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How to Invest in Short-Term Rentals in 2023

How to Invest in Short-Term Rentals

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Whether you’re a seasoned real estate investor diversifying your properties or are brand new to investments, short-term rentals are often a good choice. Investing in short-term rentals allows you to take advantage of the demand for travel accommodation. Plus, you can use the property for your own vacations, in between generating rental income.

Is it time for you to invest in short-term rentals? Read on to learn how to get started.

What is a short-term rental?

Short-term rentals are homes rented for less than 31 days to the same tenant. You may have heard them called “vacation rentals.” While you don’t get the same long-term commitment to rental income, well-situated homes in vacation destinations have the potential to generate higher gross income.

These rentals can include second homes rented out part of the time, homes listed full time on Airbnb or VRBO, and even spare rooms in primary residences. Regardless of how often you list the property for rent, however, you’ll still have the same landlord obligations as you would for a long-term rental. You’ll need to maintain the property and make any required repairs. Some owners do it themselves, while others hire a property manager—especially if the property is far from their home base.

Why short-term rentals are a smart investment

Depending on the location, your short-term rental can gross higher annual income than long-term rentals. When you’re deciding on an investment property, make sure to research the average daily rate and average length of stay for similar properties. According to AirDNA, the 2022 demand for vacation rentals went up over 20% last year, and is expected to grow 5.5% in 2023. The average annual rental revenue for short-term rentals was $56,000 per year in 2021.

Real estate also tends to appreciate faster than inflation, making it a smart investment in 2023. Plus, short-term rentals perform well during recessions, since they’re often budget-friendly accommodations, especially for families and other groups. Because you’re not asking a tenant to commit for the long term, you’ll attract many different kinds of renters, including business travelers, vacationers, and more.

The COVID-19 pandemic changed the way most people travel. There has been a distinct preference for larger spaces with fewer shared communal areas, making short-term rentals a more desirable option.

Finally, you’ll receive tax deductions and write-offs, just like you would with long-term rentals. As long as the property is rented for 14 or more days per year, you’ll enjoy the decreased tax liability.

How to start investing in short-term rentals

Here’s an overview of how to get started on your journey as a short-term rental investor.

Determine your buying power

First, you’ll need to determine how much you can afford to spend on a short-term rental property. Working with a financial professional will help you clarify your buying power. For example, you’ll need to decide how much of your resources you can leverage to purchase the property. This typically includes a down payment of 20 to 25% for the property itself, plus closing costs (usually 2 to 4% of the purchase price).

However, simply purchasing the property isn’t enough. You’ll also need to factor in costs for renovations, improvements, and upgrading appliances and fixtures. Don’t forget to set aside funds for decorating and furnishing the home, too: attractive, social-media-ready rentals in desirable locations are most likely to command higher rental fees.

The best way to handle this is to pick an all-inclusive number that you can afford, then look for properties priced low enough to afford upgrades and furnishings.

Research and pick a market

Next, you’ll need to find the right rental market. Not every location is created equal. You’ll want to consider the vacation and travel demand first. However, your short-term rental property doesn’t have to be in a major metropolitan area to be successful. Plenty of vacationers and business travelers need accommodations in smaller cities and towns, especially if the property is close to recreational areas and other attractions.

Before you pick a location, consider whether there’s a distinct tourist season (and off-season). Some markets might command high rents during the popular months, but remain empty during the off-season. Other markets may offer lower rents but year-round occupancy. This is a personal preference for most investors. Some owners might want to use the property themselves, during the off-season, while others might need it to generate steady income all year.

Next, you’ll need to investigate how the market treats short-term rentals. Some neighborhoods and municipalities prohibit short-term rentals, or include so many unfriendly provisions and taxes that it’s not worth bothering. Find out what it takes to get the license, and what you’re allowed to do with the property.

Finally, choose a location where you can easily manage the property. If you’re planning to do maintenance and management yourself, it will need to be within easy driving distance. If you plan to hire a property management company, you have much more flexibility in location, since they will handle emergencies and routine maintenance.

Look for a suitable property and make your purchase

Next, work with a real estate agent—preferably one who specializes in short-term rentals and investment properties—to find the right property for your needs. A good agent will help you scout locations, get early bidding access, determine average rental rates, and find comparable properties in the same area. Once you’ve found the right property, work with your lender and agent to secure the purchase.

Network with other short-term rental owners

Finally, start networking with other short-term rental owners. A good network will support you through everyday challenges like finding a good property management company, cleaning crew, and bookkeeper, or how to handle destructive renters. The better your network, the more you’ll learn about local market dynamics.

Short-Term Rentals Crowdfunding

Another way to invest in short-term rentals is by buying shares of rental properties through an crowdfunding platform like Here. Here allows investors to buy $100 fractional shares or more of properties all over the United States. Investors can then collect passive income from rental revenue.

Here manages day-to-day operations so you don’t have to deal with property management responsibilities or renters. This service may be an attractive alternative to investors who don’t want to deal with direct management of rental properties or simple want exposure to Airbnbs without buying rental properties outright.

Should you invest in short-term rentals?

Investing in real estate is safe and often effective. When you invest in short-term rentals, you’ll have the opportunity to generate a steady income stream throughout the year. As long as you follow the steps above and do your research, this can be a profitable and satisfying way to build your portfolio and fund future investments.