It’s easy to see the growing popularity of Airbnb and other online vacation rental sites and think it’s a good idea to buy a property dedicated to short-term housing. But this strategy may not be as simple or lucrative as it sounds, experts warn.
The old adage “location, location, location” is even truer in vacation rentals.
“Some areas are better for year-round tenants,” says Will Woodard, a certified financial planner with the Outer Banks of North Carolina. He explains the climate of his hometown: “The weekly [vacation] The rental market on the Outer Banks is very competitive and requires significantly higher costs. There is a relative lack of supply in the year-round rental market, so there is a high demand for rentals, especially in the nicer areas that are not overcrowded with weekly rental chalets. . “
The catch is that the accommodation is expensive and although the rents are high compared to the surrounding non-tourist areas, they would only reward an owner who has been owner for more than 15-20 years due to the high purchase prices, said Woodard.
These are the kind of market conditions investors should be aware of when appraising a property to hold for rent. But there are other considerations you should take into account.
Review local ordinances and rules. The biggest threat to the short-term rental industry is the rapidly changing local laws that limit their use.
With affordable housing “at such a dead end,” most major cities are enforcing regulations on short-term rentals, forcing landlords to put their rental properties back into markets for families as long-term rentals, says Shawn Breyer, owner of Breyer Home Buyers. in Atlanta.
And in Charleston, SC, where Carolina One Plus real estate agent Susan Matthews says vacation rental margins are “super generous” due to year-round tourist attractions, rental income from Holidays are only legal if the operator owns and lives on the property full-time. This is in addition to city rules that require short-term rental operators to not only obtain a special license, but also pay accommodation fees and taxes. They can only accommodate four adults at a time, she said.
If you are buying in a foreign country, consult with a lawyer to make sure you understand local laws and make sure the lawyer is fluent in your language, says David Johnson, founding director of Halo Financial, a London-based company that provides exchange services.
Make sure the property is functioning as a long term rental or other use. Short-term rentals listed on Airbnb.com, HomeAway.com, or VRBO.com are a great addition to your rental income, but it’s not a good long-term strategy, Breyer says. This is because business comes and goes and consumer demand could change.
So when you analyze a property to turn into a rental, make sure that it also generates cash flow as a one-year rental.
“If your cash flow numbers don’t work with a good long-term strategy, then don’t buy the property,” Breyer said.
You may also want to consider adapting the property to other models, such as furnished student accommodation or long-term relocation accommodation, says Matthews. In Charleston, the College of Charleston, South Carolina Medical University and other schools are creating a high demand for student housing as business growth has created a need for long-term relocation housing. “These rentals also offer good margins,” says Matthews.
Think about the tax rules. IRS tax code provides that rentals below fair market value prevent landlord from factoring in expenses, says Morris Armstrong, registered agent, investment advisor and rental property owner at Armstrong Financial Strategies in Cheshire, Connecticut. This means that you can’t keep it for personal use while getting tax deductions, and you have to be careful where you set your rates. If you rent the accommodation less than 15 days a year, it is exempt from income tax.
Consider the expense of a short-term rental. Vacation rental properties are more expensive to operate and maintain due to frequent furnishings, cleaning and repairs, Matthews says.
You also have to pay for gas, water, electricity, cable and the Internet, Armstrong adds. Talk to a local real estate agent about likely occupancy rates and competitive prices.
That’s not to say you’ll have to look for the type of amenities that command higher prices and enough bookings to cover your costs. The most popular vacation rental equipment is a swimming pool, with 19% of VacationRenter.com survey respondents. Next are pets at almost 18% and air conditioning at around 13%. VacationRenter.com aggregates vacation rental listings from multiple sites.
Not having what customers want can turn your cash cow into a net loss.
“If you are looking for income and profit from a rental, then you need to step up your game,” says Armstrong. “I have a client with a dated cabin on Cape Cod. They refuse to update it with central air conditioning or a more modern look to the kitchen. In the past, they could count that it would be rented out most of the time. summer season. Now they’re in luck if it’s rented two weeks. “