Short-Term Rental: 7 Things You Need to Know Before You Invest

As the short-term rental industry grows, demand continues to increase. This is now making investment in short-term rental property a more attractive prospect.

It might be part of a retirement plan; an opportunity to pursue a digital, location independent life, or to achieve a family goal to own a second home.

Buying a vacation property has the potential to deliver significant income to offset mortgage and other costs.

As with any investment, due diligence is critical to a successful outcome. So it is necessary to do research that is wide-ranging.

Making an informed decision about where to buy and whether there is a potential for sufficient rental to make it worthwhile means doing research into many areas.

This might include regulations, zoning, and local infrastructure, inbound tourism statistics and taxation issues.

There is also competitive analysis of the local vacation rental market to understand the traveler demographic and occupancy potential to consider.

This is a unique market and knowing a few things about how it works, who to approach in the research phase, and the obstacles that may be encountered along the way, can be a huge factor in creating a successful business.

1. Not all realtors know the short-term rental market

Only a small percentage of realtors understand the vacation rental business, and It’s important to work with an agent who does.

Ask questions about their experience of selling properties that have short-term rental potential, being careful to distinguish that from the residential rental market.

A good realtor will be able to discuss supply and demand, regulations, inbound tourism, seasonality and the importance of location for different traveler demographics.

Find the right one, and he or she will reduce the time you spend on research considerably

More articles about this:

VRS145 – How to Invest Wisely in Vacation Rental Property with Erica Muller
It’s Time to Buy the Next Vacation Rental Home
VRS012 – Buying a Vacation Home with Confidence to Succeed – Erica Muller of The Flamingo Group
Buying a Rental Cottage – Setting the Criteria

2. Buying a turn-key property can be the best investment

A property that has solid short-term rental history has a list of previous guests for remarking purposes, and may come with reservations already in place is a valuable asset.

These properties can start earning income from day one and there won’t be a need to set a lower rental rate in order to start attracting guests.

This type of property may be listed over the current market value but the benefits may well outweigh the premium cost.

To cover the bases, make sure the owner can provide at least three years of rental and income records.

3. Regulations can limit or prohibit rentals

Few areas are free from regulation and legislation and every location is different.

If you fail to research the current and planned legislation in an area of interest can throw up a lot of challenges later on. Make sure you look at state-wide statutes as well as county, municipal and HOA plans for short-term rentals.

Diving into the details and getting down to a more granular level, it’s also worth looking at the make-up of an HOA board, or municipal council.

Get hold of previous minutes and see if the topic has been raised in committee in the past.

This more detailed research can yield useful information to help in decision making.

More articles about this:

How to Create a Vacation Rental Alliance and Beat the Bans
Keeping on the Right Side of Your Neighbours

4. Demand can be feature-driven

When you are choosing a location, it is more than just checking out the great beach.

Understanding the demand for property in an area means finding out what type of property is most popular.

In hot, short-term rental, beach areas such as Destin and Panama City Beach, a 2 bedroom condo on the waterfront may be a better investment than a 3-bedroom home off the water.

While in areas that attract multi-generational families, a larger property is likely to achieve more occupancy than a smaller townhouse.

In urban areas, a location with an on-street parking spot can be in much higher demand by guests than one without.

More articles about this:

5 Things Your Cottage Buyers Need To Know If They Want to Rent

5. Some areas are prone to saturation

Are some areas becoming saturated with short-term rentals?

Yes, there are, and you can find the answer to that by researching on the large listing platforms where you’ll find hundreds, perhaps thousands, of listings.

Don’t just look at the availability charts of those on the first few pages – drill down to the 20^th, 30^th and 40^th pages and look at the occupancy of those as well.

In these saturated short-term rental areas, it will be tough to get high on those lists at the outset so it's important to see what the availability is like further down.

6. Tourism departments can provide valuable inbound statistics

Just because a place looks popular at a certain time doesn’t mean this will extrapolate over all seasons.

Tourism offices will often be able to provide data on inbound travel; whether they mostly arrive by air or road; how long they stay, and other information that can play a part in an investment decision.

A property in Orlando near Disney is likely to rent year-round, however, one further south in Florida may struggle to get summer rentals.

The snowbird market in Gulf Shores, Alabama is not as guaranteed as other areas, but may have a solid tourist market from March through September.

7. Occupancy taxes will need to be collected and filed regularly

While it’s important to consider the impact of taxes on your short-term rental income in annual filing, don’t forget to research the local and state taxes that may apply on occupancy.

These taxes are paid by guests but need to be filed regularly (often quarterly).

Fortunately, there’s help available for this – Avalara MyLodgeTax can assist in determining what taxes need to be collected and will do the filing for you.