Are you considering investing in a short-term rental (STR for short)? Our formerly small, fringe business—which started a few decades ago with classified ads and word-of-mouth referrals—has met mainstream investing in a big way.
Thanks to unicorn startups like Airbnb (now a household name), shifts in the housing market, travel demand, and other factors, short-term rentals are now recognized as a legitimate investment opportunity by agents, lenders, and hoteliers.
Not only that, STRs give long-term rentals a run for their money when it comes to attracting investor attention. When studying short and long-term rentals side by side, short-term/vacation rentals often net nearly 2x more than their long-term counterparts. This makes STRs a prime opportunity not only for everyday real estate investors, but also for larger investment groups such as funds.
Of course, there are a number of steps between making your rental property investment and the ROI stage where you reap the benefits. It can be intimidating! You need the right know-how in order to earn passive income from a rental business.
That’s why The Distinguished Guest, along with vacation rental real estate pro Erica Muller of VRolio, are breaking it all down for you below with our top 9 tips to consider when purchasing an STR investment property.
Follow these in (roughly) chronological order and you’ll be covered for some of the trickiest aspects of making a property investment.
Determine your goals.
First and foremost, decide what type of buyer you are. Are you a hobbyist looking to cover the cost of your second home or vacation home before you retire there? A serial investor looking to build a real estate empire? Somewhere in the middle?
The answer to this question will determine the right location(s) where you begin your property search. If you are in the game for a second home to retire to, then your dreams will determine your location. If you are primarily an investor, then you will be searching for investments and locations that yield the highest ROI. (Ideally, if you’re looking for a retirement investment you’ll live in one day, you will also consider the viability of the STR market in that area.)
Erica Muller puts it this way: “Can you set your emotions aside and focus only on numbers, or is it essential to love what you purchase? These questions will help you narrow down your options and figure out what kind of investor you really are.”
Hire an agent that understands the STR market.
Once upon a time, STR-specific real estate agents simply did not exist. That has changed a lot. Take advantage and get yourself a knowledgeable agent that will save you time, and potentially make you more money.
Erica suggests getting to know your potential agent’s level of expertise when it comes to buying and selling STR properties with interview questions like:
- How many vacation rentals have you sold?
- What is the difference between an Airbnb and a vacation rental?
- What is your strategy for valuing the asset & income side of the vacation rental?
- Are you a Certified Vacation Rental Agent?
Understand local laws when it comes to property owners and short-term rentals.
Once you have an idea of your ideal location, it’s time for another extremely important step: do your research into the area’s STR regulations. Not all vacation/short-term rental markets are created equal—not by a long shot. In some places, it’s not even legal to operate a short-term rental.
Sometimes, there are tax implications between using a property as a primary residence versus a short-term rental investment.
With STR in the mainstream, most agents and relators are (or should be) well versed in regulations regarding their area. If you are upfront with your agent about your intent to STR rent, they can help you identify properties that suit your needs and also ensure that your new business venture is above board.
Be sure you understand the political climate of the area. How long have they allowed STRs? Are there permit fees? Registration requirements? Do I need to pay transient occupancy taxes on annual revenue?
Also, understand the possible direction of the local market in the future. Is there a history of failed legislation that keeps coming up year after year? That can be an indicator of the market’s future climate.
In some heavily regulated markets, advocacy groups are popping up to represent the interest of STR owners and investors, like NASTRA in Nashville, TN and Host 2 Host in Portland, OR. Look into whether or not your selected market has such a group; they can often provide a wealth of info and resources, as well as opportunities to get involved and be heard.
Look into your competition and do some market research.
Once you have your vetted agent, ask them to help you understand what a good investment in the rental market looks like in terms of:
- Average occupancy
- Average nightly rates
- Seasonal rates
- HOA Terms
- Mortgage Payments
- Operating expenses
- Big Ticket events that draw guests at certain times of the year
Next, ask them to refer you to one of their past clients who is now running a successful STR in the area so you can get a second perspective on the above.
But don’t stop there! Scour the listing sites like Airbnb/Vrbo to make your own determination on rental and occupancy rates, as well as property taxes, insurance, and other relevant factors.
Run the numbers for cash flow and rental income.
Whether you’re a hobbyist or a serial investor, running the numbers is essential. Luckily, companies like Vrolio have free resources that can help you do just that—and it is specific to the STR industry. Make sure you look at both your interest rates depending on your credit score, your cap rate, and your cash on cash return. Understanding where you want to be with this is key to guiding your investment.
Be sure to factor in maintenance and property management company costs, if applicable.
Make an offer.
Now it’s time to place your offer and get this ball rolling! But first, there are more questions to ask, like:
What exactly is included in the purchase price? The existing bookings? Furnishings? What about any intellectual property, like property branding, a website, an email list of past guests, existing listings on booking sites, or other value-add items? Will you hire property management? How will you deal with delinquent renters?
Also, consider the legal logistics of the transfer of all of the additional assets. Does your loan program allow for you to protect the sale by writing the assets into the contract, or not?
Having your agent assess the asset and income value of the property will help you better understand if your offer is in line or not.
Do your due diligence on your short-term rental property.
Review all of the reports that you receive, like the home inspection, and give them a shrewd eye. That means running the numbers again (and again) and also preparing a capital plan.
Consider that some items in the home may need to be replaced over time, like large appliances, flooring, and paint, as well as roof repair and pool maintenance.
During this time, if you want to hit the ground running, you might also consider creating your listing on Airbnb and Vrbo, setting up your social media accounts and planning any upgrades needed to open your home for business.
Close the deal.
At this stage, make sure any bookings made prior to your purchase have all been turned over to you or your manager, and any advance deposits and down payments collected are accounted for on the closing statement (if applicable). Review the numbers with the title company, make sure insurance is in place, and that utilities have been transferred.
Get ready to open for business!
There are a ton of excellent resources out there for the new STR investor. For one place to start, check out The Distinguished Guest’s Modern Hospitality Guide for tips and tricks to make guests happy, get great reviews, and rake in the repeat business that will set you up for success.