Risks and Rewards of Short-Term Rentals | A Starter Guide for Property Owners

by Ashley Halligan

Property Management Analyst,
Software Advice
12/20/2011

The short-term rental market is one of the hottest segments in real estate and property management. According to HomeAway, an online marketplace for vacation rentals, listings have increased 44% since 2009. Real estate agents, property managers and independent property owners are all vying for a piece of this pie. But, do the rewards outweigh the risks?

We wrote this guide to help independent property owners and small property management groups understand the pros and cons of short-term or vacation rentals. Here we present four risks and rewards to help you determine the best option for your property.

Four Risks

1.Hidden Costs – Short-term rentals are a different breed; they have many costs that traditional long-term rentals don’t have. These behind-the-scenes costs can include everything from replacing furniture to landscaping the lawn to supplying toilet paper. In essence, they’re more like hotels than rental properties. Here’s a quick list of common unforeseen costs:

  • Maintenance – garden and lawn irrigation, pool maintenance, pest control, HVAC maintenance
  • Utilities – cable, electricity, Internet, telephone, etc
  • Upkeep – housecleaning, toiletries, replacing appliances, carpet cleaning
  • Annual fees – taxes, insurance, property management fees, license fees

You should also consider what it will cost to advertise and promote your property. Jay Reynolds, owner of VacationCake.com and a founding member of the Austin Rental Alliance, says annual advertising costs can be $1,000 or more per property.

This is just a sample of the expenses you may encounter over the lifetime of a short-term rental. You should carefully consider costs when you start your investment analysis, and you’ll obviously want to ensure your revenue outweighs expenses.

2. Competition – Maybe we should call this an important consideration rather than a risk. Regardless, you will need to research your competition before buying your next rental property (or converting your existing rental). Short-term rentals are showing up in all regions across the country, even in the most unlikely places. You can improve your odds of success by choosing the right city from the get go. Or if you already own a property, you can differentiate your rental by offering unique amenities that others don’t offer.

A quick way to to gauge competition is to visit an online vacation rental website such as HomeAway or Airbnb. Choose your state and city, then track how many properties are already listed. For reference, here’s a list of the fastest growing markets provided by HomeAway. Percentages in the growth column represent year over year growth from Q2 of 2010 to Q2 of 2011.

CityGrowth# of Listings
Venice, FL367%114
Fort Morgan, AL347%98
Indio, CA337%32
Miramar Beach, FL313%223
Port Aransas, TX281%307
Carillon Beach, FL265%47
Charlottesville, VA260%39
Sonoma, CA237%305
Rockport, TX226%56
Sunnyside, CA223%20

During this process you should review competitors’ properties. What amenities or unique features do they offer? How do they differentiate themselves? Is the property eco-efficient? Does it include sports equipment such as bicycles or kayaks? Even simple things such as a fridge stocked with local produce or pastries might attract visitors.

3. Restrictions – A new risk to short-term rental owners is the possibility of rental restrictions. New York City, Chicago and many other cities are introducing laws that ban or put special restrictions on rentals under 30 days. Increased noise and traffic, growth in dicey quasi hotels and negative impacts to limited housing supplies are all reasons for the restrictions.

These restrictions are putting a major roadblock in the way of the fast-growing short-term rental market. And it should be a serious consideration if you’re thinking about running your own. After all, you don’t want to get stuck with an illegal investment, now or in the future. So plan ahead, and do your due diligence. Be sure to identify municipal or neighborhood proposals to restrict short-term rentals.

4. Community Risks – In addition to your business risks, short-term rentals may pose risks to your community. Crime is the most obvious and most often discussed. Short-term rentals have received negative media attention this year as a few properties were ransacked by tenants. Traffic, parking and noise are other problems that have many neighborhoods balking at the idea of converting more properties into short-term rentals. Finally, there are also less obvious risks. Short-term rentals may:

  • Reduce the housing available for locals
  • Dilute neighborhood culture and characteristics
  • Create unfair competition to the hotel industry

So don’t forget to review and address community risks. You already have enough business challenges to manage; you won’t want your neighbors and city gunning for you too.

