Building A Small Property Specifically for Short Term Rental

11 Replies

I am considering building a small "home" (1000-1200sqft) specifically for short term rental in a tourist destination area.  I am aware there are often minimum sqft requirements for a home but will cross that bridge later as I don't know where I would build this yet.  My idea is to build it on a somewhat secluded lot, two bed, one bath, normal amenities within driving vacation distance from a major metropolitan area.  The hook is...the style would be of a high-end hotel room (think Chicago/NYC) with the amenities of a home in a small footprint.  Long story short...I want to develop a premium rental with premium rates in a footprint that will keep costs very reasonable.  I would initially start booking with services like Airbnb, homeaway, etc. but would like to move away from that at some point...don't want to hitch my wagon to a single horse.  

I have not talked about this with anyone at this point, not even my wife.  I am looking for some initial feedback on this idea.  I could also use some pointers on developing a presentation for investors. 

This is an idea I've thought about as well.  A few things I plan on doing: Use an architect, especially since your idea is for a high-end, small destination home.  Because mine will be purpose-built, I'll have an area specifically for the cleaning service supplies.  And, I'll use as many eco-friendly technologies and design techniques as possible.  I'll create a web site for the home and update it from the very beginning showing architecture renderings, plans, and the construction process.  My idea is to begin to gain a following for the home before it's even rentable.  And, when it's finally rentable, my first guest will be a professional photographer so that I can then use high-quality images on Airbnb and the others.

As for developing a presentation, I think you'll need to spend some money at your architect's office on a nice rendering or two--even if the final design changes.  Find and secure your lot so the architect can have constraints (lot size, lot orientation, views, zoning codes, etc).  Then, pay for a few views and a plan of a possible "what-if" design.  You need just enough to tell your story and for a builder to give you a rough idea on the building costs.

Has anyone else already followed this path?  What did you do?

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Sounds like we are thinking the same way.  I also had the idea for a dedicated cleaning closet.  I thought that having it accessible from the exterior only would mean more controlled access and less temptation to guests. I like your website idea and giving a photographer a free stay for pro photos is a good idea too.  I hadn't thought of that.  

HI Andrew,

My partner is a contractor/developer in our VR biz. Typical margins on the houses he builds are about 30%, and even higher in resort areas we build. I serve as the property manager. When we buy land to build a VR, we focus on areas in or near the resort town with a proven renter following. After we buy the lot/land and finish building the VR it already is worth significantly more than our costs.

So, I would give quite a bit of consideration to: 1. The secluded area you mentioned-- can you secure renters to rent in that area and charge a premium?, and 2. Whether there is a way to partner with a contractor/developer so that you are not paying full retail to buy the home? Perhaps they could be the investor if you don't have enough $ after buying the land to put down 20-25%, plus furnish the home and pay taxes, mortgage payments, etc until first rents come in. Additionally, you may have some challenges attracting investors without a track record. You will need to be very tight with all the numbers, city ordinances, zoning, surveys, property mgmt plan, etc, etc. 

Once you decide what town/area to buy land, I would look at the competition. If there are alot of small 2-3 bedroom homes already there, you may want to consider your options. Often, you get more bang for your buck by adding more rooms to the VR, due to the higher rents you can collect. Sometimes, the incremental costs of additional bedrooms are outweighed by the higher rents you can charge over time.  

I could go on and on, but just wanted to throw some thoughts out there that may/may not be useful for you. Your idea is interesting in likely has merit if the demand is there, numbers work, etc. Good luck!

This plan can have merit, but are you certain you want to go with the small home plan? I believe you leave yourself open to more risk if your stakes are too small.

Example: You have a vacation rental, it nets you $200/month. If your fridge breaks down on you, it will cost you the equivalent of weeks or months of profit to recoup the loss. 

If you have a bigger vacation rental, that nets you more, you get significantly less exposure to these things.

Another thing to consider is fixed costs, and their size in relation to your property income. Suppose you want wifi in your unit. the setup and monthly cost will be the same for a tiny place and for a big place.

Its much easier to keep a big fish tank than it is to keep a small one. Same thing with property (to a certain extent anyways). 

Worth considering I think. Hope this helps. It usually pays to think bigger

I don't disagree with your think big opinion. My economy of scale will come later when I invest in a few mor properties similar to this idea.  Also, by going new with everything I should have 5-7 years without major maintenance. 

