Have you ever thought about buying an investment property? When compared to the volatility of the stock market, investing in rental property can provide a stable and effective way to generate income. While it can be profitable, owning investment property comes with challenges just like any investment.
One way to mitigate the risks of owning rental property, and increase your profits, is to think about using it for short real estate term rentals. It’s no secret that the short term rental business is red hot right now, with the popularity of vacation homes and AirBnBs. But, they also work for renters who need a place to stay for less than 12 months, which is considered a traditional lease time.
The travel business has been experiencing a noteworthy change due to popular travel websites such as Airbnb and Vrbo. Large corporations and luxury resorts have been losing market share and aren’t the industry leaders they once were. As a result, investment property owners and landlords are getting a larger share of the market in terms of hosting guests and travelers.
In this blog we’ll discuss buying an investment property in general, the benefits of using the property for short term real estate rentals working with companies like AirBnB and Vrbo, and what you need to know about operating a short term rental property.
Buying an Investment Property
Buying investment property and becoming a landlord is a good way to earn income. While there are some differences, the process of buying a rental property isn’t much different than buying your primary residence was. Just like when you bought your family’s home, as an investor you can qualify for an FHA or VA loan or a traditional mortgage.
Rental property loans tend to be riskier for lenders so you can expect to be charged a higher interest rate on your rental property mortgage than you were able to get on your primary residence. Also, due to the increased lender risk, you should plan on a down payment of 15% – 25%.
After purchasing your rental property and finding reliable tenants you also have to think about ongoing maintenance and managing the property. A good rule of thumb for rental property owners is to set aside 1% of the property’s value for repairs.
As the owner you can manage the property yourself or hire a property manager, who typically charges between 8% and 12% of collected rents. A property manager supplies services that range from arranging maintenance and repair work, to screening new tenants, and handling late rent payments.
Now that you know the basics of buying your investment property, let’s take a look at the benefits of using it for short term real estate rentals.
What is a Short Term Rental Property?
A short term rental is a property that has a lease term of fewer than 12 months. It could be a single or multi-family home, a condominium, or a townhome. Typically, an owner buys this type of property with the intent of leasing it.
Short term rentals are popular for vacation homes and AirBnBs in popular tourist destinations. Companies such as Airbnb and VRBO have brought the short-term rental market into the mainstream, making it easier than ever for investors to profit from real estate ownership. Rather than getting tied into long-term leases, property owners can capitalize on local demand for temporary and vacation rental housing.
However, they also work for renters who need a place to stay for less than 12 months, the norm for traditional lease times. In recent years, the industry has transformed from a side-gig for homeowners looking to make extra income into a booming industry in many markets across the country.
Location is an important factor that determines the success of your business. As a real estate investor, your job is to make sure that your short term rental property is going to create a cash flow and generate a return if you decide to sell it one day.
To achieve that, you should invest in a short term real estate rentals property in a popular tourist area. While not every destination is created equal, you should aim for an area that has a steady flow of visitors year-round and shorter shoulder seasons.
Benefits of Investing in Short Term Real Estate Rentals
The number one benefit of investing in a short term rental property is that the owner can charge more per month than a typical, long-term unfurnished rental. But there are more benefits than that in short term real estate rentals. Some of those benefits are:
- Higher Earnings – A well-marketed short term rental in a desirable area will always outperform a long term rental in terms of generating income. Vacation rentals bring in more income than your typical yearly leases.
- Better Maintenance – Short-term rentals allow you to take better care of your investment. With more short stays, you can get in there and have the property cleaned more often and catch any maintenance issues before they go too long. Most vacation rentals charge a cleaning fee, so you don’t even have to pay for some of the upkeep yourself.
- Flexibility – You have complete control over the calendar and when you want to offer your rental. Most people enjoy the flexibility of dealing with a homeowner versus a hotel manager. Also, if you decide to do bathroom renovations, you can block off the calendar for a month and finish the project when it’s convenient for you. You also have the freedom to adjust the prices as you see fit. After your bathroom remodel is done, you can charge more per night if you want. And, if potential guests are looking for a full month’s stay, you can adjust your pricing so it’s more competitive.
- Appreciation – Past the monthly cash flow, your property will be appreciating in value year after year. The longer you hold on to your rental property, the more it will be worth when you decide to sell.
- Accessibility – Unlike other investments, you can take out a loan to purchase the property, and use borrowed money to bring in more income. You can build wealth much faster when you know how to leverage debt in a profitable way.
- Tax Benefits – Short term rentals have tax advantages that make them very appealing. The interest paid on the loan is a tax write-off, not to mention all the other deductions for maintenance, management, marketing, insurance, and so on. You can also take a deduction for depreciation on the property.
More on Location for Your Short Term Real Estate Rental
It is vital to select the best location for your Airbnb business. The same benchmarks you would employ for a long-term rental don’t always apply when looking to buy a short term rental home.
Locations outside of major cities are becoming increasingly attractive. Moreover, residences that are near outdoor activities, such as mountains, beaches, and national parks, perform exceptionally well. Other things to consider are attractions in the surrounding area, access to major roads and airports, vacation rental interest, and the local economy.
The benefits listed above, and the importance of location, are the reasons that I have personally invested in an AirBnB here in Newport, Rhode Island known as the Newport Treehouse. I have also dedicated the time and energy to become AirBnB superhost which tells vacationers that they can expect an outstanding experience when they stay at my property.
I’d love to talk with you if you’re interested in investing in short term real estate rentals.
Buying, Selling, Renting, or Investing
Whatever your interest is, Bay Shores Real Estate will be with you every step of the way. We are a partnership of professionals, each dedicated to helping people find the life they love. We strive to help you have a life with more free time, less financial stress, and less worry.
Our firm brings all of the key real estate related services discerning clients need, together under one roof. Whether it’s for your primary home, your vacation property or your B&B rental, our team of professionals is here for you. That’s what Bay Shores Living is all about! Let’s connect today to talk about your short real estate term rentals journey.