Top Five Factors to Consider When Purchasing Short-Term Rental Properties
The real estate industry has seen a boom in short-term rental properties. Advancements in technology, along with the growing emergence of platforms that facilitate short-term rental property investments can be linked to this rise in popularity. More and more investors are choosing short-term rental properties over traditional rental properties for a number of reasons. Short-term rental properties allow homeowners to earn additional income by renting out all or part of their property without committing to being full-time landlords.
Companies such as AirBNB, FlipKey, and VRBO have contributed to this increase. Through their platforms, converting your existing property into a short-term rental is quick and easy. These platforms have also become instrumental for investors looking to purchase short-term rentals. While there are many factors to consider when analyzing a potential investment, we’ve put together a list of our top five items to consider when purchasing a short-term rental property.
1. Marketing Options:
Before purchasing a short-term investment property, you need to consider how you will market your property. The growing popularity in this sector has led to extreme competition. Property exposure to potential renters is key to your investment’s success. The most popular option is to register your property on a platform such as AirBNB, FlipKey, or VRBO. As we mentioned earlier, these companies have created a platform that allows property owners to list and advertise their properties, along with many other benefits.
These sites are extremely efficient at bringing property owners and renters together. Advertising your property on your own is always an option but you may have difficulty competing against properties listed on these platforms.
2. Consider your Market:
There are two types of short-term rental property investors; 1) Property owners renting out their primary residence and 2) Investors looking to purchase properties specifically designed to become short-term rentals. This section pertains to investors looking to purchase a short-term rental property in a specific market.
Considering that the top ten short-term rental markets fall within major tourist driven cities, tourism obviously plays a crucial role in your success. However, not all short-term rentals need to be in a tourist heavy market. The most important factor is having a consistent supply of renters. Perhaps, your property is located next to a hospital or an airport where there is high demand for short-term housing.
During your due diligence, you should look at rental and purchase comps to give you a good idea on how your property will perform. When looking at comps, be sure to look at properties that are listed on the platform you intend to use to get the most accurate depiction.
3. Evaluating the Income:
Unlike traditional real estate investments, short-term rental properties behave differently in terms of revenue. Rental income is more volatile and subject to longer periods of vacancy. The added risk is offset by higher rental rates vs traditional rentals. This higher rental rate creates a cushion against the volatile revenue stream. However, there is one key metric that you want to consider when evaluating your property, the cash-on-cash return. The cash-on-cash return measures your properties cash flow over the total out of pocket investment.
This number is useful when comparing multiple investments as it allows you to identify profitability quickly. The top ten markets in 2017 had an average cash-on-cash return of 10.11%. Traditionally, investors tend to seek cash-on-cash returns of 8-12%.
4. Expenses Unique to Short-Term Rentals:
In addition to the normal expenses associated with real estate investment properties, short-term rentals have expenses that are unique to their property type. Investors should weigh these additional costs when evaluating performance. If your property is listed through AirBNB, it will be subject to a Host Service Fee every time a booking is completed, generally around 3%.
Your investment may also be liable to pay a Hotel Occupancy Tax depending on your location. Be sure to find out if your market is subject to these taxes. Short-term rental properties may also warrant additional insurance such as Short-Term Rental Insurance. However, in the majority of cases, this insurance is offered through your hosting platform.
Furnishing your property can also add a significant capital expense to your pro forma. As opposed to traditional rental properties where the tenant furnishes the property, you will be expected to furnish your short-term rental. Maintaining and replenishing amenities for your guests adds another expense. The rate at which you replenish these items will, of course, depend on how frequently you are renting and turning over your property.
5. Differentiate Yourself:
In a hyper-competitive environment such as short-term rental properties, it’s important that you differentiate yourself from the competition. Think about what makes your rental better than everyone else’s on the market. Why should a prospective guest rent from you? Below are a few examples to help make your property stand out.
Stage your property when posting pictures on platforms like AirBNB. This can pay dividends in attracting possible renters and with the numerous free resources online you can easily do this on your own.
Have full working amenities in your property such as a washer and dryer. This is often overlooked but will help separate you from your competitors. Quality sheets and accessories around the property are also important in keeping your renters happy. Fresh scents, clean bathrooms, and upgraded soap go a long way in customer satisfaction.
Consider having a welcome basket for your renters. Get creative and think about what you’d like to receive if you were renting from yourself. Create a pamphlet showcasing the local hot spots such as restaurants and popular nightlife.
Sending thank you letters to your renters can go a long way in reaffirming their decision to choose your property over another's. At the end of the day, the reviews you receive will dictate how well you compete in the marketplace. It’s the small details like this that will have the largest effect on your guests.
As always, there are many more factors that come into play when considering your next investment. With that said, these fives metrics should give you a strong baseline and starting point for your potential short-term rental. If the numbers make sense and you are confident in the market, you will be in a good place to make the best possible decision.
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