math based on our projected revenue of $6,750 per month. Note that we\u2019re not charging a cleaning fee in this equation.<\/p>\n\n\n\n
The equation would be: $6,750 – $4,300 = $2,450\/month<\/p>\n\n\n\n
With that information, you can determine whether the investment is worth your time or not. Based on those numbers, however, that\u2019s a pretty solid return.<\/p>\n\n\n\n
Buying a Short-Term Rental<\/h2>\n\n\n\n
So, you\u2019ve done all the research and now you\u2019re ready to pull the trigger on a property. Where do you start?<\/p>\n\n\n\n
Well, it\u2019s the same as any other real estate transaction. You find an agent, tour the property, make an offer, line up financing, run through any inspections, and close.<\/p>\n\n\n\n
Finding an agent<\/h3>\n\n\n\n
Getting in touch with a quality real estate agent who specializes in or has experience with short-term rental transactions is often the best route to take. If you\u2019re purchasing a property in an outside market, you\u2019ll need to do some online research to see if there are any brokers who are prominent in the area for STRs if you don\u2019t know anyone already. If you have an agent that you work closely with on other transactions, ask if there are referrals that they can point you toward.<\/p>\n\n\n\n
Touring the property<\/h3>\n\n\n\n
Touring the home can be a logistical challenge if the property is outside of your local market. However, it\u2019s always recommended that you tour the property in person before ever signing an offer. Pictures don\u2019t always do a home justice and descriptions can’t give you a clear enough idea of the property either. Getting a hands-on look at a home will reveal all of its pros and cons.<\/p>\n\n\n\n
If you can\u2019t get to the property, however, ask your agent to tour the home for you and give you their own feedback. You can also ask them to video call you during their visit. Or, ask about a virtual tour instead. Many properties have 3D tours set up so that any buyer can complete a virtual visit from their computer screen.<\/p>\n\n\n\n
Do what you have to do, but make sure you examine the home closely. You want to take the time to discover any problems, get a feel for the space, imagine it as a vacation spot, and make a decision.<\/p>\n\n\n\n
Making an offer<\/h3>\n\n\n\n
When the market is hot, there is less flexibility on offers. Sellers are getting bombarded by offers, many of which are above the asking price.<\/p>\n\n\n\n
An easy way to know how much leverage you have on an offer is to see how many days the property has been listed on the market. If it\u2019s been listed for a month or more, you\u2019ll likely be able to talk the seller down – even if it\u2019s a hot market.<\/p>\n\n\n\n
You can also figure out how flexible or motivated a seller is by looking at the number of times they\u2019ve lowered the price – and by how much they’ve dropped it. Less price fluctuation and higher days on market will often mean the seller is either unmotivated or inflexible.<\/p>\n\n\n\n
If the seller has been dropping the price significantly, it typically means the opposite. They want to sell and may be willing to take any realistic offer at this point.<\/p>\n\n\n\n
Lining up financing<\/h3>\n\n\n\n
Sellers like to know that you\u2019ll be able to buy the house, so sending a pre-qualification letter with your offer is a good start. If the seller decides to accept your offer and you\u2019re using a mortgage loan to purchase the home, it\u2019s time to start the full approval process.<\/p>\n\n\n\n
Work with your lender to submit the proper documentation and make the underwriting process clean and easy. The mortgage loan process doesn’t typically deviate significantly when purchasing an STR, but keep in mind that you won\u2019t be able to get an FHA loan or other government-backed loans since this will be considered an investment property or your second home.<\/p>\n\n\n\n
Due diligence and the road to closing<\/h3>\n\n\n\n
After your offer is accepted, there is a short window of time, called the due diligence period, in which you can pull out of the deal without sacrificing your earnest money deposit. This is the best time to get the ball rolling on inspections. <\/p>\n\n\n\n
General home inspections should do the trick when buying an STR, but if you think you need further inspections, be sure to line those up as well<\/p>\n\n\n\n
Closing<\/h3>\n\n\n\n
Closing is the process in which you sign the paperwork, complete the purchase, transfer titles, and get the house keys. <\/p>\n\n\n\n
The closing process may vary significantly depending on the state you\u2019re purchasing in. In many states, the buyer brings the attorney. In others, it may be quite different. How this process looks really just depends on where you are.<\/p>\n\n\n\n
Once the closing process is complete, it\u2019s time to start making money.<\/p>\n\n\n\n
Listing, Marketing, and Managing Your Short-Term Rental<\/h2>\n\n\n\n
At this point, you should have figured out whether you\u2019ll be using a property management company. If you are, it’s a good time to engage with them and start setting up shop.<\/p>\n\n\n\n
