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Short term rentals (STRs) represent a great opportunity for investors looking to get their start in the real estate business and have become increasingly popular in recent years as platforms like Airbnb and VRBO have gained popularity. They’re a great way for high earners to generate additional income streams while reducing the taxes they owe on their W-2 income.
But if you’re a first-time investor, it can be difficult to know how to get started with short-term rentals. There’s a lot to consider, from the location of the property to hiring professional advisors like lawyers, accountants, and realtors.
Today, we’re sharing our top ten tips for first-time short term rental investors. These tips have been honed through years of experience working with real estate investors, and give you the insight you need to take the first steps towards building wealth with short term rental properties.
Looking for a more in-depth guide to short term rental properties? Read our Guide to Short Term Rentals.
1. Research the Ideal Market
The best places to buy a short term rental property are often popular destinations with up-and-coming real estate markets. As you research different markets, take visits to areas you’re interested in. Pay a trip to the downtown area: are the stores and restaurants thriving or are there lots of vacant storefronts?
Once you start to zero in on a location, check local regulations around short term rentals. Many municipalities have restrictions that might affect your plans.
2. Determine Market Rate Rents
Another key element in determining whether a market is ripe for a short term rental investment is to research the competition. It’s important to understand both the current levels of supply in the market as well as what market rate rents look like in the area.
You can get a quick read on market rate rents by visiting platforms like Airbnb and VRBO. For a more comprehensive approach, use tools like MarketMinder, PriceLabs, and AirDNA to analyze data from STR platforms and pinpoint how rents have evolved over time.
3. Research Seasonal Trends
Many short term rentals are in areas with major seasonal trends like beach towns and ski resorts. Depending on these, expect occupancy levels and your pricing strategy to change throughout the year.
If you own an STR in a beach town, you can (and should) charge more for prime summer and spring break dates than for the off-season. Using the tools mentioned above will help you better understand seasonal trends and identify opportunities that you can capitalize on.
4. Identify the Perfect Property Type
There’s no one perfect short term rental property type. It depends on location, your budget, and the existing rentals on the market. If you’re a first-time investor, you might be looking at smaller properties like condos instead of a single family home.
Work with your financial advisor and accountant to determine your short term rental buying power, and partner with a local realtor to help you find properties that match your criteria.
5. Find a Lender to Work With You
Many investors use financing to purchase short term rental properties. Securing a mortgage for a short term rental is different from a mortgage on your primary residence. You’ll likely be expected to come up with a higher down payment (20%+), and your interest rate will likely be 0.5% to 0.75% higher than a mortgage on your primary residence.
The process isn’t completely different from securing a residential mortgage though. You’ll still need to show proof of your financial health, including your assets, liabilities, and income. Working with a real estate accountant makes this process go much more smoothly.
6. Hire a Lawyer to Facilitate the Transaction
As you get ready to purchase your first short term rental property, it’s important that you find a lawyer to provide you with counsel.
A good real estate lawyer will educate you on your legal responsibilities, walk you through the transaction, and provide guidance as you turn your new property into a short term rental business.
7. Work with a Local Realtor
Another indispensable member of your team is a local realtor. Ideally, you want to work with a professional who knows the local market and understands short term rentals.
This knowledge of the local market is key, especially if you’re from out of town. A local realtor can help you find comps, notify you of off-market properties, and ultimately gives you the best chance of successfully purchasing your first investment property.
8. Discover the Ideal Property and Make a Winning Offer
Once you’ve found a property that matches your criteria, it’s time to make an offer. But first, do your due diligence. It’s important to understand the property taxes, average utility costs, and maintenance requirements of the property before committing to a purchase.
Work with your realtor to pull together a competitive offer that gives you the best chance of securing the property. The strategy for this will differ from market to market: another reason why it’s important to work with a local real estate agent.
9. Work with an Accountant to Set up Your Finances
Upon completion of the purchase, engage a real estate accountant. Investing in short term rentals can offer a wide range of tax benefits, but ensuring you benefit from these requires the services of an accountant with experience planning short term rental tax strategies.
To learn more, check out this video:
Walkthrough: How a Short-Term Rental Investment Can Result in BIG Tax Savings [Tax Smart Daily 060]
10. Hire Support Staff
Before you can start welcoming guests to your short term rental, you need a team to help you run it. At the very least, you’ll need to hire a cleaner and have a handyman on speed dial for any urgent maintenance needs.
Many short term rental investors hire a property manager. Property managers handle all guest communications and coordinate other team members, like cleaners and maintenance workers. A great property manager is well worth their fee, saving you countless hours.
Buying a Short Term Rental Property
The purchase of your first short term rental property is an exciting event, and provided you do everything right, could be one of the best investments you ever make.
If you have any questions about buying your first short term rental property, our team can help. We have experience working with short term rental investors all over the country and a track record of building tax-efficient real estate investment strategies that drive maximum returns. Contact us today to learn more.