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What To Know Before Investing in a Short-Term Rental Property

Are short-term vacation rentals a lucrative business opportunity?

Absolutely! Initially, short-term vacation rentals were just a side hustle for landlords and families with vacation homes.

However, with the recent surge in travel demand, it has become a legitimate and profitable way to generate income.

Don’t underestimate the power of the short-term rental market – it can be a goldmine waiting to be tapped into. With that said, they’re several factors to consider to ensure your vacation rental success.

Short-Term Rental Investment Starts Before the Purchase

Choosing the right STR property in a thriving market can make all the difference. In fact, Realtor.com recently revealed that some of the most attractive STR markets only require 14 days or less of rental income per month to cover the mortgage payment.

Why Are You Buying An STR?

If you’re considering purchasing a short-term rental property, it’s crucial to determine why you are buying a short-term rental property.

Answering this question will help to define your objectives. And defining your objectives will help you to refine your search and find the best short-term investment property for you.

Are you emotionally involved? Do you dream of a place to retire or you can enjoy yourself and possibly share it with your family and friends?

Or are you looking at this as strictly an investment opportunity?

If you have to absolutely love what you purchase, you’ll want to purchase your second home in a place that aligns with your aspirations.

On the contrary, if you are investor minded, you’ll want to find a property with the highest returns possible.

While these two types of buyers may seem to have conflicting goals, you can land somewhere in the middle. Determine what’s your primary objective and make your decisions based on what’s most important to you.

If you end up falling in the middle, you will likely still want to purchase a short-term rental that has a high enough demand to offset the operating costs of a short-term rental business.

Create A Business Plan

Well, before you dive into the search for your ideal short-term rental property, you need to have a solid business plan in place.

As an owner of short-term rental property, it’s essential to understand that you will be providing a service in the marketplace.

This means dealing with travelers and exchanging monies for a service which is essentially running a business. Therefore, it’s crucial to approach your STR investment with the right mindset and treat it as a business from the start.

When crafting your business plan it should outline where you currently stand, where you want to be in the future, and the precise, achievable steps to get there.

Do Your Research

It’s important to approach it with a hospitality mindset. Treat it like you’re running a boutique hotel, and you’ll be in the right frame of mind to launch a successful vacation rental business.

To start, research the market you’re interested in, and consider renting a place there to get a feel for what’s already out there.

When you’re conducting your market analysis, be sure to take into account factors like proximity to local attractions, seasonal demand trends, projected occupancy rates, and local regulations that might affect your investment. You’ll also want to look at the amenities offered by other properties, as well as their average daily rates and revenue growth over time.

But don’t worry, you don’t have to go it alone. Companies like AirDNA offer great data and analytics on short-term and vacation rentals.

Hire an Experienced Real Estate Agent

Finding an STR-savvy agent to help you with your research, can potentially make you a higher return by leveraging their industry-specific expertise in the local market.

Before hiring a real estate agent ask them key questions to gauge their knowledge and experience with buying and selling STR properties. These may include how many vacation rentals they have sold, and their valuation strategy for vacation rentals.

A local real estate agent who specializes in short-term rental properties can provide valuable insight, may know of unlisted opportunities, and can negotiate on your behalf.

They can also help you understand the local short-term rental market and provide guidance on which neighborhoods or areas are most suitable for your investment goals.

Moreover, a good agent will be able to connect you with other professionals in the industry such as property managers, contractors, and cleaning companies who can help you with the day-to-day operations of your STR business.

Remember, investing in an STR property is not just about the property itself, it’s about the entire experience that you provide to your guests. So, having a knowledgeable team by your side can make all the difference in ensuring the success of your investment.

Choosing The Best Short-Term Investment Property

When choosing a property for short-term rentals, there are a few factors to keep in mind. Firstly, it’s essential to consider the location and ensure it’s in an area that will attract guests. Look for properties that are near popular tourist attractions or business centers.

Opportunities can be found in areas that have high demand and limited hotel options.

Look for properties that are well-suited for short-term rentals, such as those with multiple bedrooms and bathrooms or those with unique amenities.

. Secondly, it’s crucial to consider the property’s size and layout. Properties with multiple bedrooms and bathrooms can accommodate larger groups and can potentially increase rental income.

Additionally, properties with outdoor space such as a backyard, balcony, or rooftop can be attractive to guests who want to relax and enjoy the outdoors.

It’s important to consider the property’s maintenance and upkeep requirements. Properties that are easier to maintain can help save on expenses and reduce the workload for property owners.

Once you’ve found the perfect property, punch the numbers!

Conduct a Competitor Analysis

In order to make a smart investment in the short-term rental market, it’s important to do some market research and understand the competition.

A reputable real estate agent can provide valuable insights into factors such as average occupancy, nightly rates, and seasonal rates. Additionally, they can refer you to one of their successful past clients in the area for a second opinion.

However, it’s also important to conduct your own research by checking out listing sites like Airbnb/Vrbo to determine rental rates, occupancy rates, property taxes, insurance costs, and other relevant factors.

This will help you make an informed decision and stay ahead of the competition. Once you’ve punched the numbers, do it again and again!

Punch The Numbers

This is where the rubber meets the road! Running the numbers is a critical step in the process of investing in an STR property. Conducting an analysis of the potential cash flow and rental income can give you a clear idea of the profitability of the investment. To do this, you should consider various factors, such as the property’s location, market demand, and the costs associated with running the rental property.

