Should you be Investing in Short Term Rentals?
by Christopher Levarek
“No Mutual fund ever had a view like this”
- Unknown
It was early summer in Arizona and my entire team had gathered at our latest property for a company retreat. A 1.5 million dollar, 4000 sq. foot mansion in the heart of Sedona, Arizona with all it’s picturesque red rock scenery. Our party consisted of 6 children and 14 adults from various parts of the United States, some meeting for the first time in person.
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As we unpacked in one of our newly listed vacation rentals acquired with partners, I was amazed to be staying at this million dollar property flush with new furniture, amenities and artistic detail.
I remember thinking, “How cool is this? Not only do we get to cashflow from this property, we also get to stay here!”
This is the power of investing in short term rentals. Well, at least one of the benefits but fear not, we will cover all of them!
In this article, I’ll be discussing just what makes short term rentals a good investment as a passive investor or even how you can even buy one yourself.
Let’s jump in!
Investing in Short Term Rentals - What’s to know?
So, in case you haven’t heard the term before, a short term rental is a property that is rented by the night. Similar to a hotel, it can have “short term” stays for a night, 3 nights, or just a week long. Typically these properties are called Airbnb’s as this was the online platform that really first made them popular.
On a side note, many of us in the market understand that calling them Airbnb’s is akin to calling your home rental a Zillow. It just doesn’t make sense, but I digress.
Short term rentals have gained popularity in the investment world and many have investors have jumped into owning or investing in one in recent years. So what are some of the reasons to have a short term rental or invest in one?
Glad you asked, lets have a look…
Reason #1 - Cashflow
One of the more common reasons vacation rentals are popular as an investment is that they cashflow. Quite well! A short term rental can be expected to earn 4 times as much income as a long term rental over a year.
Now the expenses will be higher on short term rentals due to maintenance and cleaning costs. Yet, a STR will on average when managed correctly put out 4 x the cashflow of a long term rental.
Cha-ching!
Reason #2 - demand
As we enter 2023, it is very apparent that people prefer to stay at a short term rental then a hotel in many cases. We can see this by the demand in the picture below. Barring, 2020 due to a pandemic, each year has posted near 20% increase in demand.
Vacationers and small parties, simply choose to stay at a home with all the features, kitchen, personal spa and luxury amenities instead of in a single bedroom hotel. The feeling of staying in a house with friends versus isolated in a hotel just does even compare.
So short term rentals are in high demand.
Reason #3 - Lifestyle
This one goes back to the intro of the article, living a life by design. This means being able to visit your property and stay every now and then. An investor can have a free or discounted stay at their short term rental investment.
For many this is the golden ticket. It’s like having a timeshare which also gives you cashflow! You can also vacation to areas perhaps previously too expensive to justify the visit.
For many this is called investing to create a life by design or lifestyle investing.
Reason #4 - Tax benefits
This one is known to some and completely missed by others. You see short term rentals offer amazing tax benefits. Not only can you expense trips to the properties in many cases, being an investor or manager of the property, you can also receive large deductions or paper losses on the rental.
Similar to an apartment complex, an investor can have a “cost segregation study” completed to realize a paper loss on the short term rental. This simply means at tax time you can apply those paper losses against income, lowering your taxes due.
Yet, even better, with short term rentals, you can even apply the paper losses against W-2 income. Imagine getting back some of your W-2 taxes paid throughout the year because you own a vacation rental.
Check out this video to learn about this amazing loophole.
REASON #5 - VISIBILITY
These last two are more on the management side but very nice to have when owning a property.
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Visibility means that you the owner or management team have the ability to walk the inside of the property in between guests. You have access to check on the conditions, update the property or apply fixes almost at will. This is just not the case with a long term rental.
With a LTR, you might be waiting months before you can get into the property or at the behest of the tenant’s schedule. Changing filters or applying repairs or new improvements takes that much longer. In a STR, you can be in and out within a day between guests.
You have your finger on the pulse so to speak and that is very useful.
Reason #6 - Flexibility
Our final reason for investing in STR is Flexibility as a manager. You have the ability to modify and adjust your strategy daily. Whether you want to tweak pricing, minimum stays or add amenities, you can do so.
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This allows you to increase margins or income much easier then on a long term rental. On a long term rental, you might be sitting for 6-12 months before you can update rents or adjust your strategy.
So a short term rental just allows for one to feel the market and adjust very quickly.
IN FINAL
Whether you are investing passively or looking to own your short term rental, all of the above reasons are in your favor! Cashflow, Demand, Lifestyle, Tax Benefits, Visibility and Flexibility all make investing in short term rentals a very attractive addition to your portfolio.
If you are looking to buy your first or next vacation rental, be sure to checkout our course the “Vacation Rental Masterclass”. This course is entirely in video, comes with a ton of FREE resources and yours to keep forever!
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Or if you are more interested in investing passively in a diverse vacation rental portfolio through our fund, join our Valkere Investor Club to learn more.
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Happy Investing!