Short-term rentals have become significantly popular among landlords and renters in the past several years. Because of that, is it recommended to invest in this venture? Ultimately, this may depend on numerous factors like your investment’s security and the amount of time you’re willing to commit to this endeavor. With the current demand, the market for short-term rental properties won’t diminish anytime soon. Here, we will discuss the advantages and disadvantages and ways you can analyze the market for short-term rental properties.
What is a Short-Term Rental Property?
Typically, short-term rental properties are vacation properties that you can rent for a weekly or daily rate. Examples of these are AirBnbs, as these provide a more personal alternative to hotels. With these, travelers can have more privacy, space, and a lot of desirable amenities.
Since that is the case, people who are searching for vacation rentals are often checking out properties that are near famous attractions. If you want to purchase a property for short-term rental, consider what we’re going to discuss to determine if it’s right for you.
Will it be good to get Short-Term Rentals?
Before you invest in anything, make sure to ask some questions. When you want to invest in rental property, you need money, patience, and time. Aside from that, long-term rentals are not similar to short-term rentals. These are some points that you need to consider before you invest:
- Check if the rental property is in a great tourist location. – If you get a short-term rental property in a desirable tourist location, you will have minimal vacancies and higher rental rates.
- See if the property requires a lot of work. – Before renting a property, you must ensure that it is spic and span. Because of that, if it needs a lot of repairs, cleaning, or maintenance, you must fix every issue before renting it out.
- Know how much time you are willing to commit to this endeavor. – It may take a lot of time to greet guests, clean and maintain the property, coordinate reservations, and market your rental. If you don’t want to do these duties, you need to plan for the expenses in property management.
- Review if you can afford the expenses whenever there are vacancies. – Whenever no one is renting your property, you must take care of the maintenance expenses. Even if short-term rentals may have slow and busy months, you must plan and prepare for every season.
- Study the area where is the rental property located. – In case you don’t reside near the rental property, you need to hire a property management company that can help you communicate in case of emergencies.
How Can You Analyze the Market for Short-Term Rental Properties?
Before investing, you need to know how to analyze an area’s market potential for short-term rentals. Short-term rentals can be significantly different from long-term units. These are the things that you need to consider in analyzing the potential of a short-term rental property:
- Property Type
A vital factor you need to consider before investing is the demand in your chosen location. If that location doesn’t have a demand for short-term rental properties, keep on searching. Highly appealing areas are nearby shopping centers, local businesses, and tourist attractions.
With Airbtics, you can predict if the demand for a short-term rental property will grow because of factors like robust GDP growth, increased customer spending, and higher employment levels. Here, you can check if the available listings, demand for STRs, occupancy rate, average STR daily rate, and revenue for every available room increased compared to the past year.
For STRs, the demand drivers may not be the same as properties for long-term occupation. The demand will be affected by local amenities like shopping centers and restaurants, tourist attractions, and the area’s popularity.
One of the most vital aspects of any property is location. Travelers are usually the ones who use short-term rentals for either leisure or business. Despite that, people’s travel areas may have changed in the past years.
All over the country, both business and leisure travelers use STRs as these can be great alternatives to generic and small hotel rooms. However, in the past several years, the locations where people choose to travel have dramatically changed. Based on the 2022 Short-Term Rental Outlook Report of AirDNA, more and more people are now looking for STRs in the following areas:
- Midsized cities
- Coastal resort areas
- Destination locations near lakes and mountains
- Rural towns and small cities
Because of the Short-Term Rental Outlook Report of AirDNA, this 2022 revealed that guests are more interested in properties near midsized cities, resort areas, destination locations, rural towns, and small cities. Because of that, before you invest in any spot, review where you can find famous rental properties firstthat .
Type of Property
The profitability and demand may be affected by what type of property you buy. Nowadays, travelers want to go to bigger homes that have a couple or more bedrooms so people will experience privacy during their stay. The demand may also be affected by what kind of property it is. According to AirDNA, bigger homes with more than two bedrooms often get booked by guests and families who want a flexible place to stay and work. It is essential to provide a great experience for the property’s aesthetics. Renters often search for a place that can provide better amenities than a hotel. Because of that, it would be best to make your property attractive enough for short-term renters.
Aside from that, guests nowadays want a unique experience. Since that is the case, buses, nature lodges, and tiny houses have increased their unique stays by 20%.
The people’s quest for a unique experience may immediately change from one season to another. According to recent information from iPropertyManagement, 63% of investors bought detached single-family residences, and most of the rentals are in small towns, rural areas, and resorts.
The other important consideration for short-term rental properties is the season. People usually plan their vacations based on the seasons and the activities related to them. When it’s summer, there is an increased demand for beachfront rentals. For winter, the demand for rental properties near the mountains increases because of the ski season. STRs in Aspen may have a significantly high demand whenever it’s ski season. STRs in Galveston, TX, Orlando, FL, and Kissimmee, FL, can benefit from the yearly high demand.
Income or Revenue
For STRs, you can measure their revenue performance with metrics like RevPAR, gross annual revenue, and ADR.
RevPAR means the revenue per available room. This metric factors the occupancy rate by measuring the generated revenue for every room available every night. Whenever an STR has a $4,500 gross revenue monthly, its RevPAR will be $150.
An STR generates the total income in a certain time period is the gross annual revenue. By the end of 2021, the STRs’ average annual revenue increased to $56,000.
With ADR or average daily rate, you can calculate this by dividing the gross revenue you collected in a period by the number of days people rented the house. If the STR gets booked for fifteen days a month and the gross rental income is $4,500, the ADR is $300.
