The age-old issue of "short term vs. long term" rental investments rages on among real estate investors. The truth is that some investors are more suited for one type of investment than others.
Even when armed with industry-leading real estate investment software, most investors prefer to focus on one or the other because it is easier to scale investments this way.
But is investing in short term rentals right for you? Here are 5 questions to ask in order to find out if it’s the path for you.
Question 1: Do You Have A Deep Understanding Of Real Estate Investing?
Before even looking at property prices, you need a thorough understanding of how to invest in real estate. Investing takes time and commitment to the craft, and you can’t walk in blind and expect to hit it out of the park.
Here are some of the main concepts to know about real estate investing before even looking at properties.
1. Getting Financing
Find out how much money you need and what kinds of loans you can get, like a long-term mortgage or a short-term loan for a rental property. You should weigh potential rental income against costs such as property taxes, utilities, and maintenance costs, to make sure the investment makes sense from a financial point of view. Remember to factor loan interest into these costs.
2. Know The Laws & Regulations
Take the time to familiarize yourself with zoning regulations, construction codes, and licensing requirements in your area that may affect short-term rental properties. Find out if there are any laws or restrictions on short-term rentals, such as the number of days permitted or the types of properties that can be rented for short periods of time.
3. Understanding Insurance
Consider the type and amount of insurance required for short-term rentals, such as liability insurance or damage protection. Find out what areas are high-risk locations, such as a flood zone, and make sure you have the appropriate insurance. Comparing providers and coverage is also a critical step to keeping your short term rental investment profitable.
4. Supply & Demand
Look at the local short-term rental market to determine how much demand there is for short-term rentals and how much competition there is. What types of amenities do most properties have? How many beds and baths? Where are most short term rentals located?
Question 2: Do You Understand The Risks And Rewards?
The Risks Of Investing In Short Term Rentals
Legal Compliance: Short-term rentals must abide by local rules and legislation, which are constantly changing. If you don’t keep up with these ever-changing rules and regulations, you risk losing the privilege to rent out your property on a short-term basis.
Property Damage: We’ve all been there…short term rentals are more prone to visitors being more careless with them. This can result in higher repair and maintenance costs, which can eat into overall revenue.
Vacancy Rates: Because of seasonal demand, market saturation, or other causes, vacancy rates for short-term rentals can be high. If you don’t take steps to counter this vacancy, this can quickly destroy your short term rental’s profitability.
The Rewards Of Investing In Short Term Rentals
Appreciation: Short-term rental properties in high-demand areas may appreciate in value over time due to their location and the possibility of increased rental income - especially in areas that are growing quickly.
Tax Benefits: Short term rentals can help you shelter some of your earned income and keep more of that in your pocket.
Higher Rental Income: Because of higher rates and the flexibility to accommodate more guests, short-term rentals can earn more money than traditional long-term rentals. And this is, at the end of the day, the goal of most real estate investors.
Question 3: Do You Know What The Purchase Process Looks Like?
Knowing how real estate investing works is not the same as knowing how the purchasing flow looks. Here’s how the flow of property purchasing generally works.
1. Investigate Areas & Properties
Even after landing on a city, you still need to determine where in the city you’ll buy property. Consider foot traffic, amount of tourists, proximity to attractions, and local regulations when you’re looking at this.
2. Evaluate Potential Properties
Realeflow’s real estate comps software helps you find similar properties to your target property, so you have a much better understanding of how much you should be paying.
After you get a property inspection and are able to estimate your repair costs, you’ll be able to evaluate the property’s projected income and determine if it’s going to meet your financial expectations.
3. Secure Funding
Investigate different funding options for your transaction, such as typical mortgages, short-term loans for rental properties, using a HELOC to purchase rental properties, and any other creative funding methods you can devise.
Remember to factor in loan repayments into your overall budget and costs when you’re looking at a property’s profitability potential.
4. Close On The Property
The fun part comes when you finally get to sign the papers. But make sure you’ve built a team of trusted real estate experts (accountant, lawyer, title company) before closing any deals.
Question 4: Do You Know How To Reduce Vacancy?
Short-term rental investments must have low vacancy rates in order to be successful. Here are some of the finest strategies for landlords to keep their homes rented and profitable:
1. Set Competitive Rates
Look at the local market to see what other rental rates are like, and adjust your prices to remain competitive while still generating a profit. Remember to always keep an eye on rental rates and make adjustments as needed to remain competitive and profitable.
2. List Your Property
Make sure to optimize your listing on places like AirBnb, VRBO and Homeaway with killer copywriting and high resolution, professionally shot photos.
3. Provide Outstanding Management
Respond to renters' questions as quickly as possible. Sometimes, if they’re between two properties, renters will go with the property that responds the fastest. You’ll also want to have great maintenance staff and/or contractors on your team so that they can handle any and all issues as they arise.
4. Build A Solid Reputation
We all know good reviews mean the world to properties. So make sure you find creative ways to incentivize renters to leave good reviews across any platforms you list on.
Question 5: Are You Looking At The Right Spots?
Location, location, location - am I right? The best location for short term rentals is usually different than target locations for long term rentals. Here’s where you want to look when you’re looking for short term rental properties;
1. Growing Cities
Investing in short-term rentals in a growing city is an absolute goldrush for real estate investors. Imagine investing in Austin 15 years ago!
But predicting the market is extremely difficult, and takes years of real estate investment experience to begin to predict location growth with any accuracy.
2. College Towns
In college towns, especially near well-known institutions or colleges, short-term rentals can be an excellent option. Visitors not only included parents and visiting teachers, but universities often hold conferences that attract visitors from all over the world.
3. Tourist Areas
Tourist destinations can be ideal for short-term rentals. Tourists are likely to pay a high price for properties in or near popular tourist destinations such as national parks, museums, and other cultural or historical attractions.
Investors may consider sites near airports or train stations in order to make it easier for tourists to access the property.
4. Well-Known Vacation Destinations
Tourists are likely to be interested in properties located on or near beaches, ski resorts, or other popular holiday destinations.
Investors should look at properties near popular tourist attractions, such as amusement parks or natural sights, in order to attract visitors.
Short term rentals are the goal for many real estate investors - and if you think it’s right for you, it’s time to get after it! And while you’re building your strategy, remember to leverage industry-leading investment software like Realeflow, where you can keep your leads, marketing tools, outreach templates and deal flows all in one place.
To help you get started, you can grab a 7-day free trial of Realeflow here!