Investing in a short term rental is an ideal way of making money and saving on taxes. Short term rentals are proving more lucrative than long-term rentals, and more investors are getting in on the action.
Most administrations are reducing the restrictions originally introduced to reduce the spread of Covid-19. This means that most people have started traveling and prefer private accommodations to give them the sense of being home away from home.
The traveling business has made a major shift with the introduction of short term rentals known as Airbnb. Huge corporations and luxurious resorts are no longer leading in the short term rental market. Landlords and property owners are beginning to take up a larger share of the short term rental market when it comes to hosting guests and travelers.
This article will cover everything about a short term rental, from its definition, pros and cons, and why you should consider owning a short term rental property as an investor.
What Is a Short Term Rental Property?
Short term rental refers to a property with a lease with a life span of fewer than 12 months. It may come in the form of a multi-family or single home, a townhouse, or a condominium. The property owner will buy such a real estate property to generate rental income and not to live in it.
These short term rentals are famously used as vacation homes and Airbnbs in areas viewed as tourist destinations. However, they can also be rented out to people that need a place to stay for a period that is less than 12 months, which is viewed as a standard traditional lease period.
Recently the industry has developed from being a side gig for property owners to make extra money into a flourishing industry in several markets across the country.
Before investing in a short term rental property, you need to know that these properties demand proper management and outstanding local real estate market knowledge.
Are Short Term Rentals Profitable?
A short-time rental property can only be profitable if the property management is done correctly. You should not be under the illusion that the rental property will produce passive income without effort. Before investing your money, there are some factors you need to be aware of that will determine if your investment is profitable or not.
These properties thrive in vacation destinations because they are favored by tourists who consider their prices competitive compared to the pricy hotels and five-star resorts.
Local legislation and regulations will determine how the real estate market is set up in a particular area. A good example is New York, where strict policies restrict the number of days your property will remain occupied. These restrictions will hinder your ability to generate constant income.
If you acquire rental properties in areas that favor short term rentals, ensure that you familiarize yourself with the local legislation and regulations governing that particular real estate market. In addition to that, you can also find out their stance on platforms like Airbnb or HomeAway.
A good marketing strategy will determine whether your investment turns into a goldmine or becomes a waste of finances. You might be tempted not to pay close attention to your marketing strategy when you purchase a short term rental property in an area considered a tourist destination. However, it is not advisable to invest in a vacation rental property with no idea how to market your vacation rental property to prospective customers.
A good marketing plan should include clear images and videos, comprehensive property descriptions, and proper communication with the guests. You can inform potential customers of the amenities near the property, such as shopping stores and restaurants. Also, listing cultural and historic landmarks with the potential to interest your guests is an added advantage.
Another method of advertising is the use of social media. Some short term rentals have created Instagram accounts and contracted influencers to create content promoting the investment property.
Pros of a Short Term Rental Property
Short term rentals are a great investment because they have the following benefits.
More Earnings
A short term rental situated in a desirable location and adequately marketed will generate more income than a long-term rental. You should research rental demands in your area, but you will realize that vacation rentals are superior earners compared to yearly leases.
Superior Maintenance
With short term rentals, you have an opportunity to take better care of your property investment. With the short stays, you can get in more frequently and have the rental property cleaned while also spotting maintenance problems before they get out of hand. Some vacation rentals even charge cleaning fees, so you do not pay for upkeep from your pocket.
Flexibility
You have the power to decide when you want to offer your property for rental. In case there are some renovations to be done, you can choose to block your calendar for the entire period the renovations are taking place.
You are also allowed to adjust prices as you deem fit. You have an opportunity to make adjustments to the fees you are charging so that you remain competitive. Most clients prefer the flexibility that comes with dealing with the owner rather than a hotel manager.
Appreciation
Apart from the monthly rental income, your property appreciates yearly. The longer you stay with your rental property, the better its value will be when you decide to sell it. The rate might not be predetermined, but real estate normally appreciates.
Accessibility
Short term rentals will allow you to get a loan to help acquire the property. This means you can use credit to generate more income. New investors with limited capital will find this suitable. It allows you to build wealth faster, especially if you can leverage debt to make a profit.
Tax Benefits
Short term rentals remain appealing due to the many tax advantages they offer. If you bought the property with a loan, the interest paid on that loan is considered a tax write-off. You also receive deductions for management, maintenance, marketing, insurance, and so much more. Depreciation on the property can also be a tax deduction.
Cons of a Short Term Rental Property
Here are a few drawbacks of having a short term rental property.
Difficult to Scale
To achieve total financial freedom, you need your portfolio to grow. You can achieve portfolio growth if you have a few short term rentals performing highly. For your cash flow to grow, you need to continuously grow your portfolio.
You can leverage a loan to acquire one or two short term rentals. However, it will reach a point where you will be required to put down a sizeable down payment. This means you need more cash for your portfolio to grow.
You may decide to cashflow rentals by purchasing using the BRRRR method, which requires little or no money put down. This strategy will be useful in helping you scale up without having a significant amount of money to make a down payment.
Vague Appreciation Potential
One benefit of cash-flowing rentals is the ability to expectedly “compel appreciation.” What it means is that you can control the amount of appreciation you force by increasing the net income of the rental property.
The ability to force appreciation becomes less reliable with short term rentals. This is because, with smaller comparable properties, the value will be based on market appreciation rather than the income generated.
Limits to Tax Benefits
Bonus depreciation is one way of generating losses, but it can only be claimed once under one property. Therefore, you must acquire a new property if you want to claim another bonus depreciation.
This is done by selling the already-owned property and buying a larger property. By doing this, you can claim bonus depreciation on the newly purchased property.
You can go through this process with a short term rental, but you need to ask yourself if you are willing to trade in your current property and buy a new one after furnishing and getting the property working just the way you want it.
Another thing to remember is that you will be trading up for a more expensive property begging the question, how high can one go with a short term rental?
When dealing with a short term rental, there is a limit to how expensive you can go before the transaction seizes to make economic sense because a) there is a limit to how much in fees you can charge for a stay and b) the number of clients in the market willing and able to afford the expensive stay is limited.
Short term rentals have advantages and disadvantages to consider before making your investment. Short term rentals can work best if they add to existing cashflow rental property.
