Investing in short-term rentals can be very profitable when you choose the right property. Real estate investors are always looking for the next shiny new object and short-term rentals may just be that object. As our title suggests there are at least 9 reasons to invest in profitable short-term rentals.
The word “profitable” is the key to this article. You need to look at vacation rentals often called Airbnb, VRBO, or short-term rentals as an opportunity to turn your vacation home into a cash generator. You don’t own a vacation home? It’s about time you did and take advantage of the hot market now.
At the end of this article, you will find an invitation to take our Free Short-Term Rental Mini-Course. If you like that course, enroll in our full Short-Term Rental Investment course, the link is below.
Real Estate investments are backed by something of value
This will focus on just 9 of the many reasons why you should invest in short-term rentals vs long-term rentals or other types of real estate. Real estate investment, in general, is a foundational investment vehicle in a category with equities, bonds, and similar investments backed by something e.g. value of a company.
Real estate is an appreciating asset. In recent years short-term rentals have become very popular. In particular, Millennials and Gen-X have pushed the concept to the forefront of real estate investment.
Short-term rentals have been around forever in various forms. From renting a room in an apartment to the Bed and Breakfast model. They are all intended to serve individuals, families, and groups for a period of generally less than 30 days. Motels expanded in the 1950s as people drove to their destinations. At that time short-term rentals were almost unknown.
2020 brought a rebirth in the vacation rental business
The short-term stay became popular in the last decade and skyrocketed since COVID lockdowns. 2021 was a record year for all measures including several stays, revenue earned, and new vacation rental properties going on the market. Most of this big push was due to people in states with strict lockdown rules leaving for more favorable areas where rules were less strict or nonexistent.
I believe that the year 2020 was the rebirth of the short-term vacation rental or second home. People who could not travel by ship or plane were driving to the beach or mountains to stay at their short-term rental property. High demand for short-term property has increased interest among real estate investors. This is where the industry is now, popular tourist destinations continue to require more properties to rent.
Time for those 9 reasons
- Higher Income
Long-term rental properties provide a consistent cash flow that you can count on but the returns are usually lower than for short-term properties. A typical property with long-term leases can generate a 9%-11% cash-on-cash return. This return is good compared to most other uses of capital but not in the same category as some short-term rentals in vacation destinations. Returns over 20% are not uncommon for the right property.
2. Passive Income
This investment strategy permits you to earn passive income while your property management company does all of the work. Some short-term rental owners manage their properties. the most popular strategy however is to turn your property over to an experienced, professional manager who takes care of those calls at midnight. If you plan to scale up, personal management may be too time-consuming. Learn about this in our Short-Term Rental Investment course.
3. Tax Benefits
Depreciation is the primary tax benefit for owners of short-term rental properties. All expenses are tax deductions when you are using your property to generate income. Even when you use your vacation home to generate a few dollars to help defray expenses, you can benefit from IRS rules that allow you to deduct some expenses. If you have high earned income and are looking for a “tax shelter”, this may be your answer.
4. Your Vacation Property
You go on vacations every year and even for some weekend getaways. Why not funnel those dollars into a second home often called a vacation home? Interest rates are lower for second homes than they are for a straight investment property. Should you decide to rent it on occasion to pay the taxes, that’s your call. The great feeling that you own a property that you can go to when you need to decompress is something to experience. A large number of vacation rentals start as a second home and many remain a real second home with some additional income thrown in.
5. Investment vs Stock Market
Your second home, vacation home, or short-term rental regardless of what you call it will appreciate over time. Owing a second home or investment property is a great way to make a good investment that continues to give back. Consider that vacation homes can generate income, produce equity as the mortgage is paid down, and provide appreciation as property values move higher. Not to mention the depreciation discussed above. Compare all of these benefits with owning stocks (a balanced portfolio is a good idea).
6. A Rental Business
Create a real business, and buy more properties for short-term renters. As a rental investor, you can expand your real business into a business that can supplement your income or become a great source of retirement income. It’s all about selecting the right location and marketing strategy. Consider going from a passive income-generating vacation rental to a full-time business. People have become wealthy by catering to short-term guests. Create a business entity, logo, and website and build your business. Our course on Short Term Rental Investment will give you the knowledge and tools to accomplish this goal.
7. Your Retirement Home
I have written for years about how best to prepare for retirement. One of the key things you need to do is decide where you will retire. If you live in the suburbs of a big city and decide to relocate to the beach, buy your home years before you retire. There are many reasons for this not the least of which is your ability to finance a second home while you are a W-2 employee. Use your future primary residence as a vacation destination until you decide to move. During that period, hire a property manager and put your property on rental platforms to earn extra income. This may make the most sense of all of our reasons for short-term rental investing.
