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10 reasons to invest in short-term vacation rental property

  • Mar 8, 2018 | Jennifer Sokolowsky

Real estate has long been a solid choice for investors looking for healthy returns. However, a new type of real estate has been gaining prominence in recent years: short-term rental properties.

These are rented out for short terms, typically less than 30 days at a time, and can bring in greater returns than a conventional long-term rental property. While these types of properties may also require more hands-on management than long-term rentals, more and more buyers are considering short-term rentals as investments. Here are some reasons why.

1. The short-term rental market is growing.

A study by Technavio forecast that the global vacation rental market is expected to grow more than 7 percent annually between 2017 and 2021, when it will be worth $194 billion.

Travelers are becoming increasingly comfortable with the idea of staying in someone else’s home while they’re on vacation, and they’re discovering that there are several advantages to short-term vacation rentals over traditional hotels.

Short-term rentals are often more affordable, especially for groups. Many people find they enjoy the practical comfort of a real residence over a commercial hotel, and short-term rentals allow travelers to interact with neighborhoods and residents as well as discover aspects of their destination they would never encounter at a hotel.

2. Short-term rentals can make more money than long-term rentals.

In the right situations, owners can charge more for short-term rentals than they can for long-term rentals. That comes with plenty of caveats, as owners need to consider vacancy rates, wear and tear, market volatility, and other factors that can affect their rental business. But there’s no doubt that short-term rentals have the capability of bringing in more income than long-term rentals under the right circumstances.

Moreover, it’s possible to turn short-term renters in recurring revenue. Many vacationers who enjoy their stay will consider returning the following year. Let your visitors know you appreciate their business and would love to see them again in the future.

3. A short-term rental property can help diversify your investments.

Even if you own other real estate properties, short-term rentals involve a completely different market than other types of real estate. And if real estate is not currently a part of your investment portfolio, short-term rentals can be a great way to get into this area. Through asset diversification, you help to insulate your investment portfolio from market volatility. What’s more, the revenue from short-term rentals may be able to cover a mortgage on the property and this can be an attractive way for first-time real estate investors to get into the market — after crunching the numbers and taking care of due diligence.

4. Short-term rental properties can be found for any taste and budget.

Can’t afford a mansion on the beach? No problem. Short-term vacation rentals come in all shapes, sizes, and price points, ranging from studio apartments to mountain chalets. Or maybe you’d like to rent out a tree house, tiny house, or tipi — you wouldn’t be the first! There are even examples of homeowners who have added dwellings to their own property to take advantage of a prime location or a large lot size with room to build.

5. Tax advantages.

Under the new federal tax law that went into effect on January 1, owners of rental properties that are operated as businesses will be able to deduct mortgage interest on these properties, along with business expenses related to the rental. If you operate your rental as a business, you may also be able to deduct up to 20 percent of net rental income from your income taxes.

6. Marketplaces make it easier than ever to find renters.

Online short-term rental marketplaces, such as Airbnb, VRBO, and HomeAway, make it easier than ever for you to advertise and book your short-term rental property. Airbnb is the biggest of the bunch and continues to grow. Founded in 2008, Airbnb reached 4 million listings worldwide last year, more than the top three hotel chains combined. Travelers know to go to these sites to find short-term rental opportunities in their destination location of choice.

If you happen to have an expertise of a skill that is in demand, you can even take advantage of Airbnb Experiences to sweeten the opportunity to book your rental.

7. You’ll have a vacation home to enjoy!

Even if you’re primarily using your property for short-term rentals, you’ll get the chance to enjoy it as well — without paying anyone else for your vacation accommodations. In this case, business and pleasure can mix very well. It can also be a huge time saver. While some people enjoy the process of planning a vacation, others would prefer to have a reliable destination they can count on visiting on a moment’s notice.

8. You enjoy hosting.

Short-term rentals need to be treated like a business, but for many rental operators, hosting travelers also offers a lot of personal satisfaction. If you enjoy creating a welcoming environment, meeting new people and making connections, and helping travelers enjoy your area, short-term rentals can be a lot of fun. A genuine love of hosting helps to make a successful business as well. You may even help love bloom! Shannon and Josh fell in love and got married following a chance encounter at an Airbnb. Who knows? Maybe you’ll be the next short-term rental match maker.

9. Having a second property offers flexibility.

It’s your house and you can do what you like with it. Need somewhere to stay while your primary home is being renovated? You’ve got one. Hosting an event such as a family reunion or a wedding? Depending on the distance, you have overflow capacity. Decide you want to sell or switch to a long-term rental situation? It’s all up to you.

10. Managed tax preparation and filing makes lodging taxes simple.

Many people just looking into getting a short-term rental property aren’t aware that in many locations, vacation-rental operators are responsible for collecting lodging taxes on the cost of accommodations from renters, jut as hotels do. Hosts don’t have to pay these taxes themselves, but they’re required to collect the taxes from guests and pass them on to tax authorities.

While lodging tax compliance can be complicated, you can get affordable help with lodging taxes from management services such as MyLodgeTax. Automated services can take care of lodging tax filing and registration and make sure you’re charging the right rate. In short, MyLodgeTax can handle all the details of lodging taxes for you — so you don’t have to worry about anything.

Is a short-term rental property right for you?

These are just some of the reasons you might want to invest in a short-term rental property. It can be a successful path for many people, but make sure you do your homework. Only you can decide whether investing in a short-term rental property is the right choice.

Lodging tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Jennifer Sokolowsky
Avalara Author Jennifer Sokolowsky
Jennifer Sokolowsky writes about tax, legal, and tech topics. She has an extensive international background in journalism and marketing, including work with The Seattle Times, The Prague Post, Avvo, and Marriott.
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