One thing to realize is a 1000sf home is a lot more expensive in cost per square foot than a 2 or 3000 SF home as the $ on a home is in the baths, kitchen, and electrical/HVAC and plumbing.

Have one other thing for you to consider and one major research item for you. First, consider upping the number of bathrooms in this type of development. For a high-end rental like this, I'd expect at least two, if not one for each bedroom. Think about who will stay there.... a group of couples that want a joint vacation is likely, and they won't want to share.

As to the research, this is very serious. Look into the laws about this and the political climate in your municipality. Many locations are cracking down on the short term rentals, and putting many more requirements on them. For example, I believe they just passed laws about this in Portland, OR that require you to have at least one long-term renter or an owner also living on the same site in order to use any part of your property for short-term (AirBnB) rentals. And I think the city of Santa Monica, CA is even more strict, only allowing a part of house to be rented but not the whole house. Be careful about this because you're profitable plan could quickly go bad.

Good luck!

Stephanie Ericson, Contractor in OR (#ARI-11356) and CA (#C29855)

Hi All,

Sorry for my absence.  I posted this and then decided it would be an awesome idea to move!  This is the first chance I have had to reply.

Wow! Lots of great feedback and I apreciate it all.  I would like to respond/clarify a couple of things...

  • I agree that by building smaller the cost per square foot is higher, but, overall costs are less.  This is one of the biggest parts of my idea.  I would like to keep the overall costs lower.
  • With a smaller build the operation costs (cleaning, landscaping, etc.) are also lower.
  • Regarding more bathrooms...I agree with you! I don't know if I will consider it for this rental though.  Since I posted my original thought I have a better idea where I may build this.  When I look at the competition in the area most are larger old homes (read falling apart) with owners renting out a spare room, or, B&Bs with shared bathrooms.  The typical renter is a single family renting for 2-5 days.
  • I still need to look into the min sqft requirement and short-term rental regulations for this area.
Originally posted by @Andrew Wells :

Hi All,

Sorry for my absence.  I posted this and then decided it would be an awesome idea to move!  This is the first chance I have had to reply.

Wow! Lots of great feedback and I apreciate it all.  I would like to respond/clarify a couple of things...

  • I agree that by building smaller the cost per square foot is higher, but, overall costs are less.  This is one of the biggest parts of my idea.  I would like to keep the overall costs lower.
  • With a smaller build the operation costs (cleaning, landscaping, etc.) are also lower.
  • Regarding more bathrooms...I agree with you! I don't know if I will consider it for this rental though.  Since I posted my original thought I have a better idea where I may build this.  When I look at the competition in the area most are larger old homes (read falling apart) with owners renting out a spare room, or, B&Bs with shared bathrooms.  The typical renter is a single family renting for 2-5 days.
  • I still need to look into the min sqft requirement and short-term rental regulations for this area.

I have been a vacation rental reservation agent for 12 years - my experience with small vs large is that there is way LESS DAMAGE in small rentals. Damage can be a real buzz kill in this industry - no time to fix stuff between rentals if you are booking them fully, and who will do this for you unless you live nearby? So when we started buying VR properties (we now own 4) we buy small, rent to mostly couples and have just about zero damage or hassles. Even our 3 bedroom we allow just 4 persons to keep wear and damage down. As far as bathrooms, it's nice to have more, but I have to say it has never come up as a deterrent in our houses that have only 1 bathroom. That's not to say people simply are skipping over our listing because of it, in which case I'd never know...but we do get FULLY booked 6 months of the year and our peak season is only about 4 months. Way more important than space, in my humble opinion, is location, view, style and comfort. 

@Maura

Thanks for the great information!  I knew that this was not a revolutionary concept and am glad to hear that it is working out for a few different people who have replied to this thread. I agree with you that the main concern is location. I had one in mind but after researching the area more I'm concerned that my occupancy would be less than 50%.  Back to the drawing board!

Like Stephanie advised, 2 bathrooms!  I know when we travel with another couple, we skip over listings with only 1 bathroom, especially if your goal is high end.  As already said, 1st make sure the municipality allows short term rentals, then try to find a secluded lot where people can walk or bike ride to festivals/restaurants/attractions/etc. and I'm sure you'll do fine.  You could make some unique services available to your guests like a chef to come in & cook a gourmet meal, wine tasting, masseuse, etc.  Check out podcasts from Heather B @ cottage blogger, a wealth of info!

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