15 Valuable Tips for Investing in Short Term Rentals
Short term rentals are an underused but highly lucrative option for investing in real estate. If you’ve never considered investing in short term rentals, you’re certainly not alone. However, this is actually an excellent investment opportunity for even the novice real estate investor.
Advantages to short term rentals
- You don’t have to deal with long-term tenants.
- You mostly deal in direct cash transactions.
- Typically, you get your money up front at the time of the reservation. That cuts down on money lost due to tenants failing to pay their rent.
- The average monthly income can be quite high, up to several thousand dollars per month per property.
- Once you get a team of maintenance people that are easily available, you have a relatively low hassle factor.
- There are built-in platforms for starting to market your property, such as Airbnb.com.
If you’re considering investing in short term rentals, you need a plan! It’s not quite as simple as putting a hammer to a nail. If you’re looking for a way to achieve financial independence through a unique niche, this could be for you! Here are some tips for you as you plan your strategy for investing in short term rentals.
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1. Recognize that this is not exactly passive income
Investing in short term rentals is not necessarily passive income. It’s more of an active investment. It actually requires quite a bit of work up front until it becomes more passive down the line.
Eventually, once you’ve bought the property, upgraded it, and started to get some tenants, you build a more steady rhythm. As with any “passive income” plan, it does require some active work, but there is a great opportunity for it to become passive over time.
2. Don’t think that short term rentals have to be “vacati0n homes.”
Short term rentals don’t have to be related to vacation homes. You can make a lot of money renting a home to someone in your community for a short period of time.
You can cater to people who:
- want a “staycation”
- need a place to stay for coming into town for a medical procedure
- need a place to stay while they’re renovating their house.
Catering to people who are coming to stay in town to be close to someone who is in a hospital is incredibly marketable. Many people who want to be close to loved ones during a prolonged hospital stay prefer a home over a hotel. Marketing directly to hospitals is a great way to increase your occupancy.
3. Choose your market carefully
When assessing a market where you want to buy a property, you can buy a property in your local market or a more distant town. You need to assess the local, city, county, and HOA regulations to make sure it’s a viable market. Tools like airdna.co can give you a lot of information.
You can start looking at sites like Zillow and Redfin to find properties that are available, then go to airdna.co to come up with data on how much rental income you can expect, how often properties are rented, etc.
Take the time to make sure that the market can support short term rentals and that there are actually some opportunities to find regular tenants. Some features of a high-yield short term rental market might include:
- Professional/college sports teams
- Large metropolitan areas
- College towns
- Vacation areas
4. Buy the “right property”
Buying the “right property” at a great deal takes some experience. Spend time doing research. Don’t just buy a house that’s cheap. It may be cheap for a reason! Take your time and be patient. Most of the money that you make on a real estate deal is made when you buy the house.
I recommend buying a house in your local area for your first property. Go over and see the property firsthand. Pictures can be deceiving. Walk the property, drive through the neighborhood, and figure out if you’re close to features of interest in the community.
5. When you market the property, a picture is worth 1,000 words
You need a house that is going to photograph well. The pictures need to look fantastic, and you need to get a high quality professional photographer.
This is not the time to go cheap and save a few dollars. Invest in high quality photos and you can use them forever. Over 90% of people who select a place to stay do so on the basis of the pictures of the property that they see. So, get good ones!
6. Understand your competition!
When you choose a property, consider who your competition will be. When you buy a low-cost property, you’re competing with every hotel in the area. If you’re buying a luxury property, you’re competing for higher-end clientele.
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7. Select high-quality tenants.
Consider setting a higher minimum age (28-30 years old) to select for more mature clients. Consider setting a three-night minimum. State in the rules that you don’t allow parties or events. Add a fee for cleaning or for excessive guests.
Install cameras on the outside of the property to keep an eye on how many people are coming and going. It only takes one crazy party that costs thousands of dollars in damage repair to kill your profitability.
8. Understand the local and state regulations
The regulations for short-term renters and long-term renters are different. Short-term renters don’t have tenants rights unless they have a longer stay (28-30 days). You can convert a short-term rental into a long-term rental if you want, so be sure that you look into both sets of regulations.
