Short term rentals can be an amazing way to launch your real estate investing career and make some serious cashflow. But have actually weighed the pros and cons? If you’re considering this investing strategy stick around and I’ll explain my top pros and cons of this asset class.
Hi everyone, Jason Marcordes here with Landmark Property Management. Over the past few years, the number of short-term rentals has gone through the roof. These have become incredibly popular investments thanks to sites like Airbnb, VRBO, and HomeAway But, just like anything else in life, there are pros and cons to investing in short term rentals (STRs). Today we are going to go over a few of those pros and cons and then at the end I'm going to share my number one most important piece of advice when underwriting your investments for short term rentals. I promise, this can make or break your investment so you want to stick around for that.
Alright, let’s dive in. Pro number one is cashflow potential! Just about everybody that gets involved with short-term rentals, does so because it can be so lucrative. Most of the time units in good areas can rent for anywhere between two and five times what they would bring in on a long-term basis. For example, if this unit typically rents for $1,000 a month for a long term lease, it would be bringing in between 2 and $5,000 per month as a short-term rental. Based on that alone, it's obvious why short-term rentals are so popular right now.
Pro number two is having access to the unit frequently, allowing you to keep an eye on the unit and keep up with preventive maintenance. A lot of times with long-term rentals, you won't lay eyes on that property for another year or two until the tenant moves out. It's really on the tenant to maintain the unit and you're really not sure if they're keeping up with things like changing the furnace filters regularly or getting clean and checks for the furnace and air conditioning unit every spring and fall. With short-term rentals, your cleaning crew and maintenance team can access the unit in between guests, allowing you to keep an eagle on the property’s condition and ultimately reduce your maintenance and capex costs over the long haul.
Pro number three is the flexibility a short term rental gives you. With long-term leases, the lease is a legal document and you have to abide by the agreed-upon terms. You can't raise the rent or vacate the property during the term of the lease. With short-term rentals, you can raise or lower the rent more frequently to help adjust for vacancy - also known as dynamic pricing. You can also sell the property vacant at any time or utilize the property for yourself in between guests. Which may be the best perk of all - who doesn't want a free vacation crashpad in an awesome location?
All right, now that you're ready to run out and find your first short-term beach rental, let's talk about the downside.
Con number one is that it is very time-consuming. Long-term rentals can be time-consuming when stabilizing the property but once it is rented and the tenant is settled in, the workload dies down significantly. With short-term rentals, guests are always turning over. You have constant questions from potential and current guests, check-ins every few days, and cleaning and maintenance in between those check-ins. There’s a Font of different things you can do to help systemize and reduce the workload but there's no escaping the fact that it's significantly more labor-intensive than a long-term rental. Also, when I had my short term rentals, for whatever reason it seemed like the majority of issues popped up at inopportune times like the middle of the night or on holidays.
Con number two is there is less consistency in payments. This is especially true if you're in an area that is very seasonal. With a long-term rental, you know exactly how much rent you're getting on the 1st of every month. With short-term rentals, that can fluctuate greatly between seasons and even from week to week depending on local events, the weather, and other things out of your control.
The last con we’re going to discuss today is the increased risk. When leasing a long-term rental, most landlords typically underwrite the applicants through a variety of different checks and verifications including credit, background, income verification, and employment verification. With short-term rentals, most of that screening is not available. If a guest stays at your place and throws a big party and does a ton of damage, it may be tough to recover those costs without a security deposit or the required information to pursue them in collections.
Alright - now you have both sides of the coin - the pros and cons of short term rentals and you’re armed with the information needed to decide whether or not short term rentals are the right investment for you. However, there is one thing you must absolutely not do when underwriting your next investment purchase!!! The number one most important piece of advice I can give you when underwriting your rental investments is to underwrite it using the income of a traditional long term rental. Short term rentals are fairly new and they are subject to a lot of different market forces. One of the most important being the local government. Local governments are still trying to figure out short term rentals and a lot of them are just now writing or modifying their short term rental legislation. One fell swoop of the pen could end in banning short term rentals in your area and put you out of business. Underwrite the property and if it makes sense with long term rental income numbers, you know you always have that to fall back on. I can’t tell you how many times I’ve seen guys with investments that are upside down because they’re no longer able to rent the property short term and it won’t cashflow with long term leases. So again, underwrite it with long term lease rental rates and if you’re able to increase the income using short term rentals, consider it the cherry on top!
I hope this was helpful! If you have questions about any of this or if we can help in any way, consider us at Landmark Property Management a resource, we’re happy to help. Feel free to check out our website at ChicagosPropertyManagement.com or give us a call.