Many investors have watched short-term rental (STR) investing from the sidelines. They’ve heard the success stories and know there are high returns to be made, but often come back to some form of the following questions:
- Is it worth the risks?
- Is it worth the hassle to set up and operate an STR?
- How much more money would I actually make?
1. Laws and Regulations
To even get started on the short-term rental path, you need to check this box. If it’s illegal to operate your property as a short-term rental, I wouldn’t advise that you try!
If you are unsure if your property can be used as an STR, you will need to confirm the rules and regulations for your property’s municipality.
2. Risk Tolerance
Have you ever spoken with a financial advisor? At some point, they’ll ask, “on a scale of 1-10, what would you say your tolerance for risk is?”
What are you supposed to say? “Yeah, I love risk! The more risk, the better!”
But you don’t want to sound like a wimp either. You’re brave, right? You know that the potential for higher returns grows with riskier investments.
Two primary risks:
- Potential damage to the property
- Financial instability
3. Net Operating Income
In almost all cases, a rental will make more income per month if converted to a short-term model. That being said, income alone isn’t a helpful performance indicator because there are several additional expenses associated with a short-term rental compared to a traditional rental. The owner now pays all expenses that are usually passed on to a long-term tenant.
In your operating expenses, you must account for:
- Features unique to your property (pool/hot tub maintenance, pest control, security)
- Management fees (if you don’t plan to manage yourself)
4. Cash Flow
Are you looking to make more cash flow from your rental investments? With rising interest rates and the rapid appreciation we have seen over the last few years, cash flow isn’t as easy to come by as it has been in the past. This trend even led BiggerPockets to produce a recent podcast episode entitled Cash Flow is Starting to Disappear: Is It Even Worth Chasing?
For those looking for financial freedom via real estate, cash flow is key to success.
The following two categories, time and management, go hand in hand. Either one or both must be checked for an STR to be a good decision for you.
Do you have the time to set up and manage an STR? There will be a learning curve. You must furnish the property. You must learn the ins and outs of setting up and listing an STR on platforms like Airbnb or VRBO. Short-term renting is a hospitality service, so you must promptly and thoughtfully communicate with guests. The guest calendar and cleanings must be accounted for at all times.
If you don’t think you have the time, that doesn’t rule out STRs for you! Like any other investment property, you have the option to hire a property manager. They are not simply collecting rent and solving tenant problems like a traditional property manager. Short-term rental managers do everything on your behalf, including:
- Set up, furnish, and onboard your property
- Manage online presence and pricing optimization
- Interact with inquiries and any guests relations
- Schedule cleaners, landscaping, and any maintenance needs
- Ensure supplies and inventory are fully stocked and accounted for
- Manage finances, including payments, invoices, and reports
Because short-term rental managers have more ongoing responsibilities than traditional property managers, they generally charge more. The industry standard for STR management is 15%-30% of your gross income. Run the numbers and make sure that a management fee wouldn’t compromise your financial goals.
Excerpted from the article by Ryan Williams from R&R Real Estate Services
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