These days, short-term rentals are all the rage. Spurred in large part by the popularity of sites like Airbnb and VRBO, an increasing number of real estate investors are converting their residential units into short-term rentals. Or, they’re purchasing new properties with the intention of renting them out to vacationers and other short-term tenants.

The market for short-term residences in many metropolitan areas is already saturated. As a result, municipalities across North America are struggling to keep up with the explosion of short-term rentals. Outdated, antiquated laws are making it challenging for cities and provinces to regulate the short-term rental industry. Because of this, many cities are simply banning short-term vacation rentals outright.

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If you’re thinking about converting or purchasing an asset for the explicit purpose of turning it into a short-term rental unit, carefully consider the intricacies and drawbacks associated with this business model. While short-term rentals may seem like a lucrative, trendy investment to make at the moment, how they’re managed ultimately determines whether they’re worthwhile.

Short-term rentals in Canada

The majority of Canada’s rules and regulations surrounding housing and temporary residences are legislated at the provincial and municipal levels. The province in which you want to own and operate a short-term rental will largely determine the way you approach your business.

In Ontario, for instance, it’s relatively complicated to operate a short-term rental business. Here’s what to keep in mind if you’re attempting to operate a short-term vacation rental in Ontario:

·        Guests may be considered residents: Under Ontario law, there’s some discrepancy regarding whether guests are considered tenants. If you’re simply renting out a room, guests aren’t afforded any legal protections. If you’re renting out an entire unit even for just a few days, guests might be considered legal tenants. Have them sign a standard lease form, just in case an issue arises.

·        You can’t evict residents to convert: This should go without saying, but it’s illegal to evict existing long-term tenants in order to convert their unit into a short-term rental in Ontario. While you are allowed to evict a tenant to convert a building to commercial use, short-term rentals still qualify as residences under Ontario law.

·        Tenants can’t rent on Airbnb without permission: You may have a tenant attempting their own real estate hustle. Unfortunately, this can turn out poorly for the tenant, the guest and you, the investor. Tenants are not allowed to rent out part of their unit as a short-term residence without your express permission.

·        Insurance liabilities may change: Many vacation rental sites, including Airbnb, offer some forms of limited insurance. Your own coverage may need to change as well if you’re planning on renting out the unit on a short-term basis. It’s important to consult with your broker about ways your liabilities and responsibilities may change.

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How to succeed with short-term rentals

If you think navigating the law is ultimately worthwhile, there are a few considerations to think about to help your short-term rental business succeed. Above all, you have to ensure your investment is in a desirable location. If you’re trying to rent out a vacation unit in a small, rural town, or even a large suburb with sub-par transit access, chances are you’re going to struggle finding enough guests to turn a profit each month.

Once you have a location heavily trafficked by vacationers and other types of guests, here are a few things you can do to help your short-term vacation rental business succeed:

·        Incorporate: Topping the list of important things for success with short-term rentals is incorporating a separate limited liability corporation (LLC), specifically meant to manage your rental asset. Keep your short-term rental business separate from your personal finances, as well as from any long-term rental endeavors you also operate.

·        Hire a photographer: First impressions are everything when it comes to renting out a short-term vacation property. Hire a professional photographer to come in and take images of your property, and edit them to appear glossy and sleek. Your short-term rental needs to stand out from other listings in your area. Think of ways you can use imagery to make your property unique and appealing.

·        Consistently review your listing: There are few things more important than consistently reviewing and revising your short-term real estate listing. At least once a month, take a look at your listing, and consider ways you might revise it to appeal to a wider audience, or elevate the number of bookings you receive each month.

·        Pay fees and taxes: Chances are, you’ll be on the hook for high temporary residence fees and hotel taxes when operating a short-term rental. Consult with your municipalities tax assessor to learn more about the types of taxes you’ll need to pay, and the best way to pay them.

·        Establish rental agreements: Even when just renting a unit for a few nights, prepare a rental agreement dictating your relationship with your temporary tenant. This agreement could model your standard lease form, but include stipulations only relevant to a short-term rental.

·        Maintain customer satisfaction: Operating a short-term rental business is much more similar to owning a small business than a traditional real estate investment. This means you have to ensure customer satisfaction. Your online ratings and reviews will go a long way toward determining whether you host more guests in the future.

Following these simple steps can help you establish and maintain profitability at your short-term vacation rental.

Does a short-term rental make sense?

Considering the challenges and uncertainty facing short-term rentals, you may be better suited with more traditional long-term lease structures. For savvy investors with assets in strategic locations, short-term rentals can be a lucrative opportunity.

Remember, the infancy of this industry is both a blessing and a curse. While short-term rentals offer great margins and steady income, there are ticky-tack rules that need to be followed. Do your homework, evaluate cost models and get up to speed on possible strategies before simply converting your unit into a short-term rental property.