Four Rewards

1. Income – It’s no secret that nightly and/or weekly rates of short-term rentals can be significantly higher than that of traditional rentals. In some cases you may be able to generate as much as 25% of your mortgage in one night. Here in Austin, for example, we have music festivals that attract thousands of visitors every year. As hotels fill up, many of these concert goers consider short-term rentals as an alternative option. Prices skyrocket during these events with nightly rates rounding off at $1,250 (depending on location and number of rooms). This increased revenue can make up for slower rental periods throughout the year.

Another unique opportunity for short-term rental owners is the corporate market. You may be able to promote your property to large corporations that have offices in your area. For example, on the outskirts of Austin there are several large office complexes occupied by Fortune 500 companies. There are few short-term accommodations available in this area. So, short-term rental owners could promote their home-away-from-home features such as a full kitchen, a backyard for pets and more, to attract these customers.

2. Preservation – This isn’t as widely discussed as other perks, but property owners wishing to preserve the historic or sentimental value of a property may have more success with short-term renters. Unlike long-term renters, they are not responsible for furnishing a property or taking care of maintenance. So, you won’t have to worry about someone forgetting to replace an air filter, putting holes in the walls with paintings, letting the lawn get out of control or causing pest problems. Sue Long, a founding member of the Austin Rental Alliance, prefers renting short-term rather than long-term for this very reason.

“I do it for the love of the house that I saved from being demolished. This house sat on a lot next door to the house my father was born in in 1914. We have such a cool neighborhood and I want people from out of town to have that experience. I don’t want someone in there for a whole year who won’t respect it or take care of it the way I do.”

3. Tax Breaks – Short-term rental owners are eligible to receive many types of tax breaks. For starters, they may be able to deduct operating, advertising and other expenses such as education costs (i.e. seminars on how to rent vacation homes) and income tax preparation. The biggest break, however, is for owners that rent their property less than 14 days a year. These owners don’t have to pay any tax on the rental income; they don’t even have to report it. If you rent the property more than 15 days a year, however, the revenue must be reported as income. Working with a tax professional is advised.

As a final tip, if you have generated more revenue than expected this year, you could offset this by making year-end, tax deductible purchases. This could include everything from replacing furnishings to hiring a professional photographer or copywriter to help with advertising to buying large-ticket items like a hot tub. HomeAway has a short tutorial about year-end tax considerations.

4. Community Rewards – While short-term rentals have community risks, they also present community rewards. For example, proponents believe short-term rentals promote tourism in a community. Most short-term property advertisements will publicize the features of the property, but also the unique events and attractions of the community. Additionally, short-term rentals provide more tourist capacity in areas with few hotel options or during events and peak periods.

Short-term rentals may also increase the property values in a neighborhood. Property owners managing short-term rentals must keep their properties well-manicured, attended to and make regular, beautifying improvements in order to remain competitive in their market. Some believe this leads to higher property values in neighborhoods, which is beneficial to other homeowners.

So there you have it. Short-term rentals may be a viable option for your property, but be sure to carefully weigh the risks and rewards beforehand. If you have experience renting out a short-term property, feel free to share your tips and anecdotes below.

Thumbnail image created by turkeychik.

 

4 Comments

Great list, Ashley. Here on Maui, as a destination location, the short-term rental market is significant. As well-said in your post, buyers must use caution and diligence before investing.

Comment by Alex Cortez - Wailea Realtor
05/15/2012
 

Thank you for the article, Ashley. I’ve been looking for a rental property in Roanoke, Virginia, and I’ve been wanting to find tips on what I should be looking out for. Short term rental definitely has its tradeoffs, and I’m still trying to decide if that’s the road I want to go down.

Comment by John Lucas
11/20/2012
 

Thank you so much for taking the time to read this and leave a comment. Though this was written almost a year ago, STRs are still a hot topic–and one of that’s of regular controversy and intrigue. Laws are still shifting to either allow or disallow rentals, implementing restrictions, and banning them altogether. I’m not sure how Virginia specifically has leaned towards this? Austin has begun implementing required hotel taxes for STRs too.

Comment by Ashley Halligan
11/20/2012
 

I think one other thing to look at besides, AirBNB is foreclosure rates in your area. In certain markets, those foreclosures are rapidly turned into rental properties by banks repossessing them. Not all of them are short-term rentals, but I have seen some of them placed up for short-term renting. I do like that short-term renters tend to cause less damage to property though.

Comment by Derek Smith
03/16/2013
 

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