As the concept of Short term rentals gained immense success in a few years, every investor is now considering to invest in short-term rental properties. But they are not like other traditional rental properties. There are many different factors that are responsible for generating more rental yield than long-term rentals. Ever wonder where to start in STRs? And actually, How to invest in short-term rentals? What should be your first step? It’s actually really hard to decide where to start, especially when you are starting out. Vairt has brought an ultimate guide on how to invest in short-term rentals we gonna explain step by step how you can invest in short-term rentals.
Before getting in, you have to first assess yourself. The first step always is self-evaluation, before starting critically ask these questions yourself.
First thing, you have to evaluate your buying power. Evaluate whether have you enough capital to invest in short-term rentals or have the buying power to purchase a property funded by a mortgage. You can get a rough idea about your buying by comparing your income with annual inflation rates and current mortgage rates. For an expert opinion, you must have to consult with a certified public accountant (CPA), especially a person experienced in the real estate market to know your true buying potential.
You find out actually you can purchase a short term rental property, that’s great, but you really have time to manage all this stuff, like you have to manage these properties, you have to advertise or list these properties, there would be short stays you have to involve in this process frequently, there would be a maintenance, housekeeping and many more things that are required for STRs. One thing you can do is to hire a property management company to manage all stuff, but again you have to manage this company also, furthermore, there is the upper cost for this. Can you generate a good profit from rental yield after these expenses? It is another valid question.
Although STRs are highly lucrative and in demand, there is unpredictability involved in it. Seasonality is also involved in it. You have to advertise them in the right way. But after all, there are chances that your property occupancy rate would be lower. Do you have the patience level to bear this situation? Ask yourself can you really handle those scenarios when there would be less rental yield?
Ask yourself did you really need to pursue this strategy. If your portfolio is already producing steady cash flow & you are already those goals that you are supposed to achieve through this strategy. Then why should you pursue this strategy?
As this strategy is high time taking and smart approach. You have to continuously involve in it and take the right decisions, and smartly manage things, people & companies. Honestly ask yourself are you capable to handle all the processes? If this is not your cup of tea then leave it, and pursue that strategy that you can easily pursue. If you are, not able to handle all the processes eventually you will waste your energy and capital.
After all, you have to consider, is it really worth it for you. Does all the process involve in, capital and time you invest in really worth it? Does it provide an effective value in your portfolio? If it could not, then why should you pursue this strategy?
Critically, ask these questions to yourself & independently evaluate yourself without any biases. If you found that you pass these benchmarks, then congratulations, you are good with STRs strategy. But never over stresses things on yourself if you are not able to pursue this strategy then leave it, eventually, the loss will be yours. Although the STRs seem very lucrative and in demand, you have to critically about the different things.
You have to clearly define your goals. What do you really want to gain from Short Term Rental Properties? Did you want to create a cash flow in your investment portfolio? Did you want to set up a source of passive income? Did you want to maintain your expenses? Are you looking for early retirement? Or you want to re-invest in your rentals in the long term.
Before you decide to buy a short term rental property, first do a deep market analysis, study trends & finally make your effective buying decision. There are various factors involved in making short-term rentals more profitable. Keep an eye on everyday changing scenarios in the industry, and algorithms of online marketplaces like Airbnb. You have to keep an on eye which areas have higher occupancy, what kind of properties are more profitable, and what annual growth. In short words you have you follow the market & every day changing market in order to make an effective buying decision.
The next step is buying an actual property. You have to first evaluate the actual property first before buying. We will discuss, What could be the possible factors that make a property more profitable & how you can actually calculate rental yield. We will discuss how to analyze the possible expenses and revenue of the property and make it more profitable.
The most important process in buying a property is evaluating any specific property in any specific area. There are many factors that you should include in your buying decision that would be effective for your investment portfolio. You have to evaluate the property with different considerations from long term rental properties. Obviously, there are some common factors in both long & short term rentals because both are rented out. But short term rentals are far different from long term rentals. You have to consider different kinds of prerequisites before buying a short term rental.
