Deciding on a short-term rental investment (Part 1)

03/19/2019 | by astayabove | Uncategorized
Photo by KIMO on Unsplash

Location, Location, Location

 

You’ve heard this many times and it’s never been more true than with short-term rentals.  Guests aren’t staying in your property very long and they’re willing to pay a little more to have a preferred location / view – especially in the offseason when rates and occupancy are more competitive.  The difference between comparable houses, one on the front-row of the beach and the other being 3-4 rows back, can be 4x in revenue. But before we get too far into making a decision on the location, let’s consider some other factors that go into short-term rental investments.

 

 

 

Expected Return: Cash Flow vs Equity

Many people rush into real estate investments thinking they will generate revenue that will more than cover their expenses, while at the same time benefit from equity gain.  Many real estate “gurus” will sell you on this concept, but the reality is: it’s not typical to benefit significantly from cash-flow and equity.

Cash-Flow – if you’re looking to cover your expenses and generate a positive cash-flow on a yearly basis, you’ll want to focus on inventory with an ability to generate higher occupancy levels.  There are situations where you can invest in properties with lower occupancy and very high nightly rates, but the risk is much higher. In most markets, less than 10% of all inventory will generate $40,000 or more in booking revenue.  That percentage drops to less than 3% if you’re expecting to generate $60,000 or more a year. When you add up your mortgage, property taxes, insurance, utilities and maintenance – you can see those bigger homes come with a big risk when you’re depending on a positive cash-flow.

Equity – if you’re not as concerned about cash-flow or you want a property that will accommodate your family when it’s not being used, turning your attention towards equity may be the right approach.  Equity is a much more speculative investment since it’s difficult to predict when the housing market will go up or down – I’d recommend working with a real estate professional that’s familiar with your area and the trend in housing values.  I would combine the knowledge of the real estate professional with what I’m describing in this post in order to find a property that will still perform well in the short-term rental market.

Size of Investment

There are opportunities to invest in the short-term rental market at all levels of cost and size.  My best advice is to recognize not all months will produce high volumes of bookings so be prepared to personally cover some of your expenses in the off-season – at least at first.

Luxury or High Quality Property – no matter the number of bedrooms or size of the house, there’s a strong market for higher quality properties.  These units will typically rent first and produce a higher nightly rate. The challenge is there will be more of an up-front investment and banks may not finance the renovation.

Amenities – you can offset a less desirable location by providing amenities such as golf-cart rental or pool / hot tub.  These are great for incentivizing a guest but consider a few things before making the purchase. Guests will filter for pool / hot tub in their search, but offering a golf-cart will only win them over if they are willing to click on your property in the first place.

Market Considerations – Competition, Seasonality & Regulations

No investment is without risk:  competition is a factor in assessing your business plan; seasonality is a component to consider within any hospitality business; regulation is especially risky for our market.

Competition – There are a few sources of data to help understand your marketplace (AirDNA for example), but simply looking through VRBO, HomeAway, AirBnb and Booking.com will give you some insight on the number of properties in the your region, quality of the inventory and average nightly rates.  Many people do a comparison based on the number of rooms. I would recommend comparing based on the number of people a property sleeps. The key here is to understand the location of your competition (map view) and browse to get an idea of the quality of inventory. Through the process you’ll also learn who the major players are in the market (Property Managers or highly competitive owners).

Seasonality – This can be tricky.  I’d recommend reaching out to the local tax authority to get data on Hotel Occupancy Tax.  The availability and quality of data ranges significantly depending on the region. I’d also recommend reaching out to your state taxing authority for Hotel Occupancy Tax data to get another viewpoint.

Regulations – A couple of years ago I would have said regulations are primarily a risk for the urban market.  Today, I’m not sure that’s a safe assumption. Regulations vary in degree and in destination locations most regulations center around enforcing quality (local representation, licensing, etc.).  If you’re a risk taker, I would consider the urban markets to be an opportunity for areas with restrictions on supply. The demand in the urban markets continues to grow and if you can find your niche to operate legally, you can really capitalize on the demand.

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