Vacation Rental Ownership: How to get started
Why Short-Term Rentals?
Flexibility
One of the greatest advantages of owning a short-term rental property is the unparalleled flexibility it offers. You have the ability to use the property for personal vacations when it's not occupied by guests, turning it into your own getaway spot, hosting family & friends, or simply blocking dates that you do not wish to have guests. Additionally, short-term rentals allow you to sell the property without the complications of long-term tenant leases, making it easier to respond to favorable market conditions. This flexibility also helps you avoid the commitment of year-long leases and the potential issues that can arise from long-term tenants, such as eviction processes or lease negotiations.
Less Wear & Tear
Short-term rentals generally experience less wear and tear compared to long-term rentals. Since guests typically stay for just a few days or weeks, the property is cleaned and maintained more frequently, which helps keep it in better condition. The amenities, such as kitchen appliances, furniture, plumbing systems, are used less intensively, reducing the likelihood of significant damage or the need for costly repairs.
Larger Return on Investment
Short-term rentals can often generate higher income than long-term rentals. On average, owners can earn about 40% more revenue from short-term rentals, as nightly rates typically surpass the monthly rates of long-term leases. This higher income potential makes short-term rentals an attractive option for property investors looking to maximize their return on investment.
Easy Entry into Real Estate Investing
Short-term rentals offer a more accessible entry point into real estate investing. Renting a space in your personal property makes entry into real estate investing even more accessible. Creating a separate entrance to an unused bedroom, or a basement can help kickstart your first investment, allowing you to save money for future investments. Even if you're not a seasoned investor, the demand for short-term accommodations can provide a steady stream of income, making it a less intimidating way to start your real estate journey.
Larger Tax Write-Offs
Owning a short-term rental can also come with substantial tax benefits. You may be able to deduct expenses such as mortgage interest, property taxes, insurance, and maintenance costs. Household supplies, cleaning costs and property supplies that are used for guests comfort are great write-off's. Additionally, you might qualify for even more significant deductions, which can enhance your overall profitability.
Asset Appreciation
Like any real estate investment, short-term rental properties have the potential to appreciate in value over time. The overall decrease in wear and tear, as well as regular maintenance of your property, helps increase values. Short term rentals owners can have more confidence making improvements that will add more appreciation and ROI. This appreciation, combined with the income generated from short-term rentals, can significantly increase your overall return on investment.
Property Management Options
For those who prefer a hands-off approach, property management companies can handle the day-to-day operations of your short-term rental. This allows you to enjoy the benefits of rental income without having to deal with guest interactions, maintenance issues, or marketing efforts. With professional management, you can maintain your investment while freeing up your time for other pursuits.
Choosing a Property
Smart Investing in Properties That Will Cash Flow Without STR
When selecting a property for a short-term rental, it's essential to choose one that would be a sound investment even if it weren't used for short-term rentals. This means looking for properties that can generate positive cash flow with long-term tenants, ensuring that your investment remains viable even if market conditions change or local regulations impact the short-term rental market.
City or Vacation Rental Market?
Deciding between a city or vacation rental market is another critical consideration. City rentals (non traditional vacation rentals) often benefit from consistent demand year-round due to business travelers and tourists, while vacation rentals (destination locations) may experience significant seasonal fluctuations. However, vacation homes can often cover their expenses through rental income, making it possible for buyers to afford a second home that they can also enjoy personally. Deciding which market you want to break into will be important, as choosing the right property for each market is crucial.
Types of Properties
Single Family
Single-family homes are popular choices for short-term rentals, particularly if they offer features like multiple private entrances, a basement, or a master suite with a separate entrance. These features allow you to rent out portions of the home separately or provide guests with added privacy, making the property more attractive to potential renters.
ADU or Shared Space in Home
Adding an accessory dwelling unit (ADU) or offering shared spaces within a home can justify a larger purchase by increasing rental income potential. ADUs provide a separate, fully functional living space that can be rented out independently, while shared spaces in a larger home can accommodate multiple guests or families, increasing occupancy rates and revenue.
Property Size
The size of the property is another important factor to consider. Studios or one-bedroom units may be easier to manage and maintain, and they often appeal to solo travelers or couples. In a non traditional vacation rental market a smaller property will offer the best ROI. However, larger properties with more bedrooms can command higher rental rates and attract groups or families, offering greater income potential. This typically is the type of home that works best for a destination market such as the beach or a resort town. Filling a large property can be difficult in a market driven by business travelers vs. vacationers.
Municipalities & Local Laws
Short-Term Rental Permits
Navigating the regulatory landscape is crucial when operating a short-term rental. Many municipalities require specific permits to legally rent out properties on a short-term basis. For example, cities like Portland, require that the property is occupied by the Owner or a Tenant for at least 270 days a year. Most municipalities have their own sets of rules and regulations regarding short-term rentals. Some municipalities have no requirements while others are in the works for the future. Understanding and complying with these regulations is essential to avoid fines and ensure your rental business operates smoothly.
Lodging Taxes
In addition to permits, you’ll need to account for lodging taxes, which are often required by local governments. These taxes can vary significantly depending on the location of your rental property and are typically passed on to guests. However, as the property owner, it’s your responsibility to collect and remit these taxes to the appropriate authorities. A full service property manager typically remits and files lodging taxes on behalf of the Owner.
Owner Obligations & Costs
Furnishings
Furnishing a short-term rental property can be a significant upfront investment, but it’s critical for attracting guests and receiving positive reviews. High-quality furniture, comfortable bedding, and modern appliances contribute to a welcoming atmosphere and can differentiate your property from others in the area. Hiring a property manager that does in house staging can be helpful, as furnishings and amenities can affect your rates and income.
Utilities Including Internet
Unlike long-term rentals, where tenants often pay for utilities, short-term rental owners usually cover these costs. This includes electricity, water, heating, and internet service. High-speed internet is especially important, as it’s often one of the top amenities that guests look for when booking a stay.
Yard Care
Maintaining the exterior of your property is just as important as the interior. Regular yard care, including mowing the lawn, trimming bushes, and keeping outdoor areas clean, helps create a good first impression and contributes to the overall guest experience.
Extermination
Pest control is another cost that short-term rental owners need to consider. Regular extermination services help prevent infestations that could lead to negative reviews and potential loss of income.
Repairs & Maintenance
Ongoing repairs and maintenance are inevitable with any rental property. Whether it’s fixing a leaky faucet or replacing a broken appliance, keeping your property in top condition is essential for ensuring guest satisfaction and protecting your investment.
Mid-Term Furnished/Corporate Rentals
In addition to traditional short-term rentals, there’s a growing market for longer-term furnished or corporate rentals. These properties cater to business travelers, relocating professionals, and other individuals who need a place to stay for several weeks or months. Offering a fully furnished, well-maintained property for extended stays can provide a stable income stream with less turnover and lower management demands compared to short-term rentals.