As you know, The golden rule of real estate is location, location, & location. The important thing in real estate is a location that impacts on appreciation, more cashflow, more rental yields, more annual growth eventually the more return on investment you will get if you invest in the desired location. The desired location sounds different from your goals. If you have to invest for the long term & to hold a property, the desired location would mean different for you. But in the case of short-term rentals, you have to invest in those locations that are prime, and more visible to visitors. Furthermore, you have to invest in those areas where tourists are more likely to visit. So, in the case of vacation rentals, invest those areas that are tourists attracted and properties that are more visible and more accessible to tourists. In the case of urban properties’ locations should be urban centers and have more access to markets, restaurants, public transport, and corporate buildings. When you are going to buy a midway house, you should buy a property that is connected to a road nearby a gas station or any other midway facilities. You have to choose your location very wisely in order to grab a high rental yield. So, choose a location wisely according to your goals. Remember the rule.
Another factor that highly affects your annual rental yield is seasonality. Tourists visit different geographical regions in different seasons. For example, most of the tourists are likely to visit Utah in moderate seasons like in the months of April, May, October, & September. In the case of Hawaii, most tourists visit in the least rainy months between march & September. When it comes to eastern coastal areas people like to visit in summer, the months between June to Augusts. In New York, more tourists are expected to visit in winter. What did you notice? There’s a pattern in it, hot areas like Utah have high visitors in moderate seasons, coastal areas have high visitors rate in summers, New York has high visitors in winters. The visitor’s rate depends on seasonality, tourists are likely to visit when there is a pleasant season. People also visit different geographical regions because of different seasonal attractions like hiking, ice skating, and surfing. This how seasonality affects the tourist’s rate. And tourist’s rates will eventually decide your annual occupancy rate and rental yield.
Now what you have to do is to invest in those areas where tourists are more likely to visit for whole years, Or your occupancy rate should be at least 50% in a year. If more tourists are likely to visit in any specific season, that’s good, but you have to keep in view the duration period. It couldn’t be the viable option if your property is fully occupied in two or three months, but in other months the occupancy rate is below then 20%. So, you have to deeply analyze the seasonal factor. The seasonality affects more for vacation properties, but it doesn’t work much for urban properties.
The other important factor that is involved in short-term rentals is demand. Every one of you knows the most common rule of the economy “supply & demand”, if there is high demand for short-term rental in any specific area and less STRs then it’s a good option to invest in but if there’s an excessive supply then you should think about it. The same goes for the short-term rental market. You have to hunt those areas or locations where there’s a less competition and a high tourist rate. If the market is already saturated, then there are very low chances that you would get your desired revenue. There would be more experienced and settled players in the market before you, you have to create your own “first mover advantage”. Invest in areas with less saturation and high tourists rate, this would help you to grow and make your desired revenue with not much effort. The efforts, time, and energy you can put into making your property more profitable, which could you probably waste in fighting the competition.
The ultimate deciding factor in your annual rental yield is the occupancy rate. A higher occupancy rate equals to higher rental yields. The ideal occupancy rate is above 50%. Most of the time, your property should be occupied by visitors. 50% occupancy rate means within a month, and 15 days your property should be occupied. In long term, you have an assurity that your property’s occupancy rate should be 100%. So ideally, the occupancy rate that generates equal revenue to monthly rent and carries out other expenses is feasible. If your occupancy rate is low, then you have to increase rent to cover your other expenses. And then again, high rent would affect the occupancy rate and end up in this loop. Eventually, it causes loss, you have you avoid this loop. You can avoid the loop or generate more revenue by just hunting a property which have more occupancy rate. Occupancy rate again depends on different things like location, accessibility, seasonality, accommodation facilities, and marketing.