Just because you have the property open for booking doesn\u2019t mean it will fill itself. You need to market it. Luckily, platforms like Airbnb and VRBO make this easy to do. The process of listing, marketing, and managing your STR includes:<\/p>\n\n\n\n
Preparing and furnishing the property<\/h3>\n\n\n\n
Before you create the listing, you need to furnish the space and make it livable. And, ideally, you will make it more than livable. Make it a destination.<\/p>\n\n\n\n
Remember to include enough beds, set up a living room space, and decorate. You can choose any direction with your design, but clean and fresh is the safest bet. You should also make sure to tailor the interior design to the types of guests you want to attract.<\/p>\n\n\n\n
For example, if you have a cabin rental in the mountains, a rustic, outdoor feel is an ideal theme. If the property is in the Hamptons, however, you likely wouldn\u2019t opt for the same style.<\/p>\n\n\n\n
Creating a listing<\/h3>\n\n\n\n
You need to fill your listing with descriptions, professional photos, and important information – which is quite similar to creating a listing for a home you are selling. This includes the maximum occupancy, minimum stays, and any other details the guest should know.<\/p>\n\n\n\n
Note that your list of amenities can also be the key determining factor for getting bookings. Most guests expect you to offer free Wi-Fi, clean laundry, kitchen cutlery, TV access, and other amenities.<\/p>\n\n\n\n
Marketing Your Listing<\/h2>\n\n\n\n
Having your listing up on Airbnb and supported by a range of accurate, professional pictures, a detailed description, and a long list of amenities is enough to get some bookings. However, if you really wanted to ramp up your marketing, you could run online ads on Facebook, Instagram, or Google with links to your listing. You could also make landing pages and websites with a sales funnel.<\/p>\n\n\n\n
Just note that one of the best ways to keep a constant stream of guests coming to your property is by receiving 5-star reviews from former guests. This provides social proof, enhances your profile, and gives you better odds of securing more bookings. Regardless of your marketing strategy, make sure advertising costs are accounted for and always ask for reviews from guests.<\/p>\n\n\n\n
How to Start a Short-Term Rental Business<\/h2>\n\n\n\n
Buying a vacation property is a huge investment, so do your research and be prepared before purchasing:<\/p>\n\n\n\n
Understand Daily Rates and Fees<\/h3>\n\n\n\n
You can\u2019t predict the future, but studying average daily rates (ADR) and occupancy rates can give you an estimated guess of what your gross monthly income may be. <\/p>\n\n\n\n
ADRs can vary greatly from rental to rental, even in the same neighborhood! Even the same property on Airbnb may be $300 one night, and $400 the next. Luckily, there are several data sites you can use to hone in on an estimated ADR. These include:<\/p>\n\n\n\n
- \n
- AirDNA<\/a><\/li>\n\n\n\n
- AllTheRooms<\/a><\/li>\n\n\n\n
- Mashvisor<\/a><\/li>\n\n\n\n
- data.rabbu.com<\/a><\/li>\n<\/ul>\n\n\n\n
These sites also provide valuable information on occupancy rates, such as the average occupancy rate for an area and even the occupancy rates for individual properties (usually you\u2019ll have to pay for this feature). <\/p>\n\n\n\n
Unfortunately, information on occupancy rates is harder to calculate, because their numbers may be skewed by a number of factors:<\/p>\n\n\n\n
- \n
- Blackout dates<\/li>\n\n\n\n
- Owners listing their properties on multiple sites<\/li>\n\n\n\n
- How far out in advance are bookings available?<\/li>\n\n\n\n
- How long has the property been available?<\/li>\n<\/ul>\n\n\n\n
Check the property\u2019s booking schedule and compare it to the occupancy rates listed on the above sites. If it\u2019s consistent, it\u2019s likely a reliable source.<\/p>\n\n\n\n
One-Time Fees: Furnishing and Rehab Costs<\/h3>\n\n\n\n
We\u2019ll dive deeper into furnishing your short-term rental or Airbnb later on<\/a>, but for now you need to estimate how much it will cost to furnish your rental. Pricing varies greatly depending on the size of your home and what items you\u2019re including as furnishings. <\/p>\n\n\n\n
In general, for mid-grade, budget-friendly items, you can expect to pay:<\/p>\n\n\n\n
- \n
- $5,000 \u2013 $10,000 for 1-2 bedrooms<\/li>\n\n\n\n
- $12,000 \u2013 $20,000 for 3-4 bedrooms<\/li>\n<\/ul>\n\n\n\n
Rehab fees also vary, depending on the condition of the property and what renovations and repairs you\u2019re looking to put into it. <\/p>\n\n\n\n
Your On-going Operating Expenses<\/h3>\n\n\n\n
A long-term rental\u2019s operating expenses are comparable to a primary residence. Short-term rentals have a few more expenses to consider. Update operating expenses spreadsheet regularly. Your estimates will become more accurate over time. Create a spreadsheet with this list, and based on the size and location of your vacation property, estimate what each item will cost:<\/p>\n\n\n\n
\n\n- \n
- Booking fees<\/li>\n\n\n\n
- Cleaning fees<\/li>\n\n\n\n
- Occupancy tax<\/li>\n\n\n\n
- Property taxes<\/li>\n\n\n\n
- Insurance<\/li>\n\n\n\n
