Hardworking Americans are constantly looking for ways to make more money in today’s economy. While picking up extra shifts, a second job, or other creative money-making activities may be effective, they’re often unsustainable and lead to burnout or even depression.
One of the best ways to add an additional revenue stream to your monthly income is through short-term rentals. This real estate investing opportunity allows homeowners to rent out rooms in their home or even entire properties to temporary tenants.
The best part? Short-term rental investing doesn’t even require you to own the property. Keep reading to find out more about short-term rentals and how you can get started making more money this year through real estate investing.
Short-Term Rental Definition
Before getting started with short-term rentals, it’s important to understand the short-term rental definition and exactly what it means to invest with this type of rental property.
A short-term rental is a property that’s rented for a relatively brief period, typically only a few days or weeks rather than a long-term lease lasting a year or more. These rentals are booked by vacationers, tourists, or sports fans looking for temporary housing.
Short-term rental investing is exploding in popularity due to short-term rental sites like Airbnb and Vrbo, making it easy for any homeowner to list their site and profit off the rental income. Additionally, rental arbitrage makes it possible for investors to use short-term rental sites for passive income without physically owning their rental properties.
But housing authorities in places like New York City and Chicago have started to crack down on rental investors, citing that short-term rentals are taking away from the local housing market and contributing to the affordability crisis in many cities across America.
Types of Short-Term Rentals
One of the best parts about short-term rentals is the fact that there are several different strategies to pursue, including:
The most popular type of short-term rental is a vacation home. These are properties in locations that attract tourists and travelers during seasonal periods in the summer or during popular events like concerts or sporting events. Vacation rentals are also popular in tourist destinations in major cities year-round.
One of the best parts about vacation rentals is the rental income potential during peak seasons. As the demand for short-term housing goes up, rental investors can charge higher prices. However, off-peak seasons may cause rental income to decline or even disappear entirely.
Airbnb and Other Platforms
While vacation rental properties are also found on platforms like Airbnb and Vrbo, these sites also offer the ability for homeowners to rent out spare rooms in their homes.
This can be an ideal arrangement for single-family homeowners looking for a little extra cash in their pocket without having to purchase a rental property.
Another short-term rental property that’s gaining popularity post-Covid is corporate housing. This type of short-term residence is funded by companies on business trips or for employees currently relocating.
Corporate housing accommodations are fully furnished and offer amenities similar to hotels, meaning the owners of short-term corporate housing will need a robust property management system to ensure guests have all the supplies and amenities for their stay.
Pros of Short-Term Rentals
Short-term rentals are becoming popular for several reasons. First, hosts have total flexibility in how they use their properties. They can choose when to rent it out and for how long to accommodate their own personal schedule or changes in their plans.
Rental owners, of course, also benefit from the income that their properties provide. They can use this income to pay off debts, save for retirement, or invest in additional rental properties to further grow their income and wealth through real estate.
Short-term rentals also provide hosts with tax advantages that can reduce their taxable income at the end of the year. Tax deductions for business expenses and property management costs can potentially save hosts thousands in taxes.
This business model also allows hosts to adjust their pricing with the market without locking into a long-term lease with tenants. As peak seasons approach, short-term rental owners can increase their prices to capitalize on the demand for their housing accommodations.
Cons of Short-Term Rentals
While the benefits of short-term rentals are significant, there are some downsides to consider before buying your first investment property.
The biggest risk of short-term rental investing is the possibility of extended vacancies. As we mentioned, seasonal rental properties can provide stable income during peak times of the year but may drop off significantly after the tourist season.
Additionally, aspiring short-term rental investors should consider the level of competition in their specific market. Popular tourist destinations will likely have hundreds or even thousands of short-term rental hosts competing for the same pool of travelers, making it difficult to stand out on platforms like Airbnb.
Online Listing Fees
Platforms like Airbnb are known for charging high fees for both hosts and guests. These sites may take 15-25% of your profits, which means hosts will have to factor in these costs when deciding if a short-term rental business is right for them.
Successful short-term rental hosts have a system for cleaning and restocking the property with essential items for guests during their stay. This means you’ll be required to buy supplies like toilet paper, hand soap, towels, and kitchenware and replace any damaged items from previous guests.
Hosts who wish to delegate property management responsibilities and day-to-day upkeep will need to budget for a property management company, which will eat into the profits and affect your bottom line.
Property Wear and Tear
Frequent turnover of guests can also lead to increased wear and tear on the property. Hosts should create a fund in case of emergencies or for needed repairs to keep the property attractive and in good shape for guests.
Many online gurus and well-known investors claim that short-term rental investing and Airbnb arbitrage provides “passive income.” Unfortunately, most rental property owners find out quickly that there is a lot of work that goes into this business.
New investors will need to learn the basics of listing their properties online, talking with potential guests, preparing the property, managing expectations, and dealing with difficult renters. This will only be a passive income source when investors are totally removed from the day-to-day management of the rental.
Starting a short-term rental business is a great way to build an additional stream of income and put your property to good use. This business model is also highly scalable, as the rental income from one property can be used to finance additional short-term rentals in the future.
However, aspiring rental property owners should understand the downsides of short-term rentals, including the possibility for vacancies, income fluctuations, and fierce competition in certain areas.
Related: Risks of Real Estate Investing
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