Start by determining the property’s gross potential income based on factors such as the average nightly rate, the average occupancy rate, and the length of the rental season. You should also factor in any additional income that could be generated, such as revenue from cleaning fees, pet fees, or other charges.

Next, consider the expenses involved in running the rental property, such as mortgage payments, property taxes, insurance, maintenance costs, and utilities. You may also need to budget for advertising expenses, furniture and decor costs, and any other expenses that come with setting up and running the rental property.

By subtracting the total expenses from the gross potential income, you can calculate the property’s net potential income. This figure will give you a clear idea of the profitability of the investment and help you make an informed decision about whether to move forward with the purchase.

Close the deal: Before closing, ensure that all bookings and deposits have been transferred to you or your property manager and that utilities and insurance have been transferred.

Furnish and Decorate the Property Appropriately

When you’re punching the numbers you’ll need to consider furnishings. Your STR property should be welcoming and comfortable for guests, so invest in quality furnishings and decor that will appeal to a wide range of travelers.

Consider your target guest demographic when selecting furnishings and decor for your short-term rental property.

If your guests are mostly families with children, consider providing items like toys, high chairs, and cribs. If your guests are business travelers, prioritize amenities like a desk, fast Wi-Fi, and a printer.

Keep in mind that while you want to provide comfortable and attractive accommodations, you also need to balance cost and durability for your furniture and decor selections.

Consider, if the furnishings will be included, will you need to replace any furniture or update the decor?

And don’t forget about safety considerations, such as choosing non-flammable fabrics and furnishings that can withstand regular use and cleaning.

Securing Financing for Your Short-Term Rental Investment:

Securing financing is a crucial step when buying an STR property. To start, it is important to prepare the necessary documentation before approaching lenders for pre-approval or proof of funds.

This includes providing income and debt records, completing a loan application, agreeing to a credit check, and having a favorable credit score of at least 680. In addition, the down payment for an STR property may require 30% or more, and mortgage interest rates are typically higher than when buying a primary residence.

Buyers should also ensure they have the down payment amount and up to six months’ worth of operating expenses to show a favorable debt-to-income ratio (DTI) of 28% to 36%. Being prepared in advance for financing can help ensure a smooth and successful purchase of an STR property.

Do Your Due Diligence

It’s important to ensure that you’re making a wise decision before diving in headfirst. Conducting due diligence on the property before finalizing the purchase is essential to avoid unexpected issues down the road.

A thorough inspection of the property can identify any maintenance or repair issues that may need to be addressed, giving you an opportunity to factor in the costs of these repairs in your budget.

Reviewing maintenance records can also provide insight into how well the property has been maintained over time and what issues may have arisen in the past.

Closing The Deal

Closing the deal is an essential step in the process of purchasing an STR property. Before the closing date, it’s important to double-check that all bookings and deposits have been transferred to you or your property manager.

This will help avoid any confusion and ensure that you have all the necessary information to start managing the property.

In addition to that, it’s essential to transfer utilities and insurance to your name or the name of the property manager to ensure that the property is fully protected. Finally, make sure that all paperwork is in order and that you have a copy of the signed purchase agreement.

Engage a Property Management Company

Owning and operating a successful STR requires a lot of time and effort, and it’s understandable that some property owners don’t have the bandwidth to manage everything on their own.

Hiring a property management company with specific experience in STRs can be a game-changer for your investment.

By enlisting the help of a property management company, you can hand over the day-to-day tasks such as guest communication, check-ins and check-outs, cleaning, maintenance, and repairs to professionals with hospitality expertise.

They can also handle issues that arise during a guest’s stay, such as lost keys or broken appliances, and ensure that the property is always in top-notch condition.

The benefits of hiring a property management company include freeing up your time, enhancing the guest experience, and potentially increasing your profits by maximizing occupancy rates and rental income. Make sure to research and interview several property management companies to find one that is experienced and aligned with your investment goals.

Marketing A Vacation Rental Investment Property

Create a vacation rental marketing plan: A marketing plan is essential to attracting guests and maximizing occupancy rates.

Consider ways to differentiate your property from the competition and use online channels to promote your property and encourage positive reviews from guests.

Maximize Your Rental Revenue

You could have an amazing vacation rental, in the best location, with all the amenities but if no one knows about it, it won’t matter.

For this reason, you’ll want to create a marketing plan for your vacation rental business. Craft a memorable brand, create a vacation rental website, and market online, on social media channels to get as many direct bookings as possible.

Direct bookings help investors, cut costs, reduce commissions and fees, and develop their own leads. When investing you should never put all your eggs in one basket.

Develop a vacation rental marketing plan and you will optimize your business while maximizing your rental revenue.

Accurate Accounting

Keeping track of your financial performance is critical to the success of your short-term rental (STR) investment.

Without accurate records and important documents, you may miss out on valuable deductions and lose track of income receipts when tax season arrives.

To avoid these issues, it’s essential to use reliable accounting software to track your rental property’s income and expenses.

You can find many options available online that sync with your bank and mortgage accounts and generate financial reports such as income and cash flow statements.

Additionally, you can manually download your transactions from your STR platforms and upload them directly into your accounting software.

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