You’ve heard it a million times if you’ve heard it once – rental property can be the perfect way to make passive income that cushions the cost of living, helps you add to your savings and makes retirement a reality instead of a far-off fantasy. Not all property investments are created equal though.
Short-term rental property can be an enticing option, particularly if you live in a market where you believe you’ll have year-round tenants or high-value seasonal occupancy. Investing in the short-term rental market can be a serious risk, however.
Jumping in blindly could mean putting your money in a property that never turns a profit. Even worse, you might lose money on maintenance while suffering from serious headaches that are unique to short-term rentals.
Use this guide to learn more about short-term rental property and whether it’s a sound investment vehicle for you.
What Types of Short-Term Rental Properties are Available?
Short-term property comes in a range of flavors, making your initial investment options a little more flexible. This flexibility can bring considerable confusion if you’re new to property investment though. Here are some of the most common types of short-term rental property:
• Month-to-month rentals. Condominiums and single family homes can be rented on a month-to-month basis, giving the renter more flexibility. The benefits of renting these types of properties on a month-to-month basis is that the market value is higher per month. Many people, particularly business travelers, are willing to pay extra for a condominium or home that doesn’t require an extended lease period.
• Vacation property. Ideal for places where people flock for sightseeing or seasonal activities like skiing, vacation properties are priced at a premium rate and rented for days, weeks or months.
• Airbnb rentals. Typically used as nightly, multi-night or weekly rentals, Airbnb serves as a bridge between owners and renters for a fee. Many guests use Airbnb homes or condominiums the same way they would a hotel. However, they get the amenities of a fully-furnished apartment of home, which can be helpful for business travelers, families or groups.
• In-home rentals. Some people choose to rent out a guest house or room in their home to make money from open space in an existing property. In-home rentals can be sought via services like Airbnb or through more traditional landlord-renter methods.
Make Sure There’s a Market
You love the idea of short-term rental property and you’re ready to buy now. Hold on! Do you really have a market for short-term rental property in your area? Before you buy, you need to verify this information.
While working with a savvy real estate agent can help, you can do some of the legwork by scouting your area for other short-term rental properties. Here are a few questions to ask yourself when doing research on your market:
• What’s the average cost for buying property in my desired area? What about highly desirable areas versus off-the-beaten-path locales?
• How are the rates for short-term rentals in my area?
• How is availability? An area with lots of available short-term rentals during busy season be overcrowded already.
• Will I have year-round tenants or will I be renting only during a busy season?
Consider Extra Costs Associated with Short-Term Rental Property
You’ve got the market for a short-term rental property and it isn’t too crowded. Maybe you’ve even spotted a need for short-term property in a certain neighborhood. Before you buy, there are a few other costs associated with short-term rental property you need to know about. These include:
• Furniture. Short-term renters expect furnished spaces. This could be a significant expense depending on the size of your property.
• Linens and home items. These can add up if you’re dealing with multi-bedroom condos or homes.
• Technology. Modern homes require modern appointments like televisions. High-end homes may require smart-home setup or costly temperature control devices to be competitive with other properties in your area. Guests looking for a luxury getaway will expect these items to be in place.
• Appliances. Refrigerators, stoves, washers, dryers, water heaters and more all have to be working and up-to-date.
• Kitchen basics. Short-term rentals will require glassware, dishes, small appliances, cookware and kitchen tools like knives, can openers and bottle openers. These items may seem inexpensive, but you could easily spend $1,000-plus to furnish a large chef’s kitchen.
Understand Potential Legal Issues in Your Area
The short-term rental market has come under fire of late, particularly in major metropolitan cities like Los Angeles and New York. Some locales are even changing the way people can rent condos, homes or rooms within their homes on their own or through services like Airbnb.
While it’s impossible to list local regulations here, it is important that you do your homework on local laws and issues about short-term rental before you dip your toes in the pool. Some areas may require you to have a costly business license. Others may impose minimum stay lengths that simply won’t work for your area.
Evaluate potential legal issues in your city and state before you buy to avoid getting burned.
Do You Have Time to Manage a Short-Term Rental Property?
Ready to pull the trigger on a rental property? Not so fast. There’s one more thing to think about. That’s whether or not you really have time to manage a rental property to make it a success.
With short-term rental property, you’ll be in charge of communicating with potential guests, showing the property, cleaning between tenants and making all of the basic renovations required to keep your investment in tip-top shape.
Hiring a property manager is an option, but that does mean more overhead for you and less money in your pocket. If your margins are thin as is, hiring a property manager could push you into the red.
Short-term rental properties can be lucrative, but they’re rarely as simple to manage as condominiums, homes or even apartment buildings with standard year-long lease terms. With legal issues on the rise, particularly in populated destination areas, the landscape may become even more confusing for potential investors.
That doesn’t mean that you should avoid short-term property though. It just means that you need to move carefully and consider all of the potential downsides along with the benefits before you buy.