Here are the factors that affect the amount of revenue that an STR can generate:
- How easy it is to book the home online.
- How attractive the property gets marketed.
- The stocks available in the bathroom and the kitchen
- The number of people hosted on the property
- Amenities like the children’s playroom, extra space, or pool
- The availability of the venue for full-time whenever its the peak season
- The venue’s pet-friendliness
- Guest reviews – They should have more positive than negative reviews.
If you want to invest in a rental property, your goal should be to earn a profit. Because of that, some factors can determine if you will earn short-term rentals. Check if you are marketing the property well. If you don’t, you may not gain enough traction like the other rental properties.
Aside from that, you also need to consider other factors like:
- The possibility of booking the rental online
- Amenities provided
- Number of people that the property can accommodate
- Guest reviews – Check if they are bad or good.
These factors will determine the amount of income that you can gain from your rental property:
Aside from the possibility that you can profit from STR income, investors may also earn money in the long term because the property’s value will appreciate. When you analyze an STR property investment’s real estate market, investors review the historical trends to predict if it is possible to increase in the future.
It would be more likely for you to generate more revenue with short-term rentals than with long-term rentals. However, you may have to pay more as short-term rentals often require additional expenses with the usual costs of insurance, property taxes, and property management.
These are the other additional expenses that you have to consider for short-term rentals:
- Utilities like cable TV, internet, electricity, and water
- Booking fees for various platforms like Zoho, Guesty, and Airbnb
- Decorations and furnishings for the bedroom, living room, and common area
- Cleaning expenses after every guest
- Kitchen utensils and bathroom supplies
Even if the daily revenues of STRs are higher compared to homes that are rented full-time, you need to consider the operating expenses. Aside from the usual costs of repairs, maintenance, insurance, taxes, and property management, you also need to review the other expenses like:
- Utilities like cable TV, internet, water, and electricity
- Booking fees for platforms in a short-term listing like Vrbo or Airbnb
- Cleaning expenses are usually higher because STR guests usually stay for a shorter time of a week or less
- The expenses of furnishing a home with decor and furniture so you can get 5-star reviews and generate higher ADR
- Supplies for the kitchen and the bathroom, like linens and towels
Every time a home gets rented by a long-term tenant, your occupancy rate is at 100%. For STRs, you can calculate the occupancy by having the number of nights the home is rented divided by how many nights it’s available.
If the STR has 30 nights available every month but only 19 nights are booked, its occupancy rate is 63%.
Even if the occupancy rate may not be that high, it still has enough revenue to pay for the mortgage. Investors who buy in the top ten STR markets can generate sufficient monthly revenue so they can pay for a mortgage that has less than a month of occupancy.
The other metric related to occupancy is the ALOS (average length of stay). You can easily calculate for ALOS by having the number of nights booked divided by the number of unique bookings. If the STR is booked for 20 nights a month by four different guests, the ALOS is 5.
For long-term rentals, your guaranteed occupancy will be 100% unless you encounter unforeseen circumstances. Yet, for short-term rentals, you may not always achieve 100% occupancy. You can calculate the occupancy rate by having the number of nights the home is rented divided by how many nights it is available.
If the month has 30 days and the place was booked for 17 nights, the occupancy rate for that month is 56.67%. Since the rate is not that high, you can have the rental rates set to cover other expenses like the mortgage.
What are the advantages and disadvantages of Short-Term Rentals?
Since you’re now aware of how to analyze the potential of short-term rental properties, you will see that it has some pros and cons. Aside from that, do research on how long-term rentals differ from short-term rentals so you will know their advantages and disadvantages. These are the prose and cons that you need to consider for short-term rental properties:
Advantages of Short-Term Rentals
- Rates are Unfixed Rates – For long-term rentals are consistently fixed for the lease term. Landlords of short-term rentals can maximize their profitability by changing their rates according to the seasons or demand.
- Increased Rental Rates – Typically, short-term rentals have higher rates compared to long-term properties.
- Higher Tax Breaks- For short-term rentals, you can have more tax breaks for maintenance and cleaning expenses.
Disadvantages of Short-Term Rentals
- Income May Be Variable – For long-term rental properties, your income will be consistent every month. However, short-term rentals could drastically vary every month.
- Added Restrictions- For those who own short-term rental properties, they need to follow and be updated on every local regulation and ordinance to avoid problems.
- Minimal Tenant Verification- It can be challenging to screen or verify every renter who would want to rent a vacation home.
Attain the Maximum Income for Your Short-Term Rental Investment
It can be vital to become aware of how to analyze the potential of the short-term rental market, whether you want to invest now or in the future. After that, you would have to prepare for your investment. In case you want to benefit from short-term rental but live far from the property, you can hire a property manager who can take care of this for you.
Before you invest in real estate, it would be best if you do a thorough analysis of the asset first. Buying a property that you can rent out to a tenant for the long term is different from investing in an STR. Aside from that, you may find some of the best markets in coastal cities, destination locations, and small rural towns.
Even if the STRs may provide gross revenues of $250 every night, you may have to pay for higher operating expenses. Because of that, it would be best if you buy in a city that has a consistent demand for short-term rental properties and high levels of occupancy.
Airbtics provides one of the best short-term rental analytics in the market. Jae Seok An, one of WhatsApp’s software developers, founded Airbtics last July 2019 while he was a Super Host of Airbnb. Since the market does not have enough accurate data providers, Jae created Airbtics so he can gain better control of the information.
Airbtics is committed to helping beginners and professionals by providing the necessary information for successful investment for long-term profitability.