With new online vacation rental services becoming more mainstream and popular these days, many Investors are considering whether these types of short-term rentals are preferable to the traditional longer-term rental strategy. We’ve done our research and determined some of the key factors to consider with Airbnb or Vacation rentals, so you don’t have to!
Overall, Vacation rentals are trending well. According to VRM Intel, the number of users for these types of short-term rentals is expected to amount to 57 million people by 2023. And already, this is seeming to be a lucrative option for investors. In 2019 alone the industry amounted to about $17.5 million in revenue. While all the data is suggesting this option will be a game-changer for Real Estate Investors (REIs), there are a few very important considerations for folks thinking to move in this direction.
We’ve broken down the top factors to consider when exploring Airbnb or Vacation rentals for your real estate investment strategy. Things like: demand, upfront and on-going costs, building credibility, as well as local taxes and regulations will all factor into your success if you choose to utilize your investment properties in this way.
Let’s start with Demand. Finding a property in a great location and a well-desired vacation spot is a must with Airbnb or Vacation rentals. Additionally, having attractions nearby or offering some sort of special feature in your property will add to the property’s attractiveness to renters. Since it is not likely you will be able to book your property 100% of the year (average occupancy for these types of rentals is 50-60%), having high occupancy during travel seasons will be crucial! Another benefit with these types of short-term rentals is that there is not a long-term contract in place locking in the price. Rather, the price can be adjusted according to demand. Having a few weeks of bookings during high-traffic season at a higher rental price, could get you through some of those slower off-season months. There is huge potential for increased revenue here, but the location and general attractiveness of the property is so important to how successful the property will be.
While long-term rentals come with some costs, mostly around repairs or emergencies, short-term vacation rentals will have much higher upfront and on-going costs associated. First off, the property needs to be fully furnished and equipped with all living essentials. The furnishings are one factor in how desirable the rental is, so it’s important to really invest here and ensure the property feels ‘homey’. More and more, Airbnb’s are also including things like: coffee, snacks, games, streaming services, etc. These extra amenities will be expected by your guests, so make sure to budget these types of things into your plan. While in traditional long-term rentals, the tenant is paying for the utilities, with a short-term rental, the owner will be expected to keep up with utilities and even add extras like WiFi. Along with the upfront and on-going costs of furnishing and equipping your home with all necessary amenities, there will also be a cleaning fee associated with this property between guests. Make sure to factor that into your budget as well.
Overall, while the earning potential is very high for these properties, there will be some large upfront costs that might not pay off until you’ve established a good enough reputation to attract high volumes of renters.
This brings us to the importance of building credibility for your property. As a new rental unit, it will take some time to build a reputation that will attract renters. Things like: time on the app, number of 5-star reviews, and previous renters’ comments will all help build credibility so that your property is more attractive to folks searching for a place to stay. It is important to be patient here and build your reputation through good service and attractive amenities. At first, you might have to adjust your price a bit to attract renters who might be weary of a new listing. But stick with it, and you’ll be seeing much more traffic to your rental page if you can build up that credibility.
It’s important to be patient here and put in the money and resources to establish a good reputation. Once you have a few 5-star reviews and guests leave comments expressing how happy they were with the experience, you can adjust your price to match your demand. While it might take some time (think a few months to even a year) to get started, this credibility built will translate big time into high potential for revenue and full bookings!
Taxes and Regulations
While there is a high return potential in this type of rental, making it a very attractive option to Investors, there are also some challenges that are quickly becoming more common. Many neighborhoods, HOAs, and city ordinances actually might not allow short-term rentals. If they do allow them, there might be a fee, a permit required, or some other types of restrictions. Each state and community has different regulations around short-term rentals, so it’s important to do your research in your own locality before investing in this option.
Additionally, while any rental property will require State and Federal taxes, there might be additional occupancy taxes for Airbnb’s. While traditional long-term rentals will allow you some concessions and the ability to deduct expenses associated with the property from your taxes, you might not have this option with the short-term Airbnb or vacation rental.
All in all, there are many pros and cons to pursuing short-term vacation rentals for your investment property. You could maximize your income with these types of properties but there will be a period of patience and growth necessary before you start to see that return on your investment. Another benefit of moving in this direction, is that you can utilize the many benefits of these third-party platforms like having Airbnb promote your listing and manage payments in an easy and effective way. Airbnb also has some host protections incorporated into your partnership, however all of these benefits do come with a service fee, so keep that in mind.
Whatever investment strategy you believe is best for you, contact CPL Investments today to see how our team of REI experts can support you in your growth! We want YOU to succeed and have the resources, network, and experience to take your REI career to the next level!