Are you looking for a profitable investment? In this article, you will learn what is a short term rental and why it will make a good investment.
While short term rentals are generally seasonal, they are one of the most lucrative forms of real estate investments. Before the pandemic, the short term rental market in the US was so popular that many cities were saturated with vacation homes. However, it is also one of the industries that suffered the most when the pandemic started in early 2020.
Table of Contents
- What Is a Short Term Rental?
- Is It Profitable to Invest in a Short Term Rental?
- Things You Need to Do Before Buying a Short Term Rental
- How to Find a Profitable Short Term Rental Property
Fortunately, with the lifting of the lockdowns and travel restrictions in mid-2021, travelers from across the US and all over the world returned to taking trips. It caused a sudden surge in demand for short term rentals, which is why many new investors entered the market starting last year. The question is: “Will the increased demand still continue throughout the next few years?”
According to experts, the short term rental market will remain as strong as ever. If there’s something that people learned during the lockdowns, it is that spending time to travel is essential for one’s mental health. It is for this reason that people nowadays are willing to spend more money on travel than they used to before the pandemic.
If you want to invest in short term rentals, make sure to find a profitable market. Use a real estate analytics platform like Mashvisor to help you determine which markets are best for investing in vacation rentals.
What Is a Short Term Rental?
A short term rental refers to a residential unit—either the entire house, a room, or any living space in the house—that owners rent out to guests for a short period of time. In general, short term rentals are rented out for less than 30 days. The maximum length varies, depending on the state or local ordinances where the short term rental property is located.
Sometimes, short term rentals are referred to as vacation rentals, Airbnb rentals, transient rentals, and home-sharing rentals. Often, you can find them listed on home-sharing platforms like Airbnb, VRBO, and FlipKey. It’s important to note that short term rentals are not considered the same as hotel or hostel accommodations.
Is It Profitable to Invest in a Short Term Rental?
Many investors are wondering whether short term rentals will make a profitable investment or not—well, the short answer is yes. Since Airbnb became famous in 2010, home-sharing platforms have become the go-to option for most holiday-goers. Short term rentals are generally cheaper compared to hotels; that’s why many travelers prefer to stay in short term rental homes.
The Airbnb occupancy rate has grown significantly over the years. In fact, aside from Airbnb, various home-sharing platforms have emerged, too. The number of users per platform varies, but the short term rental market has substantially flourished. The best thing about short term rentals is that they don’t only cater tourists, but also serve business travelers as well.
Keep in mind, however, that the profitability of short term rentals will vary depending on the market you invest in. You need to consider several factors to ensure that you’ll become a successful investor. A few of the essential factors are the location, demand for short term rentals, cost of the property, and other expenses related to owning a vacation rental.
In some cases, short term rentals can provide more profits compared to long term rentals, especially when you choose the right location. When deciding which investment strategy is best, it’s important to study the market and conduct a short term rental data analysis. It allows you to choose the best investment property based on your financial goals.
So what is short term rental data? It refers to real estate information about an investment property that shows the potential profits when used as a short term rental. Knowing such type of data is crucial in helping you make an informed investment decision.
3 Things You Need to Do Before Buying a Short Term Rental
Investing in real estate is considered one of the best options if you want to ride through the economic uncertainties nowadays. Real estate generally offers a hedge against inflation, and it is the best option for those who want a long-term investment. One of the strongest and most lucrative real estate investing strategies now is short term rental investment.
As mentioned, short term rentals are back in business after almost two years in lockdown—and the market is back on its feet with a bang. In fact, due to high demands from both leisure and business travelers, the supply not sufficient compared to the demand in some markets. However, there are some markets too where short term rentals are not that lucrative.
Before you buy a short term rental property, make sure to keep these three important things in mind:
1. Choosing the Right Location Is Necessary
As with any kind of real estate investment, location can either make or break a deal. When investing in short term rental properties, make sure to choose the right location. What exactly is the right location for short term rentals? Several factors can help you determine whether a particular location is optimal for short term rental investment, such as the following:
- Demand for vacation rentals: When choosing a location, make sure to check the demand for rentals in your target markets. You can find this information by checking the rental comps in the area.
- Proximity to tourist attractions: The best short term rental markets are those that are in close proximity to tourist attractions. The major source of business for short term rentals is tourists and leisure travelers. Choosing a place that is strategically located near tourist spots will increase its chance of getting a high occupancy rate.
- Cost of housing: If you want to become a successful investor, you don’t want to choose a real estate market with expensive housing. The best place to buy a short term rental property is one that is considered affordable—it allows you to earn a better return on investment. Make sure also to choose a market with a steady appreciation rate.
Related: 100 Best Short Term Rental Markets in 2023
2. Learn the Short Term Rental Rules and Regulations in Your Chosen Location
While short term rentals are famous nationwide, there are some cities that don’t allow the operation of vacation rental homes. Before you buy vacation rental property, make sure to choose a location where it is legal to operate a short term rental business. In order to do it, you need to check the short term rental rules and regulations in your city of choice.
Moreover, you also need to know the restrictions related to operating a short term rental property. In some cities, local ordinances allow short term rentals as long as they comply with the restrictions. For instance, in some markets, vacation rentals are considered legal if they are owner-occupied. It means that the owner needs to be present at home with the guests.
In addition to state laws and city ordinances, you must also ensure that short term rentals are allowed in the village or condominium where the property is located. If you’re planning to buy a property in a village or a condominium complex, check the homeowners’ association agreement or condominium agreement. Doing so will ensure that you won’t encounter any issues later on.
