What Are Short-Term Rentals?

Short-term rentals (STRs) are furnished properties that can be rented out for brief stays, ranging anywhere between 1 and 30 days. The final timeline depends on local laws. The IRS defines them as “properties rented out for less than 15 days per year,” at which point you don’t have to report rental income.

STRs are like hotel rooms, but the guests get their own place instead. All the amenities are included, from kitchen utensils and more. Platforms such as Airbnb and Vrbo are steadily growing in popularity, as digital nomads and remote workers prefer the comfort and privacy of an apartment or house. If you are interested in investing in STRs, this article will give you some insight.

Types of Short-Term Rentals

Short-term rentals come in different types, depending on the guest’s preferences. Most platforms permit filtering options so the users can find their ideal location. These can include the following:

• Entire Homes: Offers full use of the entire property, without sharing the space with other guests or the hosts. These are popular for people who want full control and privacy.
• Accessory Dwelling Units (ADUs): These are self-contained living quarters on the same lot as the main property. This can be anything from a garage apartment, or a pool house turned into guest living quarters.
• Individual Rooms: Individual rooms within the property with shared spaces such as kitchens or bathrooms. Guests can share the space either with the host or with other guests who book a different room.

The type of short term rental property you choose depends on your business model, tax obligations, and zoning requirements. For example, some HOAs and municipal laws may not allow you to rent out the property in certain ways. Misclassifying it can lead to legal fines or the properties being unlisted.

Advantages of Short-Term Rentals

Short-term rentals come with a series of advantages over mid-term and long-term leases, which include the following:

1. Higher Income Potential

Short-term rentals have a higher income potential when compared to long-term rentals. For example, let’s say that you own investment property in California. The average monthly rent there is around $2,200, which puts you at $73 per night.

On the other hand, the average Airbnb listing cost is set at $163 per night. This puts you at around $4,800 in terms of monthly income if you manage to get a full occupancy. And that’s only the average price because some custom or niche properties can easily hit $300 per night.

2. Rent-Out Flexibility

When you rent the place out in the long term, the tenants will be there for the entire duration of their contract. If you lease the place, you won’t be able to use the apartment yourself when you stroll into town during a weekend trip. Short-term rentals are more convenient here because you can rent them out only when you want to. If you want to use it in the future, all you have to do is set it as “booked.”

3. Opportunities for Market-Unique Properties

For the most part, long-term rentals are plain and practical. That’s because they are intended to be lived in and for the tenant to decorate to their own style.

With short-term rentals, you have the freedom to buy or decorate for a niche market. This can be anything from vacation homes to tree houses and hobbit holes (i.e., earth houses).

4. Property Appreciation Potential

Short-term accommodation rentals can also have a good appreciation potential. Properties that are located in business hubs, tourist areas, or close to universities tend to increase in value over time.

Plus, if they are well-maintained, you can get some generous income from them. As a bonus, they’ll always be desirable, because they’ll be near the most important places in town.

Challenges of Short Term Rental Property

Short-term rentals have many advantages, but they’re not without challenges. While they’re not necessarily setbacks, here’s what you’ll have to work around:

1. Local Regulations and Restrictions

One of the greatest challenges of short-term rental properties is navigating local laws. These can be different not only based on the states but also on cities and neighborhoods.

For example, Barcelona is on a roll to ban apartment rentals for tourists in an attempt to lower housing costs. New York has also introduced a ban where entire home rentals aren’t allowed, just ADUs and individual rooms. Places such as Charlotte, NC, or Jacksonville, FL have looser regulations, but it’s still recommended to stay up to date with local laws and use a short term rental investment calculator for potential costs and revenue.

2. Seasonal Demand and Income Fluctuation

Short-term rentals rely on demand to get full occupancy. Depending on the area, this can change based on the season.

For example, if you have an apartment in a town that’s close to the beach, you’ll likely see demand only in summer. A mountain cabin or a vacation house might see a lot of demand during winter (especially around New Year's) but can go into a lull come spring. This can lead to income fluctuations.

3. Property Maintenance and Turnover Costs

Short-term rentals require intensive property maintenance. You’ll have to clean and restock after every guest, and repairs can also become necessary. Perhaps a guest dropped something in the sink and broke it; not everyone will pay for the damage.