The last thing you want is to market a property and have it turn out to be in a community that doesn’t allow short term rentals or that requires an unexpected licensing process. Read the rules!
9. Know how much income you can expect
Short-term rentals can be highly lucrative. You can make $1,000-$2,000 per month for a basic property. Luxury properties can make closer to $3,000-$5,000 per month. So, you could basically be financially independent with 3-4 properties.
But, this can go way down if you employ a property management company or if your local area has really high taxes. Sit down and prepare a budget. Based on your expected expenses, how many nights per month do you need to be occupied in order to make a profit?
Don’t guess, do some calculations.
10. Create an advertising/marketing plan
Advertising? Start with AirBNB and VRBO. Do both initially, because you can get bookings in both places. Booking.com is another site that is starting to show more vacation rentals as well.
You can also do direct booking with creating your own website for it. You could do direct bookings by working with hospitals, wedding venues, and event planners.
Direct booking is the best option because you get to keep 100% of your income instead of forking over a percentage to a third-party site.
Return clientele can be a great way to get bookings. You can contact previous clients and send them the schedule for a local sports team or other major events. Giving them “priority access” to choose their rental weekends first can be a great way to develop loyalty with great tenants.
11. Plan your financing
Most luxury properties are too expensive to be able to pay for in cash. A typical investment property needs a 20-25% down payment. Save up and put at least 20% down. If you can’t do that, you’re taking on a big risk in terms of monthly mortgage payments, etc. Give yourself some cushion by putting down at least 20%.
12. What are your tax implications?
There are significant tax advantages to owning rental properties. For long-term rentals, you can get professional realtor status if you work at the real estate >51% of your time for a minimum of 750 hours per year.
But, for short term rentals, you can deduct all of your expenses which can help lower your tax liability. Check with your tax professional to be sure you’re staying within the legal standards.
13. Plan for your expenses
Typical expenses for the property include:
- short-term rental insurance
- principal/interest on the mortgage
- cleaning service
- entertainment package for TV (not necessary cable TV)
- furnishing the property up front
- consumables like toilet paper and toiletries.
Again, make a budget!
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14. Create a rental agreement
Make sure you have a rental agreement that covers you in terms of limiting liability in case someone gets injured on your property. Also, get umbrella insurance coverage.
Additionally, set up an LLC or some other way to create a limited liability situation so you’re not exposed to a lot of liability.
15. Consider hiring a property management company
Hiring a property management company can be helpful, but it really cuts into your bottom line. It’s some work up front to deal with urgent problems like HVAC or plumbing issues, but once you have a team in place, it’s easy enough to dispatch people quickly.
You need to think about your personal situation and whether you have the time and mental energy to deal with emergencies when they arise. If not, it may be worth it to pay a property management company to take care of urgent issues for you. Just remember, it’ll really hurt your profitability.
Short term rentals offer an incredible opportunity to diversify your income streams and get more financially secure. It takes some planning and work upfront, but once you’ve built your system, it’s much more passive!
If you’re thinking this might be a good way to explore opportunities to invest in real estate, talk to friends that have done it, do some research and just go for it!
Take the course!
Dr. David Draghinas has been using short term rental real estate investing for years to gain financial independence. He has taken that knowledge and experience and packaged it into a course that will show you how to do it too! The course will take you step by step through the process of buying a property, marketing it, maintaining it, renting it, and maximizing your profit from it. It’s an incredibly high-yield course, especially if you’ve never thought about becoming a real estate investor!
If you’re ready to become financially independent with just a few investment properties without the bother and hassle of being a long-term landlord, this is the course for you! If you register using my link, I’ll throw in a one hour financial coaching session for you FOR FREE! That’s a $200 bonus!
- Listen to the companion podcast episode with Dr. David Draghinas.
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- 9 Easy Steps to Building a Great Investing Strategy Using the Tax-Efficient Waterfall
Please leave a comment below! Have you ever considered short term rental investing? What would you like to know about it?
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