3. Checking the Real Estate Data and Analytics Is Crucial
Before you buy any short term rental property, you must ensure that you understand the real estate data and analytics in your chosen market. The demand for rentals and the number of tourist attractions are not enough to determine an investment property’s profitability. You really need to run the numbers to be certain.
Here are a few of the things that you need to know:
- Cap rate: The cap rate is considered one of the important metrics to determine the profitability of a property. It is the rate of return based on the property’s purchase price or current market value.
- Cash on cash return: The cash on cash return refers to the rate of return based on your initial cash investment on the property. The method of financing you choose and the amount of your down payment will significantly affect the cash on cash return value.
- Occupancy rate: The occupancy rate refers to the number of days the vacation rental property is rented versus the number of days it is listed for rent. Generally, the higher the occupancy rate, the better the returns will be.
- Cash flow: Cash flow refers to the amount of cash you can generate from your investment property. A positive cash flow shows that the property generates a profit after deducting the expenses. On the other hand, a negative cash flow shows that the property doesn’t generate enough income to cover the costs of owning a rental.
You can use a short term rental calculator to compute these figures. What is a short term rental calculator? It is a tool that can help you calculate the values of the metrics mentioned above to determine if a property will make a good investment or not.
Related: How to Estimate Rental Income on Short Term Rentals Using Mashvisor
How to Find a Profitable Short Term Rental Property
Finding a profitable short term rental property may sound like a challenging quest, however, it is really simple if you know what to do. Check out the following tips to help you get started:
1. Set a Budget and Stick to It
There are several short term rentals for sale, and if you don’t set a budget, you may easily get overwhelmed and spend beyond what you can afford to pay. It is why before buying a vacation rental property, you must set a realistic budget and stick to it.
When setting a budget, make sure to include not only the price of the property but also other costs associated with buying a property. They include closing costs, inspection fees, and renovation or home improvement expenses.
When making home improvements, make sure not to go overboard. When doing renovations, you can get carried away easily and spend more than what you originally planned. Before buying a property, work with a reliable contractor first to inspect the property and ensure that there are no structural issues that are too costly to fix.
2. Study and Analyze the Market
Studying and analyzing the market is a crucial step in short term rental investing. It is where you will be able to identify markets that are optimal for investing in vacation rentals. So, what is short term rental analytics? It shows important data about a vacation rental property, such as occupancy rate, monthly income, and daily rate.
For new investors, studying the market can get a bit overwhelming, especially if you don’t know what to look for. That’s why we recommend that you work with a professional analytics platform. Mashvisor is the best real estate analytics platform available in the market today. It provides accurate and updated data that can help you make the right investment decision.
If you work with Mashvisor, you’ll get access to various real estate tools that are useful in finding the best investment property in your chosen market. One such tool is the investment property calculator, which allows you to calculate the possible profits you can generate from a particular investment property.
Mashvisor’s rental calculator also computes a property’s cap rate, cash on cash return, cash flow, income, and expenses. It lets you see whether or not the property will generate sufficient returns to make you profitable. In addition, you can also include your preferred financing method so you can get a more accurate and personalized computation.
3. Know the Short Term Rental Rules and Regulations
Do not forget to find out if a particular short term rental market allows the operation of vacation rentals. You should also determine the restrictions in your chosen market, so you will know what to expect. Find out if you need to stay on the property while the guests are renting (owner-occupied) and what is the maximum occupancy per room/property.
It is important to stay in compliance with the law, so this step is crucial. In addition, if you plan to buy a vacation rental home in a village where there is a homeowners’ association, make sure to check the agreement allows short term rentals. The same goes for condo units and/or apartment buildings.
Related: How to Use Mashvisor’s Airbnb Market Research Tools
4. Maximize Your Search Using a Large Database
To find the best investment property, you need not limit your property search using local classifieds in your chosen location. The good news is that you can now easily search for an investment property for sale without leaving the comfort of your home. Mashvisor offers access to a huge database that contains hundreds of thousands of rental properties for sale.
Another great thing about Mashvisor’s Property Finder tool is that it allows you to customize the filters so that you’ll easily find a property that fits your preference. You can enter your preferred location, budget, and rental strategy. In addition, you can also customize your preferred property type and the number of bedrooms and bathrooms.
5. Don’t Forget to Analyze the Rental Comps
Another way to determine if a particular income property will make a profitable short term rental investment is to analyze the comparables. Rental comps are similar properties that have the same features as your chosen property within the same area. By studying the comparables, you’ll get an idea of how your chosen property will perform in the market.
Analyzing rental comps also allows you to know how your competitors perform. It can help you decide how to position your vacation rental property to make it stand out among the competition.
The good news is that Mashvisor provides easy access to rental comps and neighborhood analysis. Through such tools, you can determine whether your chosen property is optimal as a short term rental based on the performance of similar properties in the same location.
Are you ready to invest in short term rentals? Start a 7-day free trial with Mashvisor now.
Short Term Rentals Are Good Investments
After discussing what is short term rental, we’ve established that it makes a profitable investment if you know where to invest. Before you buy a property for vacation rental investing, make sure to study the market carefully with the help of Mashvisor. Doing so allows you to make an informed business decision.
Aside from offering access to a large database, Mashvisor also provides the most accurate real estate data and analytics that can help you decide whether a property is worth investing in. Use Mashvisor’s rental property calculator to compute your potential profits, as well as its neighborhood and rental comps, to see how your property will most likely perform.
Schedule a demo now to get a hands-on experience of how Mashvisor works.