Before Purchasing Short-Term Rentals, There Are Four Factors to Consider
The short-term rental market, often known as STRs, has recently gained much attention in the real estate sector.
With the promise of better profits and the attractiveness of owning a investment property in an area one is passionate about, it is easy to see why this approach captures the attention of potential customers. Because of fast inflation and increasing interest rates, purchasing into a cash flowing investment property using a standard real estate investment strategy has become tough in our marketplace. This is one of the reasons why STRs (Short-Term Rentals) are particularly attractive in our current market.
It is not my intention to imply that the value in short-term rentals do not exist; rather, in many places across the United States, it is very difficult to locate them. A conventional lease does not calculate a quick return on investment for comparable high-demand markets because of the rising pricing and interest rates.
This is particularly important to remember for new investors and those of us who are trying to find financial independence via the purchase of the real estate. Experienced investors with funding and consistent earnings have the luxury of investing in properties that just break even or take an early loss because they are certain that the value of the property and rentals will grow and that they will see a potential return on their investments. In today’s economy, we have few possibilities if we seek an immediate return on our investments.
Because I am an investor in short-term rentals, I do property evaluations daily for my STR management company. I am conscious that there is potential for home runs in the market for short-term rentals; nevertheless, this market is not for everyone. Compared to long-term rentals, short-term rentals (STRs) come with a higher level of risk inherent, and the marketing strategy requires more involvement from the renter.
However, if you are interested in earning a return on your investment right away in the current market, you might consider using this investing approach. When it comes to rentals for a short period of time, you absolutely have to be conscious of what you’re doing, which is why I’m making this remark by assuming that you must know what you’re doing.
Are Short-Term Rentals Right for you?
In order to assist you in determining whether or not short-term rentals are the next investment for you, I have identified four areas in which you need to have a complete and total understanding before you make the decision to establish a short-term rental business.
1. Get Familiar With Your Figures
It’s all about the statistics, just like any other kind of real estate investment! When looking to buy real estate, you should always have certain monetary objectives in mind. The key focus of interest for you may be the cap rate, but it may also be the desired cash flow, a certain cash-on-cash return, or something else entirely. After deciding what you want to do, you should be familiar with the numbers linked with any STR.
The daily rate on average, the occupancy rate, and the expected gross revenue for the month
When trying to predict the amount of monthly gross revenue that a property will bring in, the most important sets of information to look at are the average daily rate (ADR) and the occupancy rate.
In general, the rates listed on Airbnb and VRBO are flexible, meaning that they change daily depending on the demand for a certain kind of home and location. Utilizing data sources like AirDNA, Mashvisor, AllTheRooms, or data.rabbu.com is one way to get a more accurate estimate of an average daily fee. These might provide an estimated ADR for a property of interest to you.
Pro tip: Check to see that there is no significant gap between the figures obtained from data sources and the prices shown directly on the STR sites for the period beginning now and continuing for the next three months.
It is more difficult to determine the occupancy rate. The data sources that were previously described will offer you a forecasted occupancy rate, as well as an average occupancy rate for a certain region and information on occupancy rates for particular properties that are similar (this feature is usually paywalled). Surprisingly, the statistics for these figures may be affected by the fact that some individuals advertise their homes on several platforms, how long the property has been operational, how far out in advance they make reservations accessible, and what they actively block off from their booking calendar.
Checking the reservation schedule of a similar property to determine whether it matches the occupancy rates supplied by the data site is something that I do regularly. If it seems consistent across the board, you will have greater confidence in the occupancy rate you have calculated.
After you have reached a level of comfort with your anticipated average daily rate and occupancy rate, proceed to input those figures into the formula shown below to get an approximation of your monthly gross revenue.
(ADR x occupancy rate) x 365/12 = estimated gross monthly income.
Short-Term Rentals Operating expenses
When renting a property for a long time, the operational costs typically consist of taxes, insurance, and a maintenance budget. A number of additional costs are involved with rentals that are for a shorter period of time.
It is helpful to think about how much you spend on the things listed below for your own house and then enter in estimates that are on the low end in order to obtain a clear image of your running expenditures. The following are some classifications that you should be aware of. Some of them are self-explanatory, while others are things that can only be obtained via STRs.
- Maintenance – This is routine maintenance, which is comparable to how you would budget for in the case of a long-term rental.
