Location is important, but your clients also should think about property management and occupancy rates before making a purchase.
With more investment opportunities popping up as the housing market begins to recover, properties that investors can turn into short-term rentals are in demand. Short-term rentals can be profitable, but that depends on a wide range of factors. Educating yourself on short-term rentals in your market is important in order to help investors achieve their goals. Start by understanding these three principles.
1. There’s more to location than you think. Obviously, your client will make more money from a vacation rental that’s in a popular tourism destination. Beach houses, areas with nightlife and cultural events, holiday destinations or places close to outdoor activities are all good bets. Rural and suburban locations typically are less appealing to the traveler. Even the property’s location within a popular destination influences decision-making. For example, a city property that is close to theaters, landmarks and public transportation will command a higher rent than one in an outlying area where it’s harder to access the city’s attractions.
But location concerns are bigger than this. Many municipalities have put restrictions on Airbnb rentals or banned them altogether. Neighborhoods and multiunit buildings may also have stringent rules around length of stay, so there may be multiple sets of rules and regulations to navigate. Educate yourself on the ins and outs of short-term rentals in your area so you can best inform your clients.
2. Property management can be intense. While short-term rental platforms like Airbnb and VRBO can streamline short-term rental property management, they can’t do it all. Someone has to interact with guests, arrange the details and clean and maintain the property. It take much more time to manage a short-term rental versus a long-term rental property.
Every time a guest leaves, the home must be thoroughly cleaned and put back into pristine order. Sometimes, the owner or property manager will only have a handful of hours to do all of these tasks before the next guest arrives. A colleague of mine once had a guest check out late, and as they were leaving, another guest arrived early. This didn’t give my colleague a lot of time to get the property in tip-top shape.
The stress and time pressures of a short-term rental should be discussed up front; perhaps your client will decide to invest in another type of property when they take everything into consideration. Or perhaps they love the idea of a fast-paced income opportunity where they interact with all different types of people. Whatever the case, it’s your job to help them be successful and give them all the information they need to make an educated decision.
3. Profit potential is high, but occupancy is unpredictable. As with any investment, a short-term rental must be able to prove ROI. There is no across-the-board number for a “good” ROI on a real estate investment, but on average, it is recommended to aim for an ROI above 15%. Your client not only will have to consider how much properties in the area are renting for on a short-term basis, based on size, location and other amenities, but will have to consider factors like their personal investment goal.
Here’s a simple example: A client purchases a rental property for $400,000 and pays an additional $20,000 in closing fees and maintenance/repair costs. For a long-term rental, they would set a monthly rent amount—let’s say $2,500 per month. If they divide income by expenses, the yearly ROI would be just over 7%. Whether 7% is a “good” or “bad” number is completely dependent on their specific financial situation and the property in which they’ve chosen to invest. (Of course, there are insurance, tax and maintenance costs to consider, but that’s another conversation.)
However, with a short-term vacation rental, occupancy can fluctuate wildly, so it is hard to say what the exact income would be. You can come close by exploring other rentals in the area to make some educated comparisons and doing some preliminary research to try to come close to estimating annual occupancy rates. Generally, short-term vacation rentals have a higher profit margin. The potential is there for high ROI, but it is a higher risk and dependent on a variety of external factors.
The benefits and pitfalls of short-term rentals all come down to context. Location, management concerns, local regulations, and overall value and profitability are just a few of the moving pieces. As a real estate pro, educating yourself about the intricacies of your market will help you help your clients make the best decision possible for their real estate investment future.