- Management fees<\/li>\n<\/ul>\n<\/div>\n\n\n\n\n
- \n
- Maintenance fees<\/li>\n\n\n\n
- Cable and internet<\/li>\n\n\n\n
- Electric\/gas<\/li>\n\n\n\n
- Water\/sewer\/garbage<\/li>\n\n\n\n
- Supplies\/inventory<\/li>\n\n\n\n
- Unique features, such as security, pools, hot tubs, etc.<\/li>\n<\/ul>\n<\/div>\n<\/div>\n\n\n\n
Research Common Laws and Regulations<\/h3>\n\n\n\n
Never buy a short-term rental without first knowing the law and regulations of your city and neighborhood. If a city has licensing requirements, you can find them on the planning and zoning of your city\u2019s website. Since they\u2019re common, there\u2019s usually a link or section that outlines the ordinances and regulation requirements for short-term rentals.<\/p>\n\n\n\n
It\u2019s common for cities with regulations to require you or the property manager to obtain a license to run a vacation rental. You\u2019ll also likely need a tax\/business ID. <\/strong><\/p>\n\n\n\n
While laws and regulations vary from city to city, here are the most common requirements you\u2019ll encounter:<\/p>\n\n\n\n
- \n
- Primary residence requirements<\/strong> \u2013 Many cities are adopting policies that require your short-term rental to also be a primary residence. In some cases, a property can be used as a short-term rental while the homeowner is away. In others, you can only rent portions of your home, such as an accessory dwelling unit (ADU), basement, or bedroom. <\/li>\n\n\n\n
- Property requirements<\/strong> \u2013 Some cities require your lot to be a specific size or have multiple off-street parking spots available. <\/li>\n\n\n\n
- Operation limits<\/strong> \u2013 Cities can limit the number of days you can rent out your home. 240-day maximums (approximately 20 days a month) are common, but sometimes they\u2019re even less. <\/li>\n\n\n\n
- License fees<\/strong> \u2013 These fees are pretty standard and reasonable. For example, a one-year licensing fee in Seattle<\/a> is $75. However, some destinations charge hundreds\u2014or more\u2014in licensing fees. <\/li>\n\n\n\n
- Lodgers tax<\/strong> \u2013 Certain cities and states require property owners and managers to pay a lodger\u2019s tax for renting out a room or property. The tax rate varies from state to state<\/a>. <\/li>\n\n\n\n
- Zoning laws<\/strong> \u2013 You must meet the zoning requirements of your city. <\/li>\n<\/ul>\n\n\n\n
Build Your Power Team<\/h3>\n\n\n\n
Entrepreneurs rarely operate alone. Running a short-term rental is a team effort, so even if you\u2019re planning on doing most of the heavy lifting, you\u2019re still going to be outsourcing some of the work. <\/a><\/p>\n\n\n\n
Here are a few key players in your power team:<\/p>\n\n\n\n
Investor-friendly Real Estate Agent <\/h3>\n\n\n\n
Find an agent who specializes in short-term rental properties. The right agent will save you a lot of the work and is well worth their commission. Your agent should know the short-term rental laws and regulations in your city and state, have keen knowledge of your local market, have connections to property management companies, and know the process from start to finish. <\/p>\n\n\n\n
Property Manager or Management Team<\/h3>\n\n\n\n
The right property manager can turn your high-stress rental into a low-maintenance breeze. Depending on how you work with, your property manager may do some or all of the following:<\/p>\n\n\n\n
- \n
- Furnish your property or provide you with an itemized checklist<\/li>\n\n\n\n
- Market your property on Airbnb\/VRBO platforms<\/li>\n\n\n\n
- Manage scheduling and customer service relations<\/li>\n\n\n\n
- Manage invoicing and payment processing <\/li>\n\n\n\n
- Schedule cleaners, landscapers, and other maintenance professionals as needs<\/li>\n\n\n\n
- Set up licensing and tax IDs for your rental <\/li>\n<\/ul>\n\n\n\n
In some cases, all you need to do is buy a property and get it ready to rent. The property manager handles the rest. <\/p>\n\n\n\n
Depending on your needs, the industry average for property managers is 25% \u2013 30%<\/a> of your gross rental income, depending on their fee structure. Airbnb property managers tend to charge between 25% \u2013 50%<\/a>, depending on where the rental is located and what services they\u2019re offering. <\/p>\n\n\n\n
Maintenance Crew<\/h3>\n\n\n\n
Reliable handymen\/handywomen and other vendors must be available to address functional issues with your property on short notice, should they arise. If your hot tub isn\u2019t working or your heater malfunctions, speedy repairs can help you maintain a high property and experience ratings. <\/p>\n\n\n\n
Cleaning Crew<\/h3>\n\n\n\n
- Property requirements<\/strong> \u2013 Some cities require your lot to be a specific size or have multiple off-street parking spots available. <\/li>\n\n\n\n
- Primary residence requirements<\/strong> \u2013 Many cities are adopting policies that require your short-term rental to also be a primary residence. In some cases, a property can be used as a short-term rental while the homeowner is away. In others, you can only rent portions of your home, such as an accessory dwelling unit (ADU), basement, or bedroom. <\/li>\n\n\n\n
- AllTheRooms<\/a><\/li>\n\n\n\n