- Supplies/Inventory – Items for restocking are included in this price. Everything from soap to paper towels to toilet paper is included. Things that will need to be changed regularly while you are running your vacation rental business.
- Internet – It is essential for digital nomads, who often stay in short-term rentals, to have access to a high-speed internet connection.
- Landscape/Mowing/Snow Removal
- Sewer/Trash – Include this in your costs if the expenditure is not covered by the property taxes collected by your city.
- Water
- Electric/Gas
- Property Insurance – The prices for insurance that covers short-term rentals are often higher than those for normal rental property insurance. Add 20 percent to the amount it would spend to insure a standard rental property in the marketplace that you are targeting to be prepared for it in your expenditure.
- Taxes
- Features unique to your property – Maintenance of the swimming pool and hot tub, pest management, and other related services
- Management Fees – It is important that you include the expenses associated with using a management firm or technology to manage your short-term rental property in the budget if you want to utilize either of these options.
Furnishing
When planning a rental for a short period, one must consider the huge expense associated with the purchase and installation of furnishings. There are two schools of thought when it comes to the proper way to account for the money you spend on furniture and accessories.
- It can be included as part of the expenses associated with the property’s rehabilitation or to figure it in as part of the funds needed to close on the property. Shareholders with finance who can manage a significant upfront cost and want to understand what their STR returns will be yearly without including furnishing in the operational budget often choose this option. Shareholders with capital also have the ability to pay a large upfront expenditure.
- It considers part of the operational expenditures. To calculate the monthly payment required to pay off the furnishings in one year, divide the total cost by the number of months in the year. This is a strategy for novice investors without a lot of money who want to discover whether they can still cash stream or break even for the first year of the STR while factoring in the expenses of furnishing the property.
It may be difficult to estimate the cost of furnishing a house since the cost varies not only with the number of goods purchased but also with the quality of those products. I have designed a simple furniture plan that provides rough estimations of the costs that would be required to decorate a house completely.
- 1-2 bedrooms = $5,000 – $10,000
- 3-4 Bedrooms = $12,000 – $20,000
My furniture is modern, affordable, and of a standard that falls in the middle of the quality spectrum; thus, you should take these prices with a grain of salt if you want to design a more luxurious room.
Objectives and net operating income
Since you now have estimates of both your revenue and costs, you are in a position to calculate estimates of your net operating income.
1. Gross Monthly Income – Operating Expenses = Net Operating Income
You can determine whether or not you will be able to achieve your objectives on a property by looking at its net operating income (NOI). After calculating the NOI, you can move on to calculate other useful return on investment metrics, such as working capital, cash-on-cash return, cap rate, and others.
You need to perform the calculations to determine whether or not operating a short-term rental business would help you accomplish your objectives.
2. Developing a Positive Approach
This is a hands-on endeavor.
You need to change your mentality to succeed with short-term rentals. We have been convinced that property investment may be a passive kind of investing. Real estate investors who have expertise understand that maintaining rental properties can be a more time-consuming endeavor than some people make it seem like it would be. After going through the proper channels of selling the property, taking applications, signing a lease, and delivering the keys to the tenant, you and the renter are normally forced to validate with each other if there is an issue. The exception to this rule is when the property management is subpar. It requires very little active participation from the user.
Rentals for a short time are everything from a passive investment.
Yes, it is possible to take a less hands-on strategy by automating your STR via the use of software or by employing a team (we will talk more about this in the near future). Still, many things can’t be ignored, such as cleaning or scheduling cleaners, managing your internet presence, communicating with guests, fielding questions, setting prices, and maintaining the property.
As for myself, I’ve set up an automatic Airbnb. There are often whole weeks when the only thing I have to do is respond to the odd query from a visitor to the restaurant. Then there are the days when a bed frame breaks, and one of the following options is available to me:
- Invest in a brand-new bed frame.
- Employ a handyman to make the replacement or do the repair.
- It will be fixed by me.
It should be no surprise that issues of this kind need quick attention.
To be a successful short-term rental (STR) investor, one has to see their property as an active company, have a simplified procedure, and stay on top of all areas to ensure that visitors are able to schedule trips and have a positive experience.
You working in the hospitality sector
Realizing that managing a home as a short-term rental implies you are in the hospitality sector is yet another significant adjustment in mentality that an investor in STRs has to make. The renters were responsible for paying rent and making the space their own after setting up my first long-term rental. I had supplied a beautiful property and made it plain to them what was expected of them in terms of all they were required to do.
