If you’ve ever thought about owning a short-term rental (STR) or vacation rental property, you’re not alone. Both supply and demand for STRs continue to increase at a steady pace year-over-year as travelers seek out authentic, local experiences that differ from traditional hotels. According to Skift, in 2021 the average number of available monthly STR units in the U.S. was nearly 1.1 million. On the other hand, demand increased by 27.5% in 2021, according to Migo, an apartment home sharing platform. So what does this all mean? If you’ve been thinking about buying your first STR property, now may be the time to do so and with nearly 1,000 listings available on our website, your dream property may be yours with just a few clicks.
By now, you may be well experienced in owning and managing all types of investments properties, but STRs offer a wide array of challenges and opportunities. In some instances, you may be able to increase your monthly income by 4-5 times. In this article, we’ll provide key items and insights to make your STR investing experience as seamless as possible while outlining risks and key advantages. Let’s dig in.
Define your buying strategy
Once you’ve narrowed down your price point and property size, it’s time to focus on target submarkets and neighborhoods. If you have real estate experience in your backyard, use it to your advantage. We recommend investing in areas that you understand and where you feel comfortable, and can execute your business plan effectively. That can mean different things for different investors depending on your risk and return profile. Even if you have a deep understanding of your target area(s), always use publicly available information such as Online Travel Agencies (OTAs) to find comparable properties and asking rates. Examples of OTAs include Airbnb, Expedia, and Hotels.com. Another resource is data analytics firm, AirDNA, a great resource for industry topics and trends. It’s worth noting that their platform is not free beyond the initial trial. It’s also important to not entirely rely on this information as these websites don’t provide occupancy rates and ultimately true performance data. As you do more research, you’ll want to have an understanding of what your estimated Revenue Per Available Room or RevPAR. Simply put, this is the Average Daily Rate (ADR) multiplied by the Occupancy Rate. For example, if your daily rate is $200 and you believe that you’ll be 80% occupied through the month, your RevPAR is $160.
Understand local regulation and laws
In order to move forward with owning and managing a full STR property or even one unit, it’s important to understand what you can and cannot do. Many STR laws are enacted and enforced at the city level and require you to apply for and obtain a STR permit before starting operations. As a widely debated topic, if you do an online search of STR regulation and laws, you can likely find the legislation and articles summarizing this topic. We recommend doing your own diligence on rules and regulations and contacting an attorney for a summary explanation. In addition, it’s important to always understand the property zoning and whether the property is in a homeowner’s association (HOA) that prohibits STRs. Some HOA’s, zoning designations, or local laws have a minimum night stay such as 30 days.
What to look for in expenses
Now that you’ve determined your estimated income, let’s take a look at expenses. More often than not, expenses for STRs will be much higher compared to long-term rental (LTR) expenses or those of tenants on 12-month leases, for example. In a typical apartment building, the landlord is able to pass expenses to tenants or have tenants pay directly for items such as water, sewer, trash, wifi, and electricity. This is not the case with STRs - the owner and/or manager is responsible for these costs similar to a hotel. When you stay at a hotel, you don’t pay for utilities (although it’s likely included in the rate or other fees). Another recurring expense is housekeeping which, depending on unit turnovers and guest length of stay, can be expensive. If you have one STR unit and it’s doable to clean yourself, that will save money. Another cost consideration are marketing and commissions to OTAs which can be as high as 20% depending on the channel and other variables. Despite commissions, we recommend utilizing all channels to increase exposure and bookings. Building your own website with a booking function is helpful but not necessary and either way you’ll have to spend on a lot of marketing to drive traffic to your website. By now you’re probably thinking of all the expenses that come with STRs, but many of these are also unavoidable in managing a traditional multifamily strategy. When evaluating expenses, be sure to calculate all upfront and recurring costs. For example, upfront costs include furniture, door locks, and obtaining STR permit(s), if needed. If you choose to provide smart locks, there are plenty of inexpensive options such as Yale or Kwikset. These setup costs will need to be included as you evaluate the investment and determining your payback period is important.
Hopefully this article gives you a leg up on the competition and helps you break into this burgeoning industry. There’s a significant amount of information and topics that were not covered such as management, financing, revenue strategies, etc. but be on the lookout for more articles!