Are Short-Term Rentals A Good Investment?

Short-term rentals offer investors the potential for increased cash flow, making them an attractive investment option. However, they present new challenges, particularly for those accustomed to traditional long-term rental properties. These challenges include rapid guest turnover and additional regulations.

Experts note that the short-term rental market has become increasingly competitive. It is crucial for investors to thoroughly research and devise a strategic plan before making their first investment in short-term rentals. Here are six key points to consider before investing in your first short-term rental property.

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Due diligence on local regulations

Short-term rentals, despite their popularity, do not receive a warm welcome in every city. For instance, Santa Monica, California, bans rentals shorter than 30 days unless the resident remains in the property alongside the guest. Conversely, Chicago permits unhosted short-term rentals but mandates that property owners register and pay a fee.

 If you are considering investing in a new area, it’s important to stay informed about proposed legislation and the general attitudes of local officials toward short-term rentals.

In regions where policies appear unsettled, investors should consider developing a “Plan B” strategy for their property in case new restrictions are imposed.

Even if your investment strategy ultimately focuses on long-term rentals, staying updated on local regulations is wise. This knowledge is essential in case renters show interest in listing your unit on a short-term rental platform.

Estimating potential income

Unlike a long-term rental where the monthly rent is fixed and predictable, the income from a short-term rental fluctuates based on the nightly rate and the number of bookings you secure.

Online tools such as AirDNA and Rabbu offer data on short-term rental prices and occupancy rates across various markets.

Invest time in reviewing listings of competing properties on platforms like Airbnb and VRBO to better understand the potential rate your property could fetch. While you may not be able to match the nightly rate of a luxury unit with exclusive perks, if a competing property appears run-down, you might be able to charge more for yours.

If you plan to invest in an area with seasonal tourism, expect your rates and bookings to vary throughout the year.

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Extra cash flow — but also extra work

Higher per-night rates generally mean that short-term rental properties can generate more cash flow than long-term rentals, but this extra revenue incurs additional costs. For instance, unlike typical long-term rentals, short-term units need to be furnished. While the furnishings and amenities don’t have to be extravagant, investing in a designer can enhance the unit’s appeal, making it a more attractive stay.

Short-term rentals also demand more hands-on management. Owners must ensure units are cleaned and prepared for new guests after each stay, and handle bookings and guest inquiries personally.

For those who prefer not to manage these tasks themselves, property managers who specialize in short-term rentals are available, though they usually charge higher fees than long-term rental managers. Alternatively, owners can use online tools like OwnerRez, Hospitable, or Guesty to automate tasks such as managing listings on multiple platforms, handling bookings, and scheduling cleanings.

One benefit of frequent turnover is that it allows maintenance issues or other problems to be identified and addressed quickly, often during routine cleanings between guests, thus preventing them from escalating into major concerns.

Other Things To Consider For Short Term Rentals

When managing a short-term rental property, several additional costs come into play compared to long-term rentals. These include:

  • Furnishings

Short-term rentals require fully furnished spaces. This involves an initial investment as well as ongoing maintenance and updates.

  • Basic Supplies: 

You must provide essential supplies such as towels, toiletries, and other guest necessities.

  • Service Fees: 

Listing your property on short-term rental platforms typically incurs service fees, which can vary depending on the platform.

  • Property Management:

Managing a short-term rental either costs more in terms of higher fees for professional property managers or requires more of your personal time if you choose to manage the property yourself.

  • Cleaning Services: 

Each booking must be followed by a professional cleaning, ensuring the space is pristine for the next guests.

  • Utilities: 

Unlike many long-term rentals where tenants pay for utilities, short-term rental prices generally include the cost of utilities, which the property owner must cover.

These factors combined represent a significant part of the operational expenses of running a short-term rental and should be carefully considered in the financial planning for such an investment.

Create listings that lead to bookings

Posting professional-quality photos of your property is a straightforward way to boost your profile on platforms like Airbnb or VRBO.