You are offering a service to other people when you use an STR. In order to accomplish this goal, you will need to go the additional mile, respond in a timely, and communicate deliberately about your marketing, management, and communication strategies. Providing guests with a pleasant and memorable stay is essential to the success of short-term rentals (STRs), but this goes much beyond just handing over the keys. You need to work toward getting positive feedback if you want your company to keep expanding. You will end up with vacancies and a negative cash flow if you get poor ratings.
3. The Importance of Having a Strong Workforce
In order to run a successful short-term rental, you must have a team in place. A team’s success can’t be understated, even if most of the following duties are performed only by you.
Outsourcing any of the following may be an option for you. Before making any decisions about purchasing, setting up, and running your STR, make sure that you have the following team members ready to go.
Find an investor-friendly short-term rental agency.
It is highly recommended that you engage with an investor-friendly agent if you want to buy a home used for short-term rentals. Someone with previous expertise in short-term rentals (STRs) and investment properties is the ideal candidate. They need to be able to comprehend your objectives and also provide you with assistance in formulating a strategy. A good real estate agent who is investor-friendly for short-term rentals should be familiar with all the process stages, from purchasing to setting up to STR management. They should also know the market of STR regulations and laws, as well as relations with the following supplier and systems, to help you achieve your goals.
The below set of inquiries must be able to be answered by a real estate agent in order to determine whether or not they are “STR-investment friendly:
- Can I lawfully run a short-term rental business in the market I’m targeting?
- What characteristics do you seek in a profitable STR investment in the real estate market in our immediate area?
- Are you able to evaluate real estate to determine whether or not it satisfies my investment objectives and criteria?
- Are you able to compile property listings that correspond to my investment objectives and criteria?
- For my property that is rented out on a short-term arrangement, are you able to put me in contact with reputable management companies, cleaners, handypersons, and procedures or tools?
Employing a competent short-term rentals property manager
The success of a short-term rental is directly correlated to the expertise of property management. Either you will be responsible for managing the property yourself or have to employ someone else to do it on your behalf. In order to keep your VRBO/Airbnb going well, the STR manager will act as your go-to resource. They will be able to do every one of the following successfully:
- Establish all of the necessary licences and tax IDs for your property.
- Provide a furniture shopping list for your home or office.
- We will create an online profile for your listing on the Airbnb and VRBO sites, and if necessary, we will also offer extra marketing services.
- Take care of incoming requests, make reservations, and deal with existing customers.
- Maintain the cleanliness of the space, or make arrangements for cleaning services, landscaping, and any necessary maintenance.
- Take care of the property’s bills, payments, and other administrative tasks and its financial reporting.
Service and cleaning staff for Short-Term Rentals
Finding trustworthy housekeeping firms that can “turn” your short-term rental property between bookings is essential to managing a short-term rental property. When it comes to managing short-term rentals, this is often one of the most difficult issues to deal with. Cleaners that can be relied on is difficult to locate and are in great demand. You may have to try out a few different cleaners until you discover one that can live up to your expectations and coordinate their schedule with your STRs.
On websites like TurnoverBNB and Guesty, you should have no difficulties finding a trustworthy STR cleaning. IT is ideal if they are on these networks since it allows them to have fast access to your reservation schedule, receive alerts of when cleaning is required, and be able to schedule the cleaning service. Those cleaners that go above and above will restock your supplies as required for your property, inform you when supplies are running short, even purchase or replace products and give you a charge for their services, and let you know when supplies are running low. The best cleaning services will also wash and replace the linens for you and keep you informed if anything is damaged or goes missing.
It is important that handymen and other suppliers, such as pool and hot tub services, be accessible on short notice in order to handle any functional difficulties that may arise and ensure that your visitors are provided with a 5-star experience as quickly as is physically possible.
Applications for STR management
Your STR company might benefit from using one of the many third-party applications on the market. The process of setting these up might give the impression that you have an additional member of your team.
Both Airbnb and VRBO provide many automation options on their own, which may be enough for managing a single rental property. Alternately, short-term rental management software such as Guesty, Hostway, and Lodgify offers a wide variety of automation capabilities, financial reporting, scheduling appointments, and marketing that may help you take your short-term rental company to the next level.
