As we’ve been discussing on the Illumination Wealth Blog, short-term vacation rental properties can be a great investment if managed properly. These rentals can take several different forms:
• Property Solely Used as a Vacation Rental
• Part-Time Vacation Rental and Part-Time Personal Use
• Portion of Your Property Rented Out (Room, Separate-Entry Guest Quarters, etc.)
What type of property or space you are renting out, as well as how often you are renting it out, will dictate your investment plan. Obviously, a property in a desirable location that is only used for short-term vacation rentals will generate more income than one used only part-time. Your investment plan, budget, profit projects projections and property management system all need to be tailored to your specific property.
Last week, we looked at the various factors to help you determine if owning and managing a vacation rental is worth your time, effort and money. Today, we want to dive deeper into some of the pros and cons of vacation rental properties.
One reason real estate investors utilize properties as short-term vacation rentals is because of variable pricing models that can be implemented. You can charge more during peak seasons and get more for weekend rentals compared to weekday rentals. If your property is located in a desirable vacation destination and has strong occupancy rates, then you can really maximize your profit margins with variable pricing.
Investors used to avoid vacation rentals back in the day because they require more work than long-term rentals. It takes time and costs money to continually advertise, deal with new guests, schedule cleanings and everything else that needs to be done frequently because of quick turnover periods. Now, we have apps and websites that make it super easy to market your listings, manage bookings, interact with guests, get reviews, etc. Technology has made it much more convenient to run a short-term rental.
Shorter rental periods mean your property is managed more like a hotel or bed and breakfast. Guests aren’t there for as long. Some things may go through additional wear and tear, but it’s nothing like having a tenant living in a unit for a year (or many years) and using stuff every single day. Most short-term vacation rental owners experience less property damage than long-term rental owners. Those cost savings can add up.
Owning a vacation property can allow you to use it personally when you want and rent it out when you are not using it. Many second homeowners adopt this strategy. Obviously, you aren’t going to make any profits when you are using the property yourself, but that’s a fine trade-off if you are getting meaningful use out of the home.
A long-term rental is a “set it and forget it” investment once the unit is leased. You have leases that last for longer periods. You just have to collect rent and handle maintenance/repairs as needed. A short-term vacation rental requires much more effort to clean and refresh the unit in between each guest. You may have a weekend where it’s rented out three nights in a row by three different guests. You can pay extra to have a property management company deal with the turnover grind, but of course that’s more money out of your pocket. Make sure you are prepared to put in the effort if you want to run your own AirBnB!
With a long-term rental, your tenants are paying for the utilities directly and (hopefully) keeping the place clean. You have to do deeper cleanings and upgrades in between tenants, but ideally it’s not too often if you have good tenants that stay for a long time. Short-term rentals require cleaning in between each guest and you are paying the utilities. These costs can be rolled into the rental price (most booking sites allow you to charge a tacked-on cleaning fee), but you have to be careful not to overprice your unit and potentially lose business.
Because a short-term vacation rental is more like a hotel, you need to provide and renew supplies for your guests. Towels, linens, toilet paper, soap, shampoo, dishes, coffee, etc.—these are all things you need to stock up on and refresh either daily or in between each guest. It’s always good to have at least two full sets of linens and towels available in case you don’t have time for laundry between renters.
As you might expect, it’s more work (and potentially more headaches) dealing with a large number of renters coming and going from your property compared to someone who rents it out for a year or more. You need to have patience and approach your rental with a “service first” mentality. Again, it’s more like running a hotel.
If you are thinking about running a short-term vacation rental, it’s important to do your research and crunch all the numbers. Develop a strong investment plan, budget, property management system and profit projections to make sure no details are left uncovered. This will help you be more successful and profitable. If the numbers don’t make sense, then consider a long-term rental solution or maybe avoid the vacation rental game altogether. It is not for everyone.
For help managing all of your investments, including your real estate holdings, contact Illumination Wealth today!