Short-Term Rentals as an Investment Strategy
Why are short-term rentals (e.g., Airbnb, VRBO, HomeAway, etc.) so attractive to investors? Since consumers typically spend more on lodging while travelling than they do on monthly rent, the investor conversely makes more money from short-term rentals than by traditional leases with tenants. Some investors report that they earn up to 275% or more by switching to short-term rentals.
Benefits of Short-Term Rentals
The RPOA interviewed a panel of experts regarding their investing with short-term rentals on the RPOA podcast. On the podcast, one of the experts, Frederick Kidd, confirmed that he earned a 275% increase in income by converting the property to a short-term rental. Furthermore, Gary Hall, another expert on the panel, reported that, the shorter someone stays in a property, the more likely they are to keep the property in prime condition. Also, there are far fewer issues with noise, damage, parking, etc. Frederick Kidd agreed that since short-term rental guests are rated by owners, the guests are more motivated to leave a good impression and not cause issues.
Airbnb has sustained large growth as a casual hotel alternative in the past 10 years with its 4.5 million+ properties around the world and $41 billion+ earned by hosts; therefore, for the purposes of this article, we’ll focus on both the financial benefits of short-term rentals and factors to consider prior to entering into this venture.
Marketing & Amenities
Airbnb* allows its hosts to select different options in customizing its rental; therefore, the host has flexibility in deciding how to maximize their revenue stream according to supply and demand factors within the property’s market. A few of the available choices include the following:
- Rent the entire house or on a per bedroom basis
- Set a minimum or maximum number of nights
- Types of amenities and special touches to incorporate
When a guest is searching for a short-term rental property to stay in, they are comparing your property to all the others available. It’s important to make your property stand out among the others in the area to draw the guest to your property. The goal is for the guest to write a high-rated review for your property, which encourages future guests. Here are a few tips to consider when marketing your rental and preparing the home to ensure guests have a positive experience:
- Strive to be a Superhost (Airbnb). Superhosts have a response rate of at least 90%, have hosted at least 10 trips, do not cancel, and have at least 80% five-star ratings.
- Invest in professional photographs to best market the space.
- When describing the space, use words that give the reader an experience, rather than simply being factual.
- Vacation in your own rental before making it available to the public to test whether everything is well explained and if you should change any of the offered amenities.
- Provide information to the guest(s) about the area and keep the information updated according to the season (e.g., tourist attractions, events, restaurants).
- Keep the space well stocked.
Overall, short-term rental owners and managers report that it’s important to provide amenities that guests have come to expect from a typical hotel that contribute to the guest’s experience. For example, free Wi-Fi, coffee service, extra towels, sheets, blankets, a small refrigerator, and even toiletries are desired for those who forgot their toothbrush or deodorant.
Many short-term rental owners provide a keyless entry system than can be reprogrammed after each guest departs. Have a set of numbers to rotate and program into the lock(s) after cleaning is complete and before the next guest is scheduled to arrive. The list of numbers should be changed occasionally for even greater security.
Costs Associated with Short-Term Rentals
While you may be successfully attracting guests to your property and making a good income stream, it’s equally important to monitor the costs involved with operating the space so the venture remains financially sustainable to be a truly successful short-term rental. While we considered the revenue options above and different ways to attract guests, here we consider the financial expenses involved to know what makes the most sense for your short-term rental. This is not an exhaustive list of expenses as each municipality and property is unique.
- Costs for permits or licenses required by the local municipality to operate the short-term rental.
- Possible increase in homeowner’s insurance and property taxes due to the property’s change in purpose. Furthermore, while Airbnb provides “host protection insurance”, relying solely upon this may not be sufficient.
- The associated costs in furnishings and amenities offered in comparison to the resulting revenue.
- Projected vacancies (e.g., week vs. weekend, season, etc.).
- Short-term rental company’s service fee.
- Cleaning services, landscaping, utilities, and repairs.
- Various tax implications exist when operating a short-term rental. Tax benefits are available for short-term rental hosts, but taxes will be incurred and need to be paid on the income. You must consult with your CPA to understand which taxes you will be subject to as well as tax benefits that are available to you. Some examples of taxes that will be incurred include the following:
- Overall income tax. While the 14-day rule won’t apply to you when renting full-time, it’s important to know the various rules about how the income will be taxed.
- Self-employment tax.
- Occupancy taxes, which the short-term rental company may collect and submit in certain states and cities.
While taxes are incurred on the income, some tax benefits exist on the expenses paid to operate the short-term rental. These include the following:
- Costs of running credit checks on potential guests. This expense may not be necessary if a strong system is in place for screening guests based on their profiles and intentions at the property.
- Costs involved for business travel to visit the property.
- Costs incurred from listing the property on a short-term rental’s website and other host service fees.
- Permits or licenses to operate the short-term rental.
- Other business expenses that may include maintenance repairs, buying new towels, repainting the bathroom, putting a bottle of wine the table for new guests, etc.
The above direct costs are essential to consider in strategically operating your short-term rental. However, many other factors impact a guest’s experience in your rental. Additionally, it’s important to systemize the process so your direct involvement decreases with time while the property’s success continues to increase.
Other Factors that Could Impact Your Success with Short-term Rentals
Below are some factors not directly related to revenue and expenses but that could impact your effectiveness and/or ability to operate short-term rentals.
- Understand your local municipality’s requirements and regulations. For example, as of May 2018, Grand Rapids, Michigan, allows only one bedroom to be rented to a maximum of two adults in an owner-occupied residence. Also, a license must be obtained prior to operating. Some communities have banned short-term rentals altogether.
- If the property is in a homeowner’s association, understand what requirements the association has in addition to those of the municipality. Even if your municipality allows short-term rentals, your homeowner’s association may not.
- If the property has a mortgage, review the agreement for whether you’re allowed to sublet. In most cases it’s not an area of concern, but it’s best to do the appropriate research.
- Consider how the property’s profile will be maintained and ensure that questions or concerns will be handled in a timely manner. Furthermore, have a system in place to post reviews as soon as possible after your guests check out, as well as monitor guest’s reviews about the property. Monitoring reviews help you know what is going well and poorly at your rental so you know what areas to keep and/or change. It’s also vital to guard against any negative feedback as this can discourage future guests.
- Ensure someone will be available for maintenance issues upon request.
- Consider who will perform cleaning services and how the guests will check in and check out of the property.
- Establish house rules (e.g., anyone staying in the home may not engage in wild partying or disruptive activities, whether smoking is allowed, etc.).
- Consider how guests will be screened for admittance to ensure the house rules are followed.
- Consider and respect the nature of the neighborhood and whether the neighbors should be notified that this property will be purposed for short-term rental to encourage a positive response to the situation.
- Consider how to handle injuries on the premises and theft.
- Leave detailed instructions for operating the remote controls for the television, how to access the internet and any other unique electronics or appliances in the property.
As with every investment, using a strategy like a short-term rental on a property has its risks and rewards. Owning and operating short-term rentals can be more expensive than traditional rentals but the income, in most cases, far outweighs the costs. Find out what works well for you and your area so that diversifying your investment properties with short-term rentals can be rewarding!
* Airbnb rules, guidelines, etc. are subject to change.
The RPOA hosts a meetup group the first Wednesday of every month from 12pm – 1pm at the RPOA office on short-term and vacation rentals. It’s a great opportunity to learn from other like-minded investors and network with people in the industry. Join the meetup group here!