Short Term Rental Pros, Cons and Considerations

Like most other aspects of real estate, short-term rental performance is specific to the location, season, and the property. However, here are some general considerations regarding short-term rentals beyond the standard benefits of appreciation, tax savings, etc.

Short-Term Rental Pros:

Income Potential: Short-term rentals can often generate higher rental income compared to long-term rentals, especially in popular tourist destinations or high-demand areas.
Flexibility: You have the option to use the property for vacations or personal use when it's not rented out, giving you flexibility in terms of usage.
Real estate professional status: Managing short-term rentals on your own may qualify you as a "real estate professional" in the eyes of the IRS, which provides many benefits. Here is an article on qualifying to become a real estate professional.

Short-Term Rental Cons:

Economy Dependent: Short-term rentals are primarily occupied by vacationers. During economic turbulence, fewer people are willing to spend money on vacations. Therefore, when you need income the most, you may be the least likely to receive income from a short-term rental.
Income Variability: Short-term rentals can experience fluctuations in occupancy, leading to irregular income streams, unlike long-term rentals that offer stable monthly income.
High Turnover and Maintenance Costs: Frequent turnover of guests can result in increased cleaning and maintenance costs, which can erode your profits.
Legislation and Regulations: Several cities and municipalities have specific regulations and restrictions on short-term rentals. These regulations may limit your ability to operate or add additional costs and compliance requirements.
Initial Investment and Expenses: Investing in a property for short-term rentals and furnishing requires a significant upfront cost, and ongoing expenses can quickly add up.
Time and Effort: Managing a short-term rental property can be time-consuming. It involves handling bookings, guest communications, and property maintenance. Additionally, you need to establish multiple service resources. For example, if the air conditioning stops working, you need repair people to go on-site immediately, regardless of the time of day.
Seasonal Demand: If your property is located in a seasonal area, you may experience periods of low demand, which can lead to potential gaps in income.
Competition: The short-term rental market can be highly competitive, especially in popular areas. This makes it challenging to stand out and maintain high occupancy rates.
Review and Reputation Management: Guest reviews and ratings can have a significant impact on the success of your property. Therefore, it's essential to focus on customer service and satisfaction to ensure positive feedback from your guests.

Other Considerations

Only buy properties that have the potential to be excellent long-term rentals. Markets are subject to change and having a backup use for the property is important.
Renovating a short-term rental is different from renovating a long-term rental. For example, in long-term rentals, we typically use commercial-grade nylon carpeting in the bedrooms. However, for short-term rentals, it is critical to keep costs low, so use luxury vinyl plank (LVP) flooring in the bedrooms and other areas.
Proper use of technology will be critical in minimizing the time and effort required to manage your property. For instance, using a MyQ protocol garage door opener will allow you to remotely reprogram access and also receive items into the garage as needed. The same is true for access control on exterior doors.
In addition to guest reviews, marketing will be critical. We are considering a new marketing tool for clients with mid-term rentals. This would be a property-specific website that showcases all the fun things to do in the area, a walk-through video of the property, and more. Your property needs to out-market others to maintain high occupancy and maximize rents.

Summary

Short-term rentals may be the right investment for you if:

You buy in a desirable location with a constant stream of vacationers.
You buy a good property in a good location. Low-cost properties are not likely to perform against other, nicer, properties. This is a marketing contest and you only make money if you win.
You have the time, patience, and ability to deal with guests and issues.