Short-term rental properties: 7 things you need to know before you invest
- Mar 3, 2018 | Heather Bayer
As the vacation rental industry grows to maturity, demand continues to increase, making investment in short-term rental property a more attractive prospect. Whether it’s part of a retirement plan, an opportunity to pursue a digital nomadic life, or a family goal to own a second home, buying a vacation property has the potential to deliver significant income to offset mortgage and other costs.
As with any investment, due diligence is critical to a successful outcome, and in this case, the necessary research is wide-ranging. Making an informed decision about where to buy and whether there is a potential for sufficient rental to make it worthwhile means doing research into regulations, zoning, local infrastructure, inbound tourism statistics and taxation issues, to name a few. Then there is competitive analysis of the local vacation rental market to understand the traveler demographic and occupancy potential.
This is a unique market and knowing a few things about how it works, who to approach in the research phase, and the obstacles that may be encountered along the way can be a huge factor in creating a successful business.
1. Not all Realtors know the vacation rental market.
Only a small percentage of Realtors understand the vacation rental business, and it’s important to work with an agent who does. Ask questions about his or her experience selling properties that have short-term rental potential, being careful to distinguish that from the residential rental market. A good Realtor will be able to discuss supply and demand, regulations, inbound tourism, seasonality, and the importance of location for different traveler demographics. Find the right one, and he or she will reduce the time you spend on research considerably.
2. Buying a turnkey property can be the best investment.
A property that has solid rental history, has a list of previous guests for remarketing purposes, and may come with reservations already in place is a valuable asset. It can start earning income from day one and there won’t be a need to set a lower rental rate in order to start attracting guests. Although the property may be listed over the current market value, the benefits may well outweigh the premium cost. Just make sure the owner can provide at least three years of rental and income records.
3. Regulations can limit or prohibit rentals.
Few areas are free from regulation and legislation and every location is different. Failing to research the current and planned legislation in an area of interest can throw up a lot of challenges later on. Look at statewide statutes as well as county, municipal, and HOA plans for short-term rentals.
At a more granular level, it’s also worth looking at the makeup of an HOA board or municipal council. Obtain previous minutes and see if the topic has been raised in committee in the past. This more detailed research can yield useful information to help in decision making.
4. Demand can be feature-driven.
Choosing a location is more than checking out the great beach. Understanding the demand for property in an area means finding out what type of property is most popular. In hot beach areas such as Florida’s Destin or Panama City Beach, a two-bedroom condo on the waterfront may be a better investment than a three-bedroom home off the water; while in areas that attract multigenerational families, a larger property is likely to achieve more occupancy than a smaller townhouse. In urban areas, a location with an on-street parking spot can be in much higher demand by guests than one without.
5. Some areas are prone to saturation.
Which areas becoming saturated with short-term rentals? You can find the answer to that by researching on the large listing platforms where you’ll find hundreds, perhaps thousands, of listings. Don’t just look at the availability charts of those on the first few pages — drill down to page 20, 30, and 40 to look at the occupancy of those as well. In areas of saturation it will be tough to get high on those lists at the outset so it’s important to see what the availability is like further down.
6. Tourism departments can provide valuable inbound statistics.
Just because a place looks popular at a certain time doesn’t mean this will extrapolate over all seasons. Tourism offices are often able to provide data on inbound travel: whether tourists arrive mostly by air or road, how long they stay, and other information that can play a part in an investment decision. A property in Orlando near Disney is likely to rent year-round, however one further south in Florida may struggle to get summer rentals. The snowbird market in Gulf Shores, Alabama, is not as guaranteed as other areas, but may have a solid tourist market from March through September.
7. Occupancy taxes will need to be collected and filed regularly.
While it’s important to consider the impact of tax on the rental income in annual filing, don’t forget to research the local and state taxes that may apply on occupancy. These taxes are paid by guests but need to be filed regularly (often quarterly). Fortunately there’s help available for this — Avalara MyLodgeTax is an online software that determines what taxes need to be collected for your properties and will also do the filing for you.
For more insight from Heather Bayer, visit Cottage Blogger or attend her annual Vacation Rental Success Summit.