Investing in a rental property that can be rented out on a short term basis is becoming an increasingly popular way for investors to generate additional income. With the rise of platforms like Airbnb and VRBO, property owners now have easy access to a huge base of potential short term tenants from around the world. However, short term rental properties come with their own unique set of advantages, challenges, and risks that investors need to consider. In this article, we will explore the key potentials, strategies, and risks associated with investing in a short term rental investment property.
Short term rentals can help maximize your rental property income potential
One of the biggest appeals of a short term rental property is the ability to generate higher rental yields compared to a traditional long term rental. By renting out your property on a nightly or weekly basis rather than on a monthly or yearly lease, you can capture income from significantly more bookings over the course of a year. Areas with strong tourism demand are especially lucrative markets for short term rentals. Events, festivals, ski seasons, and other peak travel periods represent huge opportunities to drive up your occupancy rates and rental rates. Make sure to analyze the local tourism market and events calendar to evaluate the true income potential of your rental property.
Leveraging professional management can improve short term rental performance
Managing a short term rental property can be extremely time intensive, as it involves activities like responding to guest inquiries, onboarding new guests, coordinating cleaning, and addressing any maintenance issues that arise. Many investors choose to work with professional vacation rental management companies that take care of all of these tasks on your behalf. These management services typically charge 20-30% of rental revenue, but can greatly improve your occupancy rates through effective marketing and guest screenings. Reputable management companies also have robust systems to ensure compliance with local regulations.
Analyze risks like property damage and local regulations upfront
Short term guests are generally more prone to cause property damage or disturbances to your neighbors compared to long term tenants, so investors need to account for higher maintenance and turnover costs. Many owners mandate security deposits from guests specifically to cover any repairs needed after their stay. It’s also crucial to check that short term rentals are legal for the property based on local zoning restrictions and homeowner association bylaws. Violating these regulations can result in harsh fines. Consider starting any conversations with relevant authorities early in the evaluation process.
Weigh capital gains and financing implications of a short term rental
In most markets, short term rental properties are classified as business rather than personal property from a financing and tax perspective. As a result, owners typically cannot utilize preferential personal mortgage rates and loan products. On the positive side, capital expenses and operating expenses from a short term rental may be tax deductible as business expenses. Consult experienced professionals to understand how a short term rental strategy would impact your personal financial plan and returns.
Short term rental properties can unlock substantial additional income but require thorough diligence across numerous factors from local regulations to risk management. Working with a trusted rental management company and analyzing data on tourism demand and occupancy rates are key to maximizing returns.