STRs have a higher wear-and-tear rate due to the influx of different people. As an investor, you need a reliable service provider to offer fast responses to any potential issue.

4. Time-Intensive Management

Short-term rental requires you to always keep an eye on the property for management. It’s not like long-term rental, where you lease it out and leave the cleaning to tenants, only covering the occasional maintenance. Here, you’ll have to handle the check-in logistics, respond to inquiries, solve maintenance issues, and take steps to ensure everything is running smoothly.

If you can afford to hire someone for that, then great. However, if you are just beginning your real estate investor journey and are low on capital, you may just have to take care of these things yourself.

How to Succeed in Short-Term Rentals

Short term rental investment has a high potential for success, but you need a good strategy. Here are a couple of tips to succeed:

Choose the Right Location

Location is all that matters with short-term rentals. Most of the time, these properties are found in strategic and accessible points, or at least close to local attractions. That said, you also need to check the legal viability of the property. For example, STRs in Austin, TX, have to be licensed and labeled based on their local regulations.

Do your research and make sure that short-term stays are allowed in that specific area. After that, calculate the revenue potential based on the average rent price in the city or neighborhood. Tools such as the REI Lense can help you analyze the investment potential of a property, so you know it’s worth it.

Create a Compelling Listing on STR Platforms

Your property may be the best in the area. However, unless people can get a good read on the place, no one’s going to book it. Make sure you write a clear and appealing but honest description of the place. Point out the unique features, such as the amenities or some attractions and hubs it’s close to.

The title should also be clear and descriptive because that’s what gets the people to click on the listing. It should also have the necessary keywords, so it stands out among other results of the type. Put some professional photos on that listing, with good staging and lighting, to make the place look more appealing.

Set Up Professional-Grade Properties

Guests want their short-term rental property to be stocked with anything they might have at home while looking stylish. They won’t spare another glance if the place looks ugly or poorly equipped. First, make sure that you invest in durable yet stylish furniture with a functional layout.

Ensure all the key amenities are there, from kitchen and bathroom supplies to Wi-Fi, climate control, and safety devices. The property should appeal to your ideal guest type, so put yourself in their shoes. For example, a family-friendly place could need a crib, whereas a traveling businessperson may need fast Internet and a working desk.

Optimize the Pricing

The base price has to be competitive, so the property performs alongside similar STRs in the area. Make sure to dynamically adjust it based on the season or potential events in the area. For example, if there’s a big festival in town around that time, you can set higher prices because of the demand.

At the same time, make sure to track operating costs properly. Consider how much you spend on cleaning, maintenance, platform fees, and property taxes. You’ll want the rental cost to cover that in a way that brings you some investment profit. Consider experimenting with minimum stays, last-minute deals, and discounts to get bookings.

Deliver High-Quality Guest Experience

Short term accommodation rental guests are more likely to come back if they have a good experience with your property. Offer clear check-in or check-out instructions, hotel-level cleanliness, and ensure fast communication. This is particularly important if the property has high-tech appliances because not everyone might know how to use everything there.

It’s important to create a welcoming atmosphere for your guests. After all, they’re choosing a short-term rental over a hotel because they want to feel like they are in the comfort of their own home. You can add a couple of personal touches, or maybe some thoughtful extras such as a welcome basket or things they could use. They’ll be more likely to come back again or leave a good review for the property.

Monitor Performance and Adjust Accordingly

Last but not least, if you want to be successful, it’s important to measure key performance metrics. Keep an eye on your occupancy rate, the reviews, and the nightly revenue. Check if your maintenance costs per stay and potential profit are covered by the monthly revenue.

You can use this data to look for improvement opportunities. For example, if the bookings are slow, you can play with the prices or photos, perhaps even relax the property policies. If you see consistent mentions in the reviews about something the property is lacking, consider upgrading accordingly.

The Bottom Line

Short-term rentals are a good option to maximize income while enjoying some flexibility. With more people preferring the comfort and privacy of their own place, this type of accommodation is likely to soar in popularity even more.

It’s best to weigh your options and see which one works best for you. You can visit the REI Lense platform to compare STRs, MTRs, and LTRs so you can make the right choice.