In the last decade, AirBNB, VRBO, HomeAway, and other vacation rental apps have become increasingly popular. In some areas, much of the rental market has already been converted to vacation homes. Many investors now wonder if short-term rentals are a lucrative business model. There are many points to consider before making the jump into AirBNB management.
Advantages of Vacation Properties
If you can find a quality property in a great location you can expect to see a high rate of return on your investment. Since short-term rentals are charged by the night or week, they usually rent at much higher rates than a monthly lease—at least when they are full.
As opposed to traditional long-term rentals, you will have the option to stay at your own property. You will also be free to offer the rental up for out-of-town relatives. Or you could even turn it into a long-term rental or sell it if you decide it’s not making the money you’d like as a vacation rental. With a long-term rental, you might have to wait up to a year for a lease to run out before the property is yours to dispose.
In real estate investing, one thing you never want to deal with is evictions. Another is tenants who are always late with their rent payments. With vacation rentals, you’re not relying on one tenant for your income. In the event that you do have a problem guest, you know they won’t be there long and there shouldn’t be a lengthy eviction process.
Disadvantages of Short-Term Rentals
Higher Cost in Money and Time
While your gross income may be higher than a traditional rental, higher costs are also involved. Unlike being a traditional landlord, where your tenant likely pays most of the utilities and handles day-to-day cleaning, you will be responsible for everything. You will be paying for water and electricity as well as natural gas if the property requires it. On top of that, most travelers nowadays will expect at least WiFi and possibly cable or satellite TV. Those costs fall to you. You will need to furnish the entire house, preferably with higher-end items. In between clients, you will be responsible for cleaning the property. You may do this personally to save money or hire a service to save time. Some hosts even like to stock the refrigerator and pantry with essentials.
In addition, there are certain rules for tax breaks that require you to be actively involved in the rental property. You will need to show proof of your involvement. For this reason, some hosts prefer to own properties near their personal residence.
Anywhere you want to run an AirBNB property will require a deep dive into their local regulations. Some areas have very tight guidelines you will have to follow. Others may have specific tax rules. A few places, most notably Clark County in Nevada which houses Las Vegas, have banned short-term rentals entirely. Pay close attention to make sure you don’t break any local laws or ordinances when setting up your vacation property.
What About the Neighbors?
Unless you find an area that already has mainly short-term rental properties, you will have neighbors to deal with. If they happen to be the kind of people to call the cops on minor inconveniences, that could spell big trouble for you. This just goes back to the old adage: location, location, location. Make sure that you keep in mind how close the property is to others as well as any rules you may want to have in place for your guests as far as noise and rowdiness. Even then you may end up with a neighbor who just plain hates the idea of tourists next door.
Even if you have rules in place, you can’t control everything since you aren’t there. Remember when we talked about the pros of a diverse tenant pool? This is the flipside. While you won’t generally have an eviction process, there is always the chance that a guest may damage your property. Even if it’s in your contract that they are responsible for damages, you may end up having to cover the costs up front. In addition, if they refuse to pay you back, you will be left with the decision of either taking the loss or filing in court.
When you sign a long-term lease with a tenant, you know your property will be occupied for the next one, six, or twelve months. In most cases, you will receive your expected income during that time, and many tenants choose to renew their lease at the end of the term. But a vacation rental will only be filled some of the time. Whatever income you get from it has to cover the expenses of owning the property all year. So if your property is in a summer vacationing area, you likely will only keep it occupied during the summer. Or if it’s a snowbird getaway, it may become vacant when the weather gets too hot. AirBNBs everywhere still get business, but if yours isn’t in a coveted destination, it will very likely stay vacant more often than not. Research short-term rentals in your area to see how heavily booked they are throughout the year.
Should You Do It?
With all this information it may be hard to decide if getting started on AirBNB, VRBO, or HomeAway is the right decision for you. Let’s sum it up to a few key points: profit, risk, and labor.
Profit in a rental property is expressed in the cap rate. A cap rate is simply your total earnings, minus your total costs, divided by your initial investment. First figure out your current cap rate—what you are actually making on your long-term rental. Then estimate a cap rate for a short-term rental. You’ll need to work out what your expenses will be. To estimate your profits, divide your rental fee, annualized, by the percentage of the year you think you will be able to keep it occupied. Researching comparable rentals is key here.
Next, remember that short-term rentals are a higher risk than longer-term leases. You cannot control how often your property will be occupied. Social and economic conditions have a huge impact in how much people travel. Housing is a steadier deal, because people will always need a roof over their heads.
Last, consider the extra work you’ll have to do. Is cleaning your rental weekly a fun hobby for you, or will it be an exhausting chore? Are you willing to be reachable at whatever hour people need to check in? Can you show up on a weekend if a pipe bursts? And remember, you’ll need to keep your listing updated.
With so much to consider, the decision may still be difficult. Contact us to be connected with a financial advisor who can help you look at all the options for your investment.