Buying Short-Term Rental Properties - Building Profitable Investments in 2023
Short-term rentals (STRs) have seen a massive surge in popularity over the last decade. This is largely in-part thanks to companies such as Airbnb and VRBO, with people flocking to the array of unique accommodations and home-style stays available instead of traditional hotel visits.
As well, short-term rental properties were proven to frequently be a safer investment than hotels. In the first half of 2020, the revenue per hotel room dropped a staggering 65 per cent, while short-term rentals only saw a drop of 4.5 per cent. With this increased demand, combined with the increased security, many investors are looking into buying more STRs in the coming years. So, if you are looking to buy STRs, this guide is for you.
However, some lenders are hesitant to finance short-term investment properties, so you need to be careful. In order to ensure you are approaching the correct lenders to start, let us get you started through a free strategy call at the link below.
What is Considered a “Short-Term Rental”?
Any rental contract that extends beyond six months is considered to be a “long-term rental.” That means any rental contracted for less than six months would be considered a short-term rental.
Often you may see these properties rented by the day as an alternative to hotel accommodations. However, you may also see an STR rented for a few months as a vacation residence or temporary residence for people visiting your city for work.
Why Would You Buy a Short-Term Rental?
For some, the idea of a short-term rental seems absurd. Why rent out your property for short periods of time to a wide variety of tenants when you could find a single tenant to occupy the residence long-term? Let’s take a look at some of the key reasons you may want to consider this option.
High Demand
Vacation rental demand is beginning to bounce back after taking a hit due to the COVID-19 pandemic and platforms like Airbnb and VRBO have built a formidable reputation against the hotel industry in recent years. This has resulted in a massive spike in demand for STRs in tourist destinations.
High Profitability
STRs can often be more profitable than a long-term rental, provided the demand is present. With an average cost of $208 per night for an Airbnb in North America during 2021, it is not hard to imagine turning a profit each month.
Let’s estimate the mortgage, insurance, utilities, and other expenses on a property you plan to use as a short-term rental cost you an average of $1500 a month. At the average nightly rental price of $208, you can cover your expenses by having the unit occupied for only 8 days, making any other nights you have the unit occupied for into pure profit. With the average monthly rent for a 3-bedroom house falling just under $2000, you can exceed the estimated profit from a long-term rental agreement by finding short-term renters for only 11 days out of the month.
Room For Growth
If you are able to secure a rental property in a prime location, that property will appreciate in value much more quickly. As well, with a short-term rental you have more room to capitalize on price appreciations much sooner than you would with a long-term agreement.
How to Find an Ideal Property
You should never invest without doing your research. Sometimes an area that sounds perfect for a short-term rental at first, can end up losing you money due to low demand. As well, the laws and regulations tied to short-term rentals vary from region to region, meaning a seemingly perfect property may not be legally allowed to be used as an STR.
Here is a quick list of factors you should consider while hunting for a property:
Local Regulations
As mentioned before, some counties and regions have outright banned short-term rentals, while others have heavy licensing and permit requirements that will cost you both time and money. So, before you start buying any sort of property, it is crucial you investigate local laws to make sure your STR is not only legal, but worth your time.
Evaluating the Market
Areas with a high demand for short-term rentals sound like a gold-mine. However, it is important to look closely at the market before making any sort of purchase.
First, if the demand is high, it is possible other investors may have gotten there first and bought up some of the best properties, leaving you in a position to either compromise on a cheaper property, pay to update a property, or move on to a different area.
As well, you may want to look at the demand in the region over the span of a few years. A region may appear to be in high demand, but it could be losing momentum over time – or a seemingly low-demand market could be rising, and you can invest into it before prices skyrocket.
Market Seasonality
Seasonality is another key factor when researching a market to invest in. While some markets are evergreen and have a high demand year-round, others may go months with virtually no demand, and then suddenly experience an overwhelming increase in popularity as the seasons change.
A property by a ski-resort may sound amazing during the winter months, but when summer comes around and the slopes are closed, you may struggle to find tenants. A beach-front rental is amazing for the summertime, but easily becomes a freezing wasteland once winter arrives. While some of these properties may make enough to justify their purchase during peak months, many short-term rentals can lose you money in a highly seasonal market
Recession Preparation
Anyone who was invested in tourism during a recession can tell you, the industry struggles during a downturn. So, it is important to be careful and assess the risks and reassurances a property may come with to be ready for a potential recession.
Seasonal markets can be a huge gamble during a recession because a downturn in tourism during your peak months may cost you the majority of your revenue from the property. Meanwhile, properties near year-round tourism attractions are going to be much more resistant to a recession.
Discover How To Rent A Property With This Step By Step Guide
Quick Tip
Find a realtor who knows the markets you’re planning to invest into, they will have access to many of the resources you will need to look for. As well, they may have the inside scoop to any ideal properties that may not be publicly available yet.
Buying Your Short-Term Rental
After you have completed your research and are confident in the market it's time to buy. So go out with your agent and make offers on properties you see potential in. Then, enjoy the ride as you enter the world of short-term real estate investing.
Don’t Forget Your Pre-Approval
Of course, before you buy anything it is crucial you get pre-approved for a mortgage from an experienced lender. It will not only help you know exactly how much you can afford to spend on a property, but it allows you to lock in the lowest available interest rates for up to 90 days, ensuring you pay the best price for your investment.
To get started today visit LendCity.ca and fill out the online mortgage application. Alternatively, you can book a free strategy call at the link below.