Many hosts use dynamic pricing solutions like PriceLabs to automate their prices daily, based on the most recent data and demand in the market for their particular property. TurnoverBNB is a piece of software that integrates an STR calendar with the calendars of cleaning partners to ensure that cleaners are scheduled.
These programs, when used together, may make the management of your STR very easier.
4. Conduct research on the rules and regulations that apply to your marketplace
Another essential aspect of managing a successful short-term rental is being familiar with the rules and restrictions imposed by the local municipality where the property is located. You must determine whether you can legally run a vacation rental business on your property.
When a community does have licencing requirements for short-term rentals, such rules are often posted on the official website in the part that deals with planning and zoning. In most instances, the website will have either a section devoted to short-term rentals or a link to an ordinance that details the regulatory criteria that STRs must meet. If you cannot locate anything online, making a quick phone call to your city’s zoning and planning department may provide you with a wealth of information. Due to this, you will also get a “feel” for how a city functions when it comes to enforcing the rules for STRs. On paper, several towns may have very stringent standards, but they may govern in a more laid-back fashion.
In many cases, cities with rules will demand that a property owner or management seek a license to run a short-term rental (STR), in addition to requiring a tax/business ID. When examining the rules and regulations governing short-term rentals, here are some additional possible requirements and restrictions that should be considered:
- Primary residence requirement – In recent times, a number of cities around the US have passed ordinances mandating that the main home be present in order to operate as a short-term rental. You are only allowed to rent out areas of your property that you use, such as a bedroom, an apartment in the basement, a mother-in-law suite, or a separate guest house. Alternately, if a homeowner is going to be away for an extended period of time, the property might be rented out on a short-term basis. According to this theory, investors who invest in short-term rental properties (STRs) push up home prices while also reducing the supply of available homes (highly debated).
- License Fees – Some destination marketplaces necessitate that STR owners pay high costs to operate, whilst the rest are relatively affordable. Check that the licensing costs won’t derail your plans for reaching your financial objectives.
- Lodgers Tax –Both Airbnb and VRBO include these fees in the price, which means the cost is passed on to the visitor. Nevertheless, it is important to be aware of the tax amount and consider whether it would discourage people from booking accommodations in the marketplace that you are trying to attract.
- Property standards/requirements –There are situations when the lot has to have a particular size. One of the most typical requirements is that it must provide a number of off-street parking places for visitors. Check to see that the property satisfies the criteria set by your local government.
- Limit on Operation Days – You should be able to rent the property for 365 days out of every year if possible; nevertheless, I’ve observed a maximum of 240 days, and other cities have a restriction of as little as 30 days.
- Zoning Requirements – In certain cases, municipalities demand that a piece of real estate fulfil the requirements of a particular zoning code before granting a license for short-term rentals.
There are still many communities in the United States that do not have any restrictions regarding short-term rentals. Some shareholders are attracted to the Wild West atmosphere and the ability to operate without applicable regulations. However, a word of caution is for communities that do not have regulations: the status quo might shift at any moment.
Most shareholders who have found a place for themselves and scaled in the short-term rental industry advise avoiding making significant investments in places that are not regulated. Instead, they recommend investing in locations with rules in place that are favorable to short-term rentals. They believe it to be safer since there are rules in place that have been voted upon and written down, making it less likely that the restrictions will be changed in the future.
If an uncontrolled municipality has an increasing number of short-term rental properties, the local government may decide to pass new legislation, which may result in the closure of lucrative short-term rentals. Many individuals choose to steer clear of this danger and instead focus on finding marketplaces where the city has permitted them to run STRs.
Always follow the regulations, and take precautions to protect your company from any potential damage.
Concluding Remarks
When investing in short-term rental properties, you need to be familiar with a wide variety of factors and considerations. However, if you have your figures nailed down, the right frame of mind your team put together. With a good understanding of the rules that govern your marketplace, there are incredible chances to be found in the short-term rental industry.
If implemented properly, the short-term rental approach can result in high cap rates, double-digit cash-on-cash returns, and substantial cash flow. This is the concept that I will use for all of my real estate investments, and I really hope that you will have the same level of success with short-term rentals as you start your journey into real estate investing!
Get Funding for Short-Term Rentals
Whether you are looking to refinance or purchase short-term rentals its always good to have access to short-term rental mortgage lender. The likes of New City Financial, we decades of commercial real estate investment funding experience. Click here to get a rate quote or call 848-262-3847.
