Table of Contents
The average annual revenue earned by full-time, short-term rental properties grew to an all-time high of $56,000 in 2021, according to AirDNA. The potential for significant returns is driving many investors to consider investing in short-term rentals.
While short-term rental investment can be highly lucrative, to produce reliable profits, you’ll need more skill and expertise than the average long-term rental investor. To succeed in the world of short-term rental investments, learn the business, know what to expect, and gain insight into how to make the most money possible.
Key Takeaways
- Short-term rental investors earn income by converting spare rooms in primary residences or whole properties into vacation rentals.
- While a poorly planned short-term rental investment can lead to negative cash flow, skilled investors know how to add enough value, increase nightly rates, and achieve profitability.
- Short-term rental investment can take a lot of work, but adding minimum night stays, being proactive with maintenance, tracking finances, and using management companies or software will make the job easier.
- To increase profitability, add amenities, price your vacation rentals appropriately, and maximize the number of guests your property can accommodate.
What Is a Short-Term Rental?
A short-term rental is a furnished rental property that rents either by the night or the month rather than through a year-long lease. These rental properties typically cater to travelers or renters looking for temporary accommodations. Short-term rentals have been popularized by platforms such as Airbnb and VRBO.
Types of Short-Term Rental Investment Properties
Investors can get creative with short-term rental properties. Many different types of properties appeal to guests and produce high returns. These include:
- Vacation rentals: Vacationers and traveling remote workers often prefer whole properties, which are the most common type of short-term rental investment property.
- Private rooms in a primary residence: Buying a second property to begin earning money on short-term rentals isn’t necessary. If you have a spare bedroom, guests may be interested in staying with you and sharing certain public spaces like your living room or kitchen.
- Tiny house/ADU: According to AirDNA, demand for tiny homes grew 27% year-over-year on Airbnb’s platform. Many people are building tiny homes or Accessory Dwelling Units (ADUs) in their backyards to increase the earning potential of their properties.
- Luxury tents: Luxury tents have been growing in popularity as an option for short-term rental guests. AirDNA reports an 11.3% YOY increase in demand. If you live near an outdoor attraction, like a state or national park, and have spare space to set up a luxury tent, you can start earning rental income.
Are Short-Term Rentals Profitable for Real Estate Investors?
Before you jump into a short-term rental investment, you’ll want to be sure it’s a worthwhile option. Analytics company, AirDNA’s mid-year update released in July 2022 forecasted the average occupancy rate as 58.2%. With an expected daily rate of $277.53, the average annual income for a short-term rental host is $58,955.
While occupancy is expected to drop slightly in 2023, dipping to 57.4%, the average daily rate is expected to rise. With a forecasted average daily rate of $286.91 in 2023, the expected annual income for a short-term rental investment property is $60,110.51.
Because of rising interest rates and costly homes, the average monthly mortgage cost is rising compared to the monthly expected short-term rental revenue. AirDNA states the expected revenue is “functionally just enough to cover the cost of the average property management fee.”
Short-term rental investors who don’t carefully plan their investment strategy could find themselves with negative cash flow. Yet, smart investors can easily achieve profitability with their assets. To keep short-term rental investment profitable, investors may consider self-managing properties, adding amenities to vacation rentals, and investing in properties in locations with low property costs but high tourist demand.
The Pros and Cons of Short-Term Rental Investment
Pros
- Pricing can be adjusted seasonally to take advantage of peak seasons.
- You can earn a much higher nightly rate than long-term rentals.
- Flexibility allows for scheduling remodels or even using the property for personal vacations.
- Ability to be more proactive with maintenance/less wear and tear.
- Significant value comes from property appreciation.
Cons
- More work than long-term rentals.
- Volatile regulations from the city or HOAs.
- Limited ability to screen tenants.
- Less consistency of income than long-term rentals.
- Operation costs can be higher because you pay utilities, furnish the apartment, and possibly pay property management companies.
Is a Short-Term Rental a Good Investment?
David Greene host of the Bigger Pockets podcast believes investing in a property with increasing demand is a guaranteed strong investment. In an episode for the show, he says, “Buying a very reliable thing that everyone’s going to want is not a speculative move.”
But, too many real estate investors are impatient and get nervous because of a few months of low profit. If you hold onto your investment for the long-term, short-term rental properties are a surefire way to help you build wealth.
Historically, the annual rate of home appreciation is roughly 3–5%. However, home values have appreciated much more quickly in recent years. According to real estate data and analytics company Black Knight, home values had a 19.3% year-over-year appreciation rate in May 2022. While this is a slowdown from the previous month, value appreciation is expected to remain above the historical average throughout 2023.
While your vacation rentals need to produce enough income to keep you afloat so you don’t have to sell, Greene believes cash flow isn’t the number one determinant of a successful investment. The main value comes from appreciation over time rather than immediate cash flow. He encourages investors to keep a long-term perspective, stating: “You’ve gotta break yourself out of the cycle of looking at investment like its a one-year decision. It’s not. It’s a many-year decision.”
To summarize, a short-term rental is a good investment for anyone willing to keep it running while the property value appreciates. The great thing about short-term rentals is that it’s nearly always an option to convert them into long-term rentals if the travel industry in your area goes south for a while. This significantly lowers your risk of losing your investment.