The type of property is also to be considered when you are investing in short-term rental property. Like, some properties are more profitable than other types of properties. Let’s take the example of urban properties & rental houses, both can be used for short-term rental properties, but you have to analyze and decide which kind of property could be more profitable or have more potential to generate high rental yield because of the high occupancy rate. You have to keep in view the local market, trends & tenant tendencies to choose any specific kind of property. For an instance, take the example of New York, in New York the trend & tendency of tenants is to choose urban center properties within skyscrapers than single-unit independent houses. So, there according to trends and tenants’ behavior, there are more chances that urban properties would be more profitable than houses. Because their potential occupancy rate would be higher, obviously there are many other factors that decide the ultimate profitability of any kind of property. Like, taxes, property management, housekeeping, and many others which you have to consider while buying any type of property for short-term rental yield.
Always, your ultimate goal is to get more profit, and that’s the reason you preferred short-term rental over traditional renting. There are many factors that affect the profitability of short-term rentals, you can’t assess the profitability by using those parameters that are usually used to assess the profitability of traditional rentals. There are many other expenses like property management and maintenance cost that eventually affects your profitability. More revenue means more profit, more expenses means less profit. Here we gonna find out how you can eventually make a rough estimate about the profitability of any short-term rental property.
In long-term rental it is very easy to find out the monthly or even annually revenue, the reason is the occupancy rate is 100% and rental is fixed. But in short-term rentals, it is a little bit tricky to calculate the exact revenue as it totally depends on the occupancy rate. And by the way, there’s no method to exactly predict the occupancy rate, but keeping in view some factors we can have a rough estimate about the occupancy rate & eventually the revenue of a property. You have to analyze the market & visitor’s tendency to predict the occupancy rate, or you can simply get the static data about any locality on online resources like AirDNA. Let’s say you have an occupancy rate of 70% over the month and the average price per night for a stay is $300. Now you can calculate the rough revenue by this formula.
Occupancy rate / 30 * Average price = Monthly revenue
70% occupancy rate / 30 days = 21 * $300 = $6300
So, this is a rough estimate of the potential revenue you can earn through short-term rentals. But your revenue comes from many ways when it comes to the short-term rentals, as compared to long-term where revenue is can be only earned from one way. But this is not limited to short-term rental, if you aren’t enough profitable then you have the option to increase revenue.
There are many other services than accommodation you can provide to the guests to increase your revenue. Don’t just rely on accommodation, there are many more options to generate revenue from short-term rentals. I mean you have the potential customers, they need those services, just grab the opportunity, otherwise, anyone else will avail it. Just think out of the box, this is not the traditional rental business you have to cast aside the typical mentality of landlords to think like you are operating a hotel & you are responsible to provide the all facilities to your guests & obviously charging them for it. The ways you can generate revenue from short-term rentals are:
Accommodation is the most common way or most of the time only way to generate revenue from short-term rentals. People stay in your property, and you just only provide them with accommodation, and eventually, they pay you for this. The most of the modern-day independent short-term rentals operate only on this revenue. You only charge for accommodation at the typical rates of short-term rentals like $200, $250, and $300 only including this basic service.
Food is a necessity to everyone. If a guest stays in your property, they expect food along with accommodation service because this is the trend that the hotel industry had set. But in the modern-day short-term rental industry, this is not something common because this is how the short-term rental industry is operated (just only on accommodation service). You have to change this traditional drift in the short-term rental industry. Although this extra service can attract more guests and increase the occupancy rate but due to the less feasibility of these methods many STRs owners avoid this service. If you can’t manage the whole operation, you can contract with a third party. Remember, your focus should be on generating more revenue with minimum resources & investment.
Although this isn’t the extra service you provide to your guests. But in some cases, there are separate charges for cleaning services. Just analyze your competitors if they are charging separately for cleaning service then you can consider it. I would never recommend this, you should adjust the cleaning service with basic accommodation service. You can add this to generate more revenue if your competitors are doing the same, but you can also skip this to beat your competition which eventually be the cause of more revenue. It’s totally up to you how you take this.
