Many people have found success after investing in short-term rentals ever since the emergence of Airbnb and similar listing sites.
Real estate investors who used to focus solely on long-term leases are now diversifying and turning their properties into successful short-term rentals.
What exactly are short-term rentals? More importantly, why are they seen as exciting investment opportunities and lucrative sources of income?
Short-Term Rentals 101
A short-term rental property is a furnished living space people rent out for short periods. Instead of leasing for a year or a couple of years at a time to a single rentee, short-term properties can be rented starting from a couple of days to several weeks.
Some short-term stays can last for as long as a month. Generally, any length of time under six months is still considered a short-term rental.
Thanks to the success of Airbnb, Homestay, Vrbo, and many other listing sites for vacation rentals, it has become much easier to find short-term guests.
This has greatly contributed to the rise of successful short-term rentals.
What is the Target Audience of Short-Term Rentals?
In the simplest of terms, it is a vacation rental. However, instead of catering only to tourists on vacation, the target market extends to other people as well.
These may include:
● Locals looking for a “staycation”
● People in the city for business or a medical procedure
● Families renovating their home
What Kind of Properties Can Be Successful Short-Term Rentals?
This can be a bit tricky. It may depend on what the city or local government allows. Some are laxer and allow entire single-family homes as short-term rentals. However, others are much stricter and limit vacation rentals to single rooms.
Some people choose to rent studio or single-bedroom apartments and condos on a short-term basis.
These types of properties are often successful among solo or duo travelers and in tourist-heavy areas.
Benefits of Short-Term Rental Investments
Those who invest in short-term rentals reap different benefits from those who lease their properties for the long term.
Here are some of the benefits of managing successful short-term rentals.
● Higher potential earnings: With the right property, the right location, and enough bookings, it’s easy to double or even triple the income you would have gotten from long-term rentals.
Think about it — average long-term residential rentals charge around $1,000 to $1,500 per month or $12,000 to $12,000 annually.
But for a short-term rental priced at $150 to $200 per night, you can potentially earn $2,250 to $3,000 per month even with only 15 days of occupancy.
In one year, you stand to earn $27,000 to $36,000.
● Upfront payment: The majority of short-term rental site listings require guests to pay either half or the whole rental fee upfront.
This can include any cleaning fees and miscellaneous costs you decide on, too. As such, this lowers the risk of nonpayment, scams, and bill skipping.
Moreover, many online rental listing sites transfer payments on a per-customer basis, rather than at the end of each month.
● Availability for personal use: This is one of the biggest perks for property owners. Since you invested your time and money into making the property look nice, it’s best to be able to use it occasionally, as well.
Additionally, the money you earn from the rental can be used to pay for the property’s mortgage. You get to enjoy a vacation property and a steady source of cash flow in one.
● Tax deductions and benefits: Each trip and stay the owner makes to a short-rental property can be written off or deducted come tax filing season.
This means you can stay for a while on your vacation rental, conduct maintenance work or repairs, and improve the place’s look without really losing much business.
● Higher property appraisal: Successful short-term rental properties generally get a higher property appraisal value. This is because appraisers consider the rental as an income property and use the “income approach” when appraising.
Naturally, properties that generate cash flow are considered more valuable than regular residential ones
● Low capital necessary: You don’t need as much capital to develop a nice short-term rental property, especially compared to regular long-term rentals.
In some cases, you don’t even need to make a purchase. Many people start with leasing a property for a year or more then subletting or subletting it on a short-term basis.
● Less wear and tear: Short-term rentals generally don’t have to worry about tenant modifications, regular kitchen use, and large-scale repairs. If your primary target customers are tourists, they would likely only be staying to sleep for the night.
Unless you were unfortunate enough to get truly messy and unscrupulous guests, you can expect a longer-lasting property.
Challenges of Running Short-Term Rentals
As with other popular investments, short-term rentals also have their fair share of disadvantages and risks.
Knowing the drawbacks of your venture will help you prepare accordingly and implement a short-term rental strategy to counter them.
These are a few factors to consider before pushing through with a short-term rental investment.
● Local laws and legislation: It is crucial to be aware and stay up-to-date with rules and regulations implemented by the local municipality or city government.
Take note that there are now cities that restrict short-term rentals and impose tax rates equal to that of hotels or motels. Failure to keep up with the law can cost you a lot.
● Aggressive marketing: You will need to market your property as much as possible to draw in guests. Moreover, it might not be enough to list the property on only one platform.
Maintaining multiple platform listings, advertising on social media, and encouraging repeat guests are necessary for successful short-term rentals.
● Regular upkeep and furniture updates: Keeping your short-term rental well-kept and nicely furnished will help attract more customers. To maintain an attractive property, you should also be prepared to update and improve the furniture regularly.