4 Tips for Managing a Short-Term Rental Property
If you feel the pros outweigh the cons and are ready to move forward, you’ll need to know how to manage a short-term rental property. The tips below are the next steps investors will want to take to ensure they have a profitable rental.
1. Add Minimum Night Stays
Managing guest turnover is the most time-consuming part of being a short-term rental investment owner. Every time a new guest arrives, you need to communicate check-in instructions and make sure the property is clean. The time this requires adds up quickly if you have a new guest every night. To make your life easier, add minimum stays to your vacation rentals. You can choose only to accept guests who are staying a few nights or even a month.
Often, minimum night stays can help you increase the occupancy of your property. But you’ll want to be careful it doesn’t turn too many guests away. Minimum night requirements work best in areas with high demand. During off-seasons or areas that don’t have many visitors, you may find yourself with fewer guests when you add requirements.
2. Be Proactive With Maintenance
The great thing about vacation rentals is you can regularly check on the condition of the home’s structure, appliances, wiring, and plumbing. Tenants of long-term rentals may not notice or report an issue in the home until it’s a major problem. A mildly leaking faucet can become a major plumbing issue that causes water damage in the home before you’re even aware there’s a concern.
Short-term rental investment properties don’t have that problem. In between guests, do a quick run-through of the home to ensure everything is in working order. If you see anything concerning, take care of it immediately. Taking care of maintenance in advance will save you tons of money and effort in the long run.
3. Track Expenses Carefully
Keeping your finances organized is critical for short-term rental investors. If you’re more familiar with long-term rental investing, there may be more expenses involved than you expect. The key to staying profitable is tracking every dollar you spend on the business. This allows you to set your nightly rates high enough to achieve a positive cash flow.
4. Get Help Managing Your Property
Self-managing a short-term rental property can be time-consuming. But as your portfolio of rentals grows, management can become downright stressful. A management company can minimize the time commitment and turn your investment into completely passive income.
A good management company will keep your property at maximum occupancy, determine the most profitable price per night, provide check-in information, and manage cleaning in between guests. While working with a management company will make your life easier, it will also cut into your profits. It can cost 10–50% of your total monthly income.
If self-managing your short-term rental is too much work but property management fees are too costly, there is hope. The property management software solutions listed below can take away some of your work without eating up all your profits.
- Kigo: Helps short-term rental owners maximize occupancy, manage reservations from multiple channels, and grow revenue.
- Guesty: Manages your calendar, integrating all reservations from channels. Guesty provides accounting support and analytics to ensure your business operates at maximum profitability.
- Vacasa: Allows you to list properties on multiple channels, maximize pricing, and process payments.
Top Strategies for Maximizing Short-Term Rental Profits
1. Put More Heads in Beds
David Greene, the Bigger Pockets podcast host mentioned above, says, “Heads in beds is a good baseline for what you can do to add value. The more people you can get into a property, the more that property’s going to rent for and the more often it’s going to rent out.”
Greene recommends putting couches in place of futons and converting twin beds into bunk beds to allow for more heads in beds in his vacation rentals. When looking for new investment properties, he targets homes with more bedrooms and bathrooms so he can attract large families or groups of friends who will be willing to pay higher daily rates.
2. Add Amenities
Adding certain amenities to your property can increase the daily rate and occupancy. Highlight these features in your listing to find more guests:
- Swimming: Airbnb reports the most searched amenity on their site is a pool, and the eighth most searched amenity is a jacuzzi. Adding a pool or hot tub to your property can help you attract more guests and compete with other properties in the area.
- Pet-friendly options: Properties that allow pets are increasingly in demand. Airbnb says, “Hosts who add this amenity will see 6% more bookings over the next year than those who don’t.”
- Dedicated workspace: If you’re hoping to attract traveling remote workers, a dedicated workspace and high-quality internet are essential. According to Airbnb, “Hosts who add laptop-friendly workspace earn 14% more than those who don’t.”
3. Price It Right
Many new investors price their vacation rentals too low or keep the price stagnant throughout the year. Every short-term rental investor should learn to find the highest maximum price without lowering occupancy.
Kirby Atwell, host of the Living off Rentals YouTube channel, says, “Going into the high season, we ask a 20–30% premium above what our pricing software is suggesting or what the comparable properties in the area are asking.”
Atwell’s vacation rentals are in tourist areas with more demand than supply during the high season. This allows him to increase prices without losing guests. In the off-season, supply is higher than demand. To compete with the other properties in the area, Atwell lowers rates.
Buying Your First Short-Term Rental Property
If you’re ready to invest in short-term rentals, your first step is finding the perfect property. First-time real estate investors may be wondering how to get into real estate. If that’s you, check out this guide: “What to Know When Buying Your First Investment Property.”
If you’re already an experienced long-term rental investor, the good news is that the process for buying your first short-term rental is very much the same. A long-term rental investor looks for properties in areas with high rents compared to home values, a growing population, and strong job options. Similarly, short-term rental investors should look for properties in areas with high daily rates compared to home values, growing demand for visitors, and a strong tourist economy.
If you want to deepen your real estate investing knowledge, read about minimizing risks in real estate here or learn about the rental market in 2022.