You can provide other services to your guests according to their demands. Like laundry, spa, Wi-Fi facility and many more. These are the services that your guests gonna always seek for. You have to manage from your side, if you can’t handle this you can simply contract with a third party. This strategy will not only generate revenue for you but also will help you to scale up and vertically grow up in this industry. You can eventually enhance your estimated revenue by this way, which will ultimately decide your profit. More revenue is equal to more profit. Don’t just focus on occupation rate for profitability, you can even earn more with less occupation rate by providing various extra services.
The expenses of short-term rental properties are way different from traditional properties. If there’s a more potential ROI in STRs then there are also more expenses along with the typical expenses of any property. Although the most of the part of your investment capital would spend on interests, taxes, mortgages, insurance, etc. But there are other expenses that are required to run a STRs.
The online community-based platforms aren’t really to provide you opportunities for free. There are fees & certain percentage they charge you to list your property on their platforms. Let’s take the example of Airbnb depending on the plan you choose they charge 3%-15%. Definitely, you have to manage this cost with other expenses.
In short-term rental properties, you have to totally maintain your property on your own. Off course, people stay for a short period of time and there is less wear & tear but are the one who is responsible for the maintenance of your property. You also have to manage this cost from your revenue.
You also have to provide different kinds of utilities to your guest like internet, TV facility, air-conditioning. Obviously, guests not gonna pay extra for these utilities, you have to adjust it with your basic rent.
After a few time, any property needs renovation and restoration. And when it comes to short-term rental properties, only well-maintained properties have more potential to be rented out. You have to manage renovation expenses along with your annual revenue.
You can’t only depend on the online platforms like Airbnb & Vrbo, because there’s much competition and saturation. You should also seek for different avenues like your own website and google business to market & promote your property.
There would be a cleaning cost when a guest leaves your property. You can add extra cleaning charges but this is only feasible when your competitors are doing the same. If not, then you have to adjust the cleaning cost with the basic rent.
You also have to pay for insurance, STRs insurance could be more expensive than the traditional one. You can call different brokers & visit websites to get a better deal.
If you have purchased property on a mortgage, then you have to manage monthly mortgage payments. There would be less profit in the beginning, but eventually, you would be able to build equity.
Also keep in view the taxes, regulation fees, and license charges. You have to pay the taxes on your property. There are different rules and regulations about the taxes on STRs depending on the which state you are living in. In some cases, you may have to pay for a license or permit for STRs. Also, consider these kinds of expenses.
We have considered the all possible ways of revenue and all possible expenses. But the real and more concerning part is what could be the possible return after that. Because in the end, it is the only thing that actually matters. You have to do simple math just minus the expense from the total revenue generated, and the left amount would be your possible return. Let’s say your total revenue was $7100 and your expenses are roughly about $2300.
Total Revenue – Expenses
$7100-2300 = $4800
You can simply increase your profit by lowering the expenses and increasing the revenue. More revenue equals to more profit and more expenses are equal to less profit. Profit is very variable in short-term rental properties as the number of guests varies from month to month. The occupancy rate and visitor trends will define your profit. You have to also keep in view these factors. That could possibly decrease your revenue.
Investing in short-term rentals is way different from traditional rentals. Short-term rentals operate differently, to run a successful STRs you would need time, smart strategy, capital or buying power, a powerful and effective plan to run an STR, and many more things that traditional investment didn’t require. First, you have to evaluate yourself whether you are able to manage this or not and even if you have enough buying power to own an STRs. You have to redefine your investment goals and must choose the most right way to invest in STRs. We have already discussed everything in detail that how you can buy a short-term rental property for an effective rental yield. But to achieve this you have to do a deep market analysis, study consumer trends, & keep in view many others. We hope that you invested your time on the most right thing, reading this guide would be helpful for you and your most of your queries would be answered but if any case of confusion or query you can comment below, we would be happy to answer that!
A Complete Guide on Vairt Real Estate Investment Platform and Investment Opportunities.Download Now
A Complete Guide on Vairt Real Estate Investment Platform and Investment Opportunities.Download Now