Limited Short-Term Rental Comps in Your Target Area? — Here's How You Determine Nightly Rates
This is one of the toughest questions I get asked, so I figured I should probably address it.
The truth is, there is no one single way. This is where a highly skilled real estate agent is critical — sorry, Redfin, but this is something that an algorithm or AI simply will never be able to replace. Why? Because they have already tried! Websites like AirDNA and AlltheRooms already exist to look at the raw data of an area. And for those people who are super analytical and need a number set before they can make a decision, unfortunately they are usually at a disadvantage when it comes to investing smaller towns, simply because there isn't enough data to draw a concrete conclusion. You have to do a little more leg work and follow your intuition if you are going to make the leap into a more rural market.
So here's what I recommend: use these sites' data, but just as a starting point. Don't take them as the end all be all. They are great for a baseline reference. Like statistics in any other area of life, the average means there are some that earn more and some that earn less than the baseline. Recognize there is a hidden range here and the real goal is to see how your property does (or will) stack up against the others in that range.
Photo Credit @David Kovalenko
Here are some factors that you will need to consider as to how your property will compare next to the average property in the area:
1) The condition of the home
How well is your property fixed up and what modern amenities does it have or lack? Be brutally honest with yourself. If you justify upgrades that aren't really upgrades, you are really only hurting yourself in the end because your evaluation won't be accurate or reliable. If you can't emotionally separate yourself from it, ask a third party who can remain neutral for this evaluation.
Some things to ponder: does your property have mini-splits — which heat and cool quickly and efficiently? Is the deck stained and well maintained or is it on it's last legs and possibly rotting? Is the roof gleaming and new or covered in moss and needing a little TLC?
So when I say "condition of the home," I am not talking about interior design — we will get to that later — I am talking about how well maintained the house is now compared to what consumers expect this day and age. They will deal with a little "charm" (rustic or outdated features here and there), but something with an extensive amount of delayed or deferred maintenance will be very off-putting and affect the overall value of a nightly stay. Be honest: is yours above average or below average in that regard?
2) The land the home is sitting on
Again, think of this as a scale, compared to the average. Is yours better or worse than the local average? Where is the house positioned on the land? Is it close to other houses? Can you see in the neighbors' windows? Or is it a bit more private?
We know that most people who go to smaller markets prefer more privacy and more land. How does yours stack up? Is it set right on the road or tucked back? Are there certain features on the land that add value? A lake, a stream, a sweet view of a mountain, awesome rock outcroppings? Is the landscaping well done or is it more of a wild yard sort of situation?
It is critical that you look at it through the lens of someone hoping to get away and vacation. Does it have more of the features they would want or less of the features that they would want? How does it compare to the average of the listings you are seeing already posted?
3) The location of the home in relation to local amenities
Every area has special features or attractions. Where your place is in relation to those matters. So, for example, if you are buying in a ski town, the closer you are to the actual mountain, the better. If you are buying in a beach town, being one block from the beach is more desirable than being one mile from the beach. So consider the location of your property in reference to your competition. Is your location superior or inferior? And again, be brutally honest with yourself.
Some questions to consider are: how far are you from town? Visitors love the idea of being remote, but not to the extent that it takes them 30 minutes of treacherous road to get to a store. They want a private house ideally paired with a 5-10 minute drive to civilization. Is your house in a prime location for that area? Are there things to do walking distance? Or do you need a car to get around? Are you close to an attraction that draws in visitors? If so, what type and what do you need to have to accommodate them specifically for that attraction? And do you have it? (ie: a mud room in a ski chalet to store boots, boards and skis).
4) The interior design of the home
Design sells, plain and simple. If your house is cuter than the next one, it will rent. If you have an "Instagrammable moment," it will rent. If it is on-trend, it will rent.
Sometimes design is so important that it can overcome a bad location. That is how big of a factor it is. People will book for a cool concept or an incredibly well designed place — assuming your marketing is on point and the pictures can get it out to the world.
Now this is not to say it won't rent if you don't have good design. It could be a smashing success. However, think about yourself as a consumer first. If you have the choice between two places listed at the same price, you will probably choose the nicer looking one of the two, right? It's human nature. People traveling want to be in a space that feels nicer than their home. It's special. You are on a trip. You want it to be a place that feels like an experience. How you achieve that is by designing it so well that it will stand out above the rest.
4) Local laws that limit inventory
This is critical to research beforehand. And know that this can change even after you purchase a place. This is the biggest risk you take as an short-term rental (STR) investor.
Does the town, village or county you are buying in have unlimited permits or is there a cap? If so, and there are permits still available, this could be a major value add. It will limit your competition in the long run, which could end up being an extremely lucrative investment for you when done right.
Photo Credit @Lili Kovac
So taking into consideration all these variations, here's what I do when evaluating a property for an STR in a more rural market:
Step 1: I look up local data on AirDNA or another data service provider as a starting point.
Step 2: I look at my particular type of property and determine if it lends itself to smaller, more frequent stays or weekend parties with higher price points. Then I choose one of those two routes as a strategy.
Step 3: I take my monthly costs and divide it by the average expected occupancy rate (for smaller houses, I personally use 16 days a month, and for larger houses I use 10 days a month). Yes, this might be overly cautious, but that's how I cover my spread. If I end up getting anything above that occupancy, it is a wonderful surprise and safety net. And, to be totally frank, I have always beat those numbers thus far. Knock on wood.
Step 4: After doing that calculation, if that number surpasses my monthly costs, I am all in. If it doesn't, I play with the numbers to see if it is possible to tweak them. Can I reduce any of my monthly expenses or can I add in a feature to increase my nightly rate? I make sure I am realistic about it.
Step 5: I look at the best competition for my price point in my area and I create a budget to beat it design wise. What do I need to do to make my place more attractive than the other cutest house in the area?
Step 6: If the design and rehab budget will pay for itself in 2 years or less, I'm all in and I jump on it. If it won't, again, I tweak the scope of work needed to see if I can make it work.
Step 7: At this point I put pen to paper and lay out my detailed plan in a spreadsheet. You will have a clear indication in your gut if as to whether or not you can afford to make your property better than the competition. You will also have a clear indication in your gut if you are excited about this project. And if you are, go for it! Don't. Overthink. It.
Investing is about taking a calculated risk. It's about seeing opportunities where others don't. It's going to require a leap of faith after you have done your research and created your plan to invest in a smaller, more rural market. If you are super analytical and need hard numbers no matter what, you should probably stick to bigger, more proven markets. But, know then that the flip side will be having to compete and make your STR stand out from the masses. It's always a tradeoff. But I personally, at this time in my investing career, prefer to choose a less populated market and try to make mine the "go-to" property of that area.
Good luck! You got this!