Attention to guest reviews is also crucial. A low rating from an unhappy guest can deter future bookings. While it’s challenging to avoid negative reviews entirely, you can minimize them by addressing potential issues before they become problems. For instance, if your property has a malfunctioning light switch or a tricky faucet, either repair it or clearly communicate these quirks to guests, providing instructions on how to handle them.

Investors should also be attentive to the questions potential guests ask prior to booking. This interaction offers a chance to ensure that your property meets the expectations of your guests. For example, someone inquiring about the thread count of the sheets might not enjoy a rustic cabin’s accommodations—and is less likely to leave a positive review. If you suspect a potential guest might not enjoy their stay, it’s better to be honest, even at the risk of losing a booking.

Consider Corporate Short-Term Rentals

Vacationers aren’t the only people looking for shorter-term stays. Corporate employees relocating to a new city, travel nurses, nomadic remote workers and people doing construction on their primary home all might seek rentals that let them stay a month or two. 

If you’re considering a medium-term strategy, look for amenities popular with traveling employees, like parking, in-unit laundry, workout facilities and proximity to the major employers in the area. 

To find renters, property owners can advertise units on corporate rental marketplace websites. But landing business from big companies looking to house a lot of employees can be tough for owners with only a handful of units unless they work with a property manager who specializes in helping companies find housing for employees. That means paying property management fees, but bigger companies also tend to pay higher rents than individuals seeking medium-term rentals on their own. 

Financing A Short-Term Rental With Whole Life Insurance

Policy Checklist - How to Get a Good Policy
Policy Checklist
Make Sure You Get a Good Policy
Is your policy good or bad? Use this checklist to help evaluate your existing life insurance or a new policy you are considering.

1. The Importance of a Cash value

The primary reason to start funding your life insurance policy now if you’re investing in real estate is to ensure you have the necessary funds when an opportunity arises. It’s crucial to have your policy well-funded in advance, so you’re not caught setting it up while also arranging financing, which can take months. Have your cash value ready when the perfect real estate opportunity presents itself. Real estate deals are often time-sensitive, so being fully cashed up enables you to act swiftly and decisively.

2. Policy Loans

Using a life insurance policy as a cash reserve is beneficial because it allows for unstructured loans from the insurance company at any time, without affecting your credit score. These are known as policy loans, and you can typically borrow up to 90% of your policy’s cash surrender value. Policy loans can be used for anything including real estate expenses such as deposits, fees, and renovations. The process is fast, with funds usually available within a few weeks, making it an efficient source of additional capital in the real estate market.

3. An Emergency Float

Another advantage of accessing your cash values through policy loans is using them as an emergency float. This can be crucial if a rental property remains vacant for a period, requiring you to cover ongoing expenses like mortgage, utilities, or association fees without rental income. Having an emergency float readily available can provide significant financial relief during such times.

4. Loan Privacy

The privacy of policy loans is a notable benefit. The insurance company does not report these loans to credit agencies, nor do they disclose your leveraging activities. This can be particularly advantageous when qualifying for mortgages, as it avoids any potential impacts on your credit or flags on your financial profile. However, transparency with your banks and lenders about your overall financial situation remains important.

5. An Emergency Float for Permitting Delays

Similar to the third point but for a different scenario, policy loans can also provide liquidity during significant delays, such as those experienced with house renovations and permitting in places like Vancouver. This liquidity allows you to manage property costs effectively while awaiting necessary approvals, ensuring that you can sustain the property financially during prolonged processes.

6. Using Your Policy for a Down Payment

After consistently funding and leveraging your life insurance policy for real estate-related expenses, you will have accumulated a substantial cash value within your policy. This built-up reserve can then serve as an excellent source for a down payment on future real estate investments. Having a significant amount in your policy can also broaden your lending options, connecting you with a wider range of financial institutions.

By strategically utilizing life insurance policies, real estate investors can enhance their financial flexibility, ensuring readiness and resilience in the dynamic real estate market.

Let McFie Insurance Help

We know the ins and outs of whole life insurance policies and these are viable ways to fund a number of different investment opportunities. We are here to help you get the best whole life insurance policy so you can start funding your future dreams today. Schedule a free consultation now!