● Market volatility: Right now, the short-term rental industry is still doing well. However, that does not guarantee a steady influx of guests. You can expect high occupancy rates during the holidays and weekends, but on regular weekdays, you may need to do even more marketing.
Should your short-term rental fail to perform well even on holidays and while the economic trend is upwards, you might need to consider converting it into a long-term property.
● High competition: As we’ve mentioned earlier, the competition in the short-term rental industry is going up. This is largely due to the increasing availability and convenience of booking vacation rentals using online platforms.
Additionally, more and more people are seeing the income-earning opportunities it presents.
Strategies for Successful Short Term Rentals
Now that we’ve covered the pros and cons of running a short-term rental property, we can move on to finding a short-term rental strategy for success.
As with any investment and business opportunity, it is important to have a plan beforehand.
Anyone aiming to build wealth and achieve financial independence with short-term rentals needs to be smart to get the most out of their income source.
Here are a few tips and strategies to earn big with short-term rentals.
Choose the Target Market and Location Carefully
Considering your target market or audience and property location are equally important. Both of these factors are large indicators of potential income.
Take note that millennials are the main driving force of short-term stays and rentals. This means you would do well to cater to this demographic and their style or amenity preferences.
Another thing to be aware of is millennials’ increasing preference towards experiences over material things.
Providing a good overall vacation or staycation experience can help you gain repeat guests and free advertising through guests’ reviews and social media posts.
In terms of property location, we’re sure it’s no surprise that areas close to tourist destinations get more guests. Other good locations are those near concert grounds, sports stadiums, or hospitals.
Smaller cities with fewer hotels and motels but beautiful surroundings also fetch high median short-term rental profits.
Price Accordingly and Adjust Regularly
One thing you need to learn when managing short-term rentals is how to price accordingly. And more importantly, when and how much to adjust it.
Short-term rental rates need to be more flexible than long-term ones. It isn’t something you can set at the start of the year and forget for the rest.
You need to account for several highly fluctuating factors that may influence demand, such as:
● Local supply
● Tourist or guest demand
● Seasonal timing
● Scheduled local events
Get Proper Insurance
A regular homeowner’s policy likely won’t cover your rental property. Running a vacation rental is generally considered a business venture and thus falls outside the scope of homeowner’s insurance.
You will need to look into special short-term rental insurance policies. Aside from the usual insurance coverage inclusions, it is best to get a policy that also covers the following:
● Identity theft
● Loss of income
● Excess use of utilities
● Liquor liability
A Quick Guide to Short-Term Rentals and Taxes
Familiarizing yourself with the ins and outs of filing taxes for short-term rentals is another way you can maximize your earnings.
Depending on how you run your short-term rental, you may be eligible to completely forgo paying income taxes or deduct more than one rental-related expense.
It is best to consult a financial advisor or accountant to learn more about these tax benefits.
Here are some fast facts you will need to know.
When Are Short-term Rentals Non-taxable?
There is no need to pay income taxes for your short-term rental earnings if you:
● Rented the property for less than 14 days the entire year
● Resided on the rental property for at least 14 during the year
What Kind of Taxes Will I Need to Pay?
The type of taxes you would be subjected to depends on how you report your short-term rental income. You can choose between active business income (Schedule C) or passive business income (Schedule E).
If you report your short-term rental as a Schedule C or active business income, you will need to pay self-employment taxes on top of income taxes. The current self-employment tax rate is at 15.3%, so this is a sizable addition.
If you report your income as passive or Schedule E, then you won’t have to pay the extra self-employment tax.
Does My Short-term Rental Qualify as Passive or Active Income?
Take note that you only qualify for passive income or Schedule E income if you do not offer any substantial services to guests. These services are akin to those offered by regular hotels and tourist centers.
● Concierge services
● Daily linen change for the same guests
● Conducting tours and outings
● Providing meals, such as daily breakfast
● Offering transportation
● Room or house cleaning while occupied by the guests
Providing even just one of the substantial services would immediately qualify your rental investment as an active business income, thus requiring you to pay an additional tax.
If you only stick to providing insubstantial services, then you can avoid paying higher taxes. You can provide the following insubstantial services without any worry about your tax rate:
● Water and gas
● Heating, ventilation, and air conditioning
● Internet or wi-fi services
● Trash collection
● Needed repairs and maintenance
Making the Right Moves
With the right property, location, and strategies, people can build their wealth with the help of short-term rentals. Even novice real estate investors can find success.
As with all investments, though, it is never a good idea to jump the gun too early. This applies even more so for potentially high-earning investments.
Before putting down any money into a short-term rental property, it is best to learn as much as you can about the industry.
Most importantly, it is crucial to familiarize yourself with the top strategies to raise your venture’s chances of success. If you are considering putting down money on a property and turning it into a short-term rental, our team at Sprint Funding can help you get the best mortgage loan for your investment. Contact us today!