What Things Should You Consider Before You Buy a Short-Term Rental?
Short-term rental over long-term rental. That's the preference of many of my buyers. Why? They love the idea of being able to use it for themselves, while also building equity and, potentially, superior cash flow. While this can be true, it is an oversimplification of what owning a STR really entails. So while I'm not here to discourage you from investing in one — I myself own a STR and am currently working on a second one — I do want to give you a fully transparent view of what it involves, so you can really decide for yourself whether or not it is the right fit for you. Here's what most people don't share...
Photo by Paola Aguilar on Unsplash
First things first, owning a STR is the hospitality business, not the real estate business.
If you don't like interacting with a wide range of people, then I strongly urge you to reconsider whether or not this is the route you want to take. This is a people business. You're (hopefully) going to have a wonderful, wide array of guests from all over the world. They will all bring with them different expectations of your property. It just comes with the territory in short-term renting.
You will constantly be striving for great reviews, and sometimes that can take a toll. There will be times where you go above and beyond and your guest still won't be satisfied. There will be times that you never hear from a guest regarding any complaints until you get the review back, and then there it will be in black and white affecting your rating. But there will also be times where you have the most incredible guests in the world, who may become repeat visitors and lifelong friends. It's all part of what comes with owning a STR. It's an emotional rollercoaster, especially in the beginning. So if you take things personally, this might be a challenge for you.
About those higher starting costs...
Yes, investing in STRs does require higher starting costs. Not only does your house need to be set up to function like a regular home (heat working smoothly, lawn cut regularly, kitchen fully stocked with plates and utensils, etc.), but it also must be nicely furnished. Ideally, you have it designed to be incredibly appealing and to stand out compared to the other properties that are available in your area. This means buying quality pieces that won't break when they are actually used — because, trust me, they will be. This also means ensuring you have enough sets of sheets, and that they aren't the super cheap ones that disintegrate after one wash. Additionally, you need to purchase cleaning products, toiletries, etc. and keep them stocked for your guests. To really do a STR well, you need to set it up better than you would your own home. And that requires a little more capital in the beginning.
Photo by Paola Aguilar on Unsplash
Then there are ongoing costs, too.
It's not just purchasing the place and getting it set up. You also need to consider ongoing costs. To best serve your guests — who, as I alluded to above, all arrive with very different expectations — you have a lot of things to consider. These include but are not limited to:
Water and water filter fees
Security camera and related fees
Regular pest control
Toilet paper, paper towels, shampoos, hand soaps, etc.
Replacing linens regularly
Ongoing routine maintenance (snaking the drain, putting window AC units in and out, etc)
If you set this up as a business entity from the start, some of these can potentially be used as tax write-offs. A certified, qualified CPA can give you professional advice regarding this. But no matter what, you will have to spend on these things — whether the property is rented out or not.
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Figure out who will manage the property.
It could be you managing the property, or it could be someone else. It depends on your lifestyle, time, preferences, location, and so much more. If you can do it yourself, and want to, go for it. It will save you some serious coin. But keep in mind, it's a trade off. You may have to stay up for late check-ins to make sure your guests arrive and settle in. It may require you to have your phone handy in case they have questions. Self-managing may require you to be generally accessible when you have guests. It is not passive by any means. There are tools that you can use to reduce the amount of work on your plate, but it still requires you to be involved in the day to day, as a general rule of thumb.
And if you choose to get a property manager, please be sure to vet carefully. Not only do they tend to be more expensive than a long-term property manager, but they also tend to be spread thin — particularly at the busiest, most unfortunate times. For example, when a natural disaster occurs (which is when help is needed most), they can be inundated with calls. Last year, this happened to a few of my clients who went the property manager route. There was an intense ice storm that knocked out power for days in some areas. The risk of pipes bursting and causing significant damage was very real. Several of my clients who have property managers for their STRs were extremely stressed by challenging communication and timeframes. A few even traveled from some distance to check on their properties themselves. So, that's just something to keep in mind. Property managers can be extremely helpful in reducing the amount of work you have to take on, but again, you still will need to manage them. And at times, you may have to fill in and do the work yourself.
How often will you use it for yourself and when?
While having a second home that you can use and then rent out when you are not using it sounds ideal, remember that you may want to use it most at the same times others do. This creates a difficult question when it comes to fun vs. finances. If you want to use it during peak season, around holidays and long weekends, it will affect your bottom line numbers. As an owner of an STR, sometimes I find it very hard to block out a weekend for my family because I know what kind of revenue it can generate if I were to rent it out instead. While using it myself was the original intent, I honestly struggle to do so. There are worse problems to have, of course, I'm just trying to be fully transparent about a challenge I face.
Know that airbnb is geared more towards guests than hosts.
The pendulum always swings, but please know that, generally speaking, airbnb as a company does everything it can to ensure guests have the ultimate experience. While this is understandable on paper, it can affect you as a host. Their policy has been fluctuating, but the trend is that they side with guests on most issues and are quick to offer refunds even if a host feels refunds may be unwarranted. Seldom do they take down bad reviews, even ones that again can be unfair, unsubstantiated, uncool, etc. And their algorithm is set up to prevent you from canceling on guests — even if a guest with not-so-great reviews books or other issues arise.
Now, there are other platforms, but in my experience, airbnb is still the heavy hitter. You have to play by their rules if you want to get bookings. They are a great company to get you exposure. And there is a lot of support available once you become a Superhost, but it's their way or the highway. Be prepared to be frustrated at times, because some difficult guests may get over on you. Again, it comes with the territory.
I share all this not to discourage you, but just to give you the fullest picture of what you are signing up for. Often times the podcasts or blog posts I read regarding short-term rentals don't include the other side or the possible drawbacks in detail. So if you're up for these challenges, and you are at least aware of them going into it, this may still be a great niche for you to invest in.
I personally have thoroughly enjoyed setting up and running my current STR. In fact I have enjoyed it so much so that I'm getting ready to tackle another one! It's been an awesome and fulfilling journey, despite all the work. It has helped me to learn a lot about myself and I'm sure it will do the same for you. Perhaps this could be the right business avenue for you and if it is, go for it. You got this!