Approach To Short-Term Rental Financing
Investing in a vacation rental is very tempting. Not only does it provide a great place to travel for you and your family, but it's also an opportunity to diversify your investment portfolio and build wealth over time.
Short-term rental properties are a great way to build wealth with real estate. A short-term rental with regular bookings can outperform a long-term rental property. It gives you a convenient place to vacation. And if it’s located near a popular destination, you can expect decent appreciation.
Maybe you're thinking about buying your first rental, or maybe you're toying with the idea of investing in even more places. Regardless, you'll benefit from exploring some of the nuances, considerations, and strategies before diving into this fast-growing market.
Short-term rentals (STRs), including vacation rentals, are an exciting and fast-growing new asset class. Airbnb and HomeAway, among others, are raising awareness of this increasingly popular and great opportunity. In fact, the COVID-19 pandemic has only accelerated demand in the industry. This is because vacation rentals are seen by many as a safer travel option than hotels, and a wider market of people are trying them and liking them.
“For travelers, especially during this tenuous era where the very air and unclean surfaces can lead to hospitalization or worse, the individualized attention one might find renting from an Airbnb-type property rather than a monstrous hotel brand can bring some solace to travelers of every level of a germaphobe.” - Travel Writer Michael Alpiner, Forbes.
Why right now is a great time to invest in short-term rentals
According to the 2022 travel trends forecast from property management company Evolve (which analyzed responses from 5,000 travelers worldwide), 86% of travelers worldwide planned to book a short-term rental in 2022. The industry is expected to grow 10% per year by 2025, reaching a value of $20 billion.
User penetration is 17.2% in 2022 and is expected to hit 18.2% by 2026, according to Statista, meaning almost 20% of travelers worldwide will have used a short-term rental by next year. Not only that, but income is growing, with estimates suggesting that short-term rental income makes up about 24% of the average owner’s income.
Are You Ready to Invest in Short-Term Rentals?
The vacation rental industry is clearly on the rise, but before jumping into it, it's important to evaluate this strategy from different angles. Consider consulting with your financial and other advisors for individualized guidance.
Make sure are financially ready. Many new investors don't realize that investment properties require a larger down payment than owner-occupied homes. With consumer mortgages, you can often put as little as 3% down, but with investment properties, you'll likely need at least 20% of the purchase price.
You also will need to make sure you have enough money to fully stock your vacation rental property with furniture and amenities, in addition to any closing costs, insurance, vacancy expenses, and, of course, your down payment.
Advantages & Disadvantages of Vacation Rentals as an Investment Strategy
Advantages
High Appreciation Potential: Higher-priced properties in desirable locations tend to appreciate more than your average long-term rental property.
Highly Lucrative: You may be able to generate more income with vacation rentals than with long-term rentals. You will typically generate more rental income with a well-performing vacation rental. These higher revenues are usually partially offset by higher operating costs.
Personal Use: Owners can use the property for a limited number of days each year without losing tax benefits.
High Demand and Marketing Potential: With the abundance of vacation rental sites available, not only is it easy to sell your property to potential vacationers, but the demand for vacation rentals is also growing.
Disadvantages
Volatility: Consumer spending on travel and leisure is subject to changing economic conditions. Often during recessions, consumers spend less on travel and leisure. Plan accordingly to be able to handle an increase in vacancy in the event of an economic slowdown.
Regulations: Many cities and owner associations have regulations and even bans on short-term rentals. Therefore, it is extremely important to check the requirements in your area before purchasing a vacation rental. However, some cities, such as beach towns, are very supportive of short-term rentals. It's always good to confirm.
Off-Season: Vacation rentals tend to be seasonal. For example, summer is a great time to go to the beach, but November is not such a big draw. Lodgify has great tips on how to increase off-season bookings.
Management: With guests checking in and out every three days, your short-term rentals need cleaning every three days. You must also obtain keys for new guests and collect keys from departing guests. It can be a lot of work and especially challenging if you live in another city. That’s why a good property management platform or company can be a game-changer.
Find a good investment deal for financing rentals
Financing your short-term rental venture starts with finding a good deal and being sure you’re raising capital for a profitable property.
Here is a checklist of investment success factors before moving on to finding funding:
Finding a great location with good conditions.
Familiarize yourself with the existing market and demand in the area.
Defining your ideal guests.
Discovering the true revenue potential of the property.
The short-term rental market analysis tool from AirDNA can help you do this, alongside your other market research. It uses data to estimate where investments will achieve the best ROI. It analyzes insight into revenue potential, supply, seasonality, and RevPAR and provides you with an AirDNA score to forecast future demand.
Available Financing Solutions:
Private loan: A loan from any private source, such as a private investor, family, or friends.
Pension loan: A way to borrow money from your retirement fund (if you have one), depending on its terms. In the US, 401(K)s allow you to take out up to 50%, and any interest repaid goes back into your account.
Conventional bank loan: The same as a mortgage for your primary home, but a second or third property. These are typically underwritten based on your debt-to-income ratio.
Commercial rental-specific loan: Similar to a regular mortgage loan, it is underwritten based on the actual or projected income of the property. Also commonly referred to as a Debt Service Coverage Ratio, or DSCR loan.
Ultimately, in today’s growing market, now is a fantastic time to invest in short-term rentals, and finding a good investment deal is the first step to sourcing financing that will work for you.
However, despite the wide range of options, traditional short-term rental financing, except perhaps for the very first real estate investment has serious limitations. But rather than going down the traditional route, choosing a company such as Host Financial is a quick and reliable way to sidestep traditional banks for expert advice and approval in days.
And once you’ve got a great financial loan for your short-term rental, you can remember why you wanted to start hosting in the first place: To give guests great stays that maximize both profit and enjoyment.
Managing & Maintaining Your Vacation Rental
First and foremost, you will want to make sure that you can manage the property yourself or have property management in place and that you are properly insured.
Hiring a Property Manager
Keep in mind that you will need to market the property, clean between tenants and perform maintenance, key distribution and accounting, and many other tasks. Many professional STR investors choose to hire local property management companies. To determine which strategy is best for you, ask yourself these questions:
Do I have the time to screen and interact with customers?
Is the property close enough for me to access when need be?
Do I have the capacity to handle the number of properties I own?
Am I able to coordinate bookings and cleaning?
Learn the Industry Trends
To make sure you're managing your vacation property properly, it's wise to see how you stack up against other vacation rental owners. You can also get a leg up on the competition by learning about vacationer preferences, such as what they look for in a vacation rental and how they book it.
Marketing Your Vacation Rental
The vacation rental market is highly competitive, so your property must stand out from the competition. If you choose to work with a property management company, they will most likely take this off your plate. For those doing your marketing, there are plenty of popular sites to list your rental, including Airbnb and VRBO. Here are some tips to make your property stand out:
Hire a professional photographer to showcase your property with high-quality photos.
List the hotel's proximity to local attractions, including shops, restaurants, and trails.
Provide positive reviews of guest stays.
Emphasizing your cleanliness and offering flexible cancellation terms.