Since we’re starting a new venture into the realm of short-term rentals, we thought we’d take this opportunity to share with you all what we’ve had to consider. Buying a short-term rental (or in our case, a vacation property) has the potential to deliver significant income to offset mortgage and other costs. As with any investment, doing your due diligence is an important step that shouldn’t be overlooked.
Ask yourself the following…
What are your goals?
At the end of the day, what are you trying to accomplish with a short-term rental property? Is it all about passive income or are you interested in dipping your toe into the hospitality industry (or, maybe both)? Do you want to enjoy the property yourself? Think about the “why” first and how it contributes to your overall financial and personal goals. For us, it’s about profiting and enjoying the place ourselves if we can help it in our first year. While the income matters, so do the memories!
Where should it be located?
Would you prefer something close by or are you comfortable with trying long-distance hosting? We wanted something close, but not in RVA so we settled on a river home about an hour and a half from our primary home. It’s close enough to get away easily for a weekend, but far enough away to have a different experience than we would have here (oh, and it doesn’t hurt that it’s on the water!). Keep in mind, you don’t have to buy exclusively in a resort or vacation area to run a successful short-term rental business. As long as there’s a hotel nearby, there’s a market for it!
What are the local short-term rental regulations?
Once you have the location nailed down, research the latest STR regulations and ordinances. Unfortunately, these rules are changing all of the time, so it’s helpful to know what the rules are. Additionally, there may be neighborhood HOA restrictions that limit the number of rentals in the area. This can make things tricky, but not impossible. It’s better to know upfront than be surprised after closing!
How involved in hosting and property management do you want to be?
This question also depends on how far away the property is. With a river home 1.5 hours away, we can’t physically do everything ourselves. We need to vet and hire a team of cleaners, handymen and potentially a property manager to help ensure that our guests will get a five star experience. If the property is close by, how much do you want to do yourself? You’ll need to balance “learning by doing” and spending too much time at the property making it less of a passive investment and more of a second job.
How do the numbers work?
How many days per month do you need to rent the place out to break even? How many days a month to make a profit? There are a lot of resources out there that give insight into your area’s occupancy rate (e.g., how often per month other short-term rentals in your area are rented for). Don’t expect a 100% occupancy rate, or even an 80-90% occupancy rate. Try AirDNA.co as a starting place–it let’s you see some some occupancy rates and other data points for free up to a certain point. The average occupancy rate in our river home’s neighborhood is about 60%, so to be safe we are using 50% as our metric for now, knowing that it will be busy in the summer and less so in the winter. There are several other monthly expenses to consider:
- Mortgage (principal, interest, taxes and insurance): Connect with your lender to see what you can afford. While interest rates are low, they will be a bit higher for second home purchases.
- Estimated utilities: water, sewage, trash, electricity, cable/streaming services, and internet to start (WIFI is a big one, don’t forget to account for it!).
- Online travel agencies like Airbnb, VRBO, Booking.com, etc. all take a percentage of your profits (typically around 3% of each booking), so don’t forget to capture that expense based on your occupancy rate.
- Property management fees: short-term rental property managers (or hosts) may charge anywhere from 15-30% to manage your property. This is a big chunk of your profits, but some form of property management help may be necessary depending on your goals.
One last thing…we are by no means experts in the short-term rental space. But, we’re excited to share what we are learning as we go! Let us know if there are particular aspects of short-term rentals you’d like to know more about!