Here are Six Questions to Help You Evaluate if this is the right option for you.
Have you ever thought about owning a short-term rental property? Have you been watching the real
estate investment market from the sidelines?
You may have heard the success stories about the high returns to be made. But you keep coming back to the same questions.
- Is it worth the risks?
- Is it worth the hassle to set up and operate?
- How much more money would I actually make?
Below is a simple decision-making grid using six categories to help you understand if short-term rentals
are a good strategy for you and your investing goals. If you and your property check the box on four or
more categories, I would suggest that you strongly consider investing in a short-term rental.
Laws and Regulations
Your first step in your short-term rental path is to check this box. Can you legally operate your property
as a short-term rental? It is critically that you confirm the rules and regulations for your property’s
municipality.
Typically, you can find short-term rental information on the planning and zoning page of your your city
or county website. If that doesn’t work, use the search bar to look up: “short-term rentals,” “Airbnb,” or
“VRBO.” Many cities have whole pages dedicated to short-term rentals. Others simply link to an
ordinance that governs short-term rentals, while many cities and counties still have no information
posted.
If there isn’t any information, that doesn’t mean there aren’t regulations. Try giving the city zoning and
planning department a phone call to ask if there are rules, and they can direct you to the right source.
If there are laws in the books, ensure your property meets the qualifications and that it would still be
profitable after meeting said requirements. Many cities have laws requiring short-term rentals to be a
primary residence. Others limit the number of days you can rent out the property in the short term.
If there aren’t any regulations, it usually means you can operate a short-term rental. But that can
change. Cities can adopt laws that can bring an end to profitable short-term rentals.
If your city allows you to operate your investment property as a short-term rental, you have checked the first box!
Risk Tolerance
The second question you need to ask is, “What is my level of risk tolerance?”
We all know that real estate investing, just like every investment, comes with risks. And investments
with greater upsides generally come with higher risks. With short term rentals, there are two primary
risks:
- potential damage to the property
- financial instability
Damage Risks
Unlike most long-term rentals, short-term rentals include furniture, bedding, dishes and glasses, and
many other items that could be damaged. However, you also have much more control over your
tenants, more authority to deny access, and less red tape to evict them.
On my properties I use strict screening standards for potential guests, such as age minimums, valid IDs,
and group limits. You can even restrict guests who have been reviewed poorly by other hosts from
viewing your property at all. Additionally, your property will be cleaned regularly and inspected after
each check-out to address potential problems.
Financial Risks
There are always financial risks with investments. The added risks on short-term rentals are primarily
centered around why guests are coming to your location. If something happens to what is attracting
them, it will impact your ability to get renters.
During COVID, Hawaii implemented several restrictions on travel, causing many vacationers to cancel
their trips. Hocking Hills, Ohio actually shut down all vacation rentals for two months during COVID.
Florida regularly faces hurricanes. I happen to own vacation rentals in all three locations.
However, there is a flip side. It is also very possible for short-term rentals to produce returns that are
double, triple, or quadruple that of long-term rentals. My personal short-term rentals average 2 ½ times
that of my long-term rentals. Real estate investing is a long game strategy. Make sure you know your
numbers and projections, and budget for the unexpected events that will inevitably occur.
In real estate investing, you must be willing to accept some temporary pain and risks if you hope to
achieve your goals. I do not believe these risks are substantially higher than with other investments. But
you do need to be aware. Check the risk tolerance box if you’re willing to make the leap with a short-
term rental!
Net Operating Income
In almost all cases, a rental will make more income per month if converted to a short-term model. That
being said, gross income alone isn’t a helpful performance indicator. Short-term rentals have many
added expenses that you must consider. In your operating expenses, you must account for:
- Taxes
- Insurance
- Maintenance
- Supplies/Inventory
- Power/electricity/gas
- Water
- Internet
- Landscaping
- Features unique to your property (pool/hot tub maintenance, pest control, security)
- Management fees (if you do not plan to manage yourself)
Therefore, the better performance indicator is net operating income (NOI), accounting for the
property’s income after all the operating expenses.
Gross Monthly Income – Operating Expenses = Net Operating Income
If your property stands to make a considerable increase in NOI, you should strongly consider making it a
short-term rental. However, if your property would produce a significantly higher NOI, converting it to a
short-term rental may not be worth the effort required.
As I have stated, when switching a property to a short-term rental, I typically see an increase of 200% –
250% increase in NOI.
There isn’t a magic percentage that determines if you should switch your property to a short-term
rental. However, I typically begin considering the option when I expect to see a at least a 50% increase in NOI over a long-term rental.
Check the box on the decision grid if your property is positioned to increase NOI enough to pique your interest!
Cash Flow
Are you looking to make more cash flow from your rental investments? With the rising interest rates
and rapid appreciation of the past few years, cash flow is getting more difficult on long-term rentals.
If you are looking for financial freedom via real estate, cash flow is key to success.
You may have a long-term rental that is breaking even, with projections of long-term increased rents
and appreciation. But that does not impact your life today, and you may be wanting to change your
lifestyle or increase your capital quickly.
I closed on a mountain property on December 31st, 2022. The purchase price was $550,000, plus
$30,000 in furniture and amenities. We finished our very first year netting $112,850 in net operating
income. That is almost $9,400 per month in cash flow. If cash flow is one of your highest priorities,
short-term rentals need to be a tool in your belt.
Time
The following two categories, time and management, go hand in hand. Either one or both must be
checked if you are considering a short-term rental investment.
Do you have the time to set up and manage a short-term rental? You must learn the business, furnish
the property, learn to set up listing on platforms like Airbnb and VRBO. The short-term rental business is
a hospitality service, and you must promptly and thoughtfully communicate with your guests, and the
guest calendar and cleanings must be accounted for at all times.
Managing your short-term rental takes time. It is possible to do with a full-time job, but it isn’t always
easy. Be honest with yourself and know if you are up for the challenge of taking on the extra work
required to manage a short-term rental well. If you have the time and are willing to take on the challenge, check the box on the decision grid!
Management
If you don’t have the time to manage the rental yourself, that doesn’t rule out short-term rentals. Like
any other investment property, you can hire a property manager. They do more than simply collect rent
and solve tenant problems like traditional property managers. Short-term rental managers do
everything on your behalf, including:
- Set up, furnish and onboard your property
- Manage online presence and pricing optimization
- Interact with inquiries and any guests’ relations
- Schedule cleaners, landscaping and any maintenance needs
- Ensure supplies and inventory are fully stocked and accounted for
- Manage finances, including payments, invoices and reports
Because short-term rental managers have more ongoing responsibilities than traditional property
managers, they generally charge more. The industry standard for short-term rental management is 15%-30% of your gross income. Run the numbers and make sure that a management fee wouldn’t
compromise your financial goals.
If you have access to good management and vendors, and your financial goals can still be met with
management, check the box in your decision grid!
Make a Decision
How many boxes did you check?
If you checked four or more boxes, I would highly recommend you consider investing in a short-term
rental. If you only checked three or fewer boxes, a short-term might not be the best investment for you.
And that’s okay. There are many ways to win in real estate, and short-term rentals are just one of them!