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When it comes to earning profits on an investment property, conventional wisdom is evolving.
Traditionally, property owners have looked for long-term renters seeking to stay in place for six months or more. But the rise of companies such as Airbnb and Vrbo has altered the status quo, leading to an increase in short-term rentals and introducing a new set of circumstances for property owners to consider. Short-term rentals allow investors to diversify their portfolios in a volatile market, and national rental sites have made it easier to fill and profit from them.
Flexibility is one of the chief benefits that property owners can expect through a short-term rental strategy. Long-term rental properties primarily provide income, but short-term rentals can be used for multiple purposes. This includes flexibility for owners to stay in the home themselves, reserve the home for friends and family, and defer costs or even make a profit when the home is rented out.
The flexibility of the property’s usage lets owners take advantage of rates during peak rental seasons and can be more lucrative depending on location. Long-term rental rates are locked in for the lease, which means owners may not reap the benefits of higher demand and increased profitability.
Rental properties are undeniably illiquid investments, which can support a diversified portfolio, but they should not do so at the cost of long-term goals. Rental-property owners lack the ability to withdraw from the property in times of need, which should be considered before investing.
Investors should also consider ancillary costs, which can be higher in short-term rentals. With greater turnover, there will probably be greater wear and tear, leading to an increase in furnishing and cleaning costs. These costs can be passed on to a degree, but owners will also need to build in periods where the home is empty to allow for cleaning and a transition between renters. Owners should also be mindful of any surprise hurdles regarding start-up costs, the potential for slow rental rates out of the gate and other cash-flow challenges.
As short-term rentals have increased in popularity, so, too, have regulations around them. Owners should do their research to ensure they understand the potential for renters and the local laws.
Prospective property owners may not hold a crystal ball, but they should carefully consider their investment’s potential to gain confidence in its financial viability.
Before committing to the investment, would-be owners should ensure that the property fits well into their overall financial strategy. Will the property’s maintenance costs hamper fiscal health? How will the inevitable empty periods affect cash flow? Will unforeseen challenges, such as a recession, derail medium- or long-term goals?
Lifestyle changes ushered in by the pandemic have substantially affected the short-term rental market. Beginning in 2020, the remote-work boom allowed consumers to move around, with one-to-two-month-long rentals becoming a more viable option. In fact, short-term rental listings are slated to reach record highs in 2022, following 9.4 percent year-over-year growth last year, according to GlobeSt.
Whether seeking temporary stretches of privacy, a larger living space or invigorating new surroundings, consumers are taking advantage of the new slate of available short-term rentals. If these consumption habits become more deeply ingrained and remote work holds popular among employers, owning short-term rental property could be increasingly lucrative.
The recent boosts in demand have run up against decreased housing inventory, and if that holds, owners should be able to rent their homes at a premium.
With those advantages in mind, investors should be wary of the latest interest rate increases from the Federal Reserve. As financing becomes more expensive, the cost of entering the short-term rental market will rise, making profitability harder to obtain and potentially necessitating an adjustment in rental strategy.
Whether folks are considering renting an existing home or are curious about buying property for short-term rentals, it is essential to weigh the evolving market conditions alongside careful research and fundamental investing realities. A wise balance of these factors may set interested parties up to own, share, rent, invest in and profit from the home of their — or renters’ — dreams.
David Mount is a director with the Wise Investor Group at Robert W. Baird & Co. in Reston, Va. Baird does not provide tax, legal or real estate advice and does not provide or service mortgages.
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