8. Buy, set up, and Sell
Some people love projects. A perfect project can involve rental property investment where you buy a property, furnish it, and put it on a short-term rental market. Your property manager can rent it for a year while you earn rental income. Work with a real estate agent who understands short-term rental properties. Have your real estate agent list the property for sale as a functioning business. The real estate market will usually consider the added value of a fully furnished property with a property manager and documented occupancy rate. Some buyers will pay more than the appraisal because you can show them your books. Sell this one and do it again. Perhaps buying a fixer for the next project will attract individual investors.
9. Long-Term Rental Back-up Plan
It’s best to evaluate your options when buying a property if you intend to rent it as a short-term property. One of the options is to consider longer stays where the lease term is up to one year. Look at leasing to long-term tenants as a fallback position if there is too much competition in your target market. Should the economy change, you need to be in a position for the long run by having a backup plan. This is one of the things we explore in the KEYLADDER Short-Term Rental Investment course discussed below.
Location, location, location
Some people will buy a property thinking that because they like it, it will rent when they are not in residence. Before buying a property that you intend to use as an income generator and for personal use, you need to do lots of study and evaluation. You have heard of the term, “location, location, location”, this applies to potential income property. Not only the location but the type and size of the property. Your personal touch inside may not be what people are looking for.
Short-term rental sites are not just flagged on a map. It takes skill to find the right location, not just the best places such as a beach town but where in that town is the best place. Some locations will generate higher rates than others. Your due diligence will pay off later when bookings fill up.
Start the entire process by setting goals. Do you want:
- A vacation home that I can rent when not there but I can afford the costs if revenue is low.
- A full-time investment rented all of the time, I may not visit, it must support itself financially
- In a future retirement home, I want some income to pay taxes, utilities
- A family vacation home that is periodically offered for rental, inconsistent basis.
- Buy, fix, rent and sell
Create a budget
After you have decided what you want to do, you can create a budget and work out how much if any income you need to offset costs or provide a profit. You must define your goals upfront. Be aware that some properties that you prefer may not be in the best position for a variety of reasons to generate a profit as a full-time investment.
Unless you are buying the property for a real vacation home or your future retirement home, don’t get distracted by how the property looks or where it is located. What matters most is that the property is located where it will rent well and when rehabbed, will be the type of property that guests are looking for.
You will need the help of an experienced real estate agent who knows the vacation rental market. Be clear about what you are looking for and the reason why you want to become an investor. Explain your long-term goals. This will help the real estate agent help you by pointing out only properties that meet your needs and goals.
A good example is your need for a fenced yard for your dog because you will be visiting on occasion. A condo will not have a fenced yard so that type of property can be ruled out of your search.
How will you acquire the property?
There is much to learn about before you take the leap and sign on the bottom line. One key factor is how will you acquire the property. Finance or pay cash? If you finance, you will need the help of an experienced loan broker who can find a loan program that meets your needs e.g. investor or second home.
If your property is located in a special zone e.g. along a beach, you will need the services of an insurance broker familiar with special policies needed for this type of property.
Be prepared to cover the costs when the property is not rented. I recommend having six months of all expenses in the bank to support expenses in a worse cases scenario. If this is going to be a long-term investment for you, income will grow over time as more people have rented and favorably commented on the property.
Factors to consider
The following are factors that will affect the profitability of a vacation rental intended to pay for itself:
- Property taxes
- Special rate insurance e.g. flood
- Interest rate if financing
- Fees charged by local government
- Property manager fees
- Third-party fees reduced from your asking price e.g. Airbnb
- Cost to guests for cleaning
- Rental rates in the area
- Local laws
- Purchase price of the property
- Length of the season
- Vacancy rate
- Cost of utilities
- Availability of high-speed internet
This list is just a start, don’t let this long list discourage you. Any investment comes with risk, the idea is to mitigate risk by knowing what you are doing before you do it. Learn as much as you can about short-term rentals. Yes, short-term rentals do generate better returns than other types of residential real estate investments but only over time with great management and marketing.
If you are ready to take the next step, I recommend that you take our Free Mini-course or full course in Short-term Rental Investing. The course should answer all of your questions and provide solid directions about how to research, select, buy, market, and manage your vacation rental property. Visit our Short-Term Rental page on this website click here
Clicking will take you to our course website where you can select the course you desire and register.
