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April 6, 2022

A Guide to Short Term Rentals

Owning a short term rental can be a great way to make money, and it’s an approach that has become increasingly popular in the last five years. There are a lot of logistics to getting started in short term rentals. If you’re thinking about renting on Airbnb, leasing out an investment property during peak vacation periods, or otherwise leveraging short term rentals (STRs) to make money and save on taxes, you need this guide.

Read on to learn:

  • What is a Short Term Rental (STR)?
  • The History of Short Term Rentals in the U.S.
  • Current Trends in Short Term Rentals
    • Geographic hot spots
    • Latest trends in STRs
    • Crunching the numbers: profits and returns for STRs
    • Research and reports
  • Platforms to Facilitate Your Short Term Rental Business
    • Airbnb
    • VRBO
    • Hospitable
    • Pricelabs
    • AirDNA
  • Who Invests in Short Term Rentals?
    • What you need to get into the game
  • How to Get Started in Short Term Rentals
    • Early investments and start-up costs
  • Checklist for Launching a Short Term Rental Property
  • Growing a Short Term Rental Business
  • Accounting Software for Short Term Rental Businesses
  • Real Estate Accountants for Short Term Rental Investors

Who are we? The team of certified public accountants at The Real Estate CPA has worked for years, specializing solely in accounting for real estate investors. If you’re a real estate investment professional, or anyone with a short term rental that needs short term rental accounting assistance, we have our Tax Smart Investor™ program, advisory services, accounting services, and more. Bookmark our homepage (www.therealestatecpa.com) and get ready to up your game, enhancing your acumen and deploying better strategies to maximize earnings from real estate investments.

What is a Short Term Rental (STR)?

A short term rental (STR) is any property with a lease term of less than 12 months. Short term rentals are popular in tourist destinations and as vacation rentals in scenic locations. The advent of platforms like Airbnb have made it easy for virtually anyone with a second home, vacation home, or rental property to use it as a short term rental.

Bonus: For the next couple of years, short term rentals will continue to have incredible tax saving benefits. In fact, it is a primary strategy used by high income earners to reduce taxes on W-2 income. You can read more about taxes and short term rentals here.

You can also save this video from The Real Estate CPA podcast to watch later:

 

The History of Short Term Rentals in the U.S.

Short term rentals in the United States started in the early 1900s as an informal way for individuals or families to share a second home or vacation home amongst themselves and their friends. In the 1950s, newspaper ads for vacation rentals started to crop up. Families who owned a second home saw this as a way to make money off of the property when it was vacant. In 1985, the Vacation Rental Managers Association was founded, bringing some structure and standards to the process.

By the mid 1990s, the first online vacation rental platforms — including Booking.com, and VRBO.com — were born. 

Booking.com started as a hotel and travel fare platform. It became the first site of its kind to also advertise vacation rentals. Craigslist.com was another early provider of this kind of service, advertising short-term rentals and sublets alongside long-term rentals and a myriad of other community-based goods or services. 

A slew of similar platforms, websites, and eventually apps surfaced in the decades that followed, with millions of monthly users leveraging the ease and accessibility of on-demand short term rentals worldwide.

 

Current Trends in Short Term Rentals

Since 2020 and the COVID-19 pandemic, the hospitality industry has been hard-hit. New standards for sanitization and social distancing have changed the way people book lodging, not to mention the fact that at the height of the pandemic, vacation travel ground to a near halt. By early 2022, that narrative was changing, and vacation travel and vacation rentals started picking up again.

Keep reading to learn:

  • The best areas to have a short term rental right now
  • The latest trends for acquiring or managing short term rentals
  • Research and reports on trends in short term rental investment and use

Geographic hot spots

If you are thinking of using a second home as a short term rental, or acquiring additional short term rentals, then you should align with the classic real estate mantra: location, location, location. Where your short term rental property is located matters a great deal in terms of how much money you can make off of renting the property.

This relates to two factors: average comparable rental prices in the area and demand.

A performance analysis conducted by AirDNA found that the following areas ranked highest for short term rentals. It based these selected locations on rates and demand, and here is the list:

  • The Poconos, Pennsylvania
  • McGaheysville, Virginia
  • Sevierville, Tennessee
  • Bryson City, North Carolina
  • Surfside Beach, Texas
  • Branson, Missouri
  • Waldport, Oregon
  • North Conway, New Hampshire
  • Ruidoso, New Mexico
  • Windham, New York (in the Catskills)
  • Gulf Shores, Alabama
  • Pinetop-Lakeside, Arizona

While those are the latest trends, Los Angeles, Orlando, and New York continue to be top concentrated markets for STR supply.

Notice that most of these geographic hot spots for short term rentals are not in places where cost of living is exceedingly high, such as Manhattan or Las Vegas. There are some important calculations to perform as you think of picking a prime spot for a short term rental.

Crunching the numbers: profits and returns for STRs

Most short term rental owners seeking to grow their business face challenges in supply in high demand markets, and it’s important that this and other factors inform your projected profits from the property. For instance, using a cap rate calculation, a sound return on a short term rental property is anywhere between 8-15%+ percent. It will be important to work directly with your financial advisor, and a real estate CPA, to ensure you are making the right decision that will yield the right return. 

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We’ll dive more into the financials and short term rental accounting dynamics as we go on, but first, let’s look at some of the latest trends in short term real estate.

Latest trends in STRs

While some people still have a single second home used for a short term rental, there is a growing trend for multi property management. Here are some other trends that are supporting growth in short term rental investing:

  • Automated processes for property management, as well as an increase in property management companies that specialize in Airbnb or other short term rental situations
  • Targeted marketing, especially showcasing properties on YouTube, creating professional video tours, going viral on social media platforms, and leveraging the power of social proof through extensive video reviews and optimized listing copy
  • Appealing to new market segments by upfitting properties to be powered via solar, have green technology only, and other efficiency attributes or components

Perhaps the primary tactical challenge to short term rental property owners in the last two years has been the need for enhanced cleaning. It is a standout metric on almost every short term rental platform, and represents an additional cost both in time lapse between rentals and hiring qualified cleaning professionals.

Research and reports

Several data gathering entities regularly review the short term rental market, and here is a summary of the latest findings.

Vacation Rentals Forecasting by Statista

  • Vacation rentals revenue is projected to reach $81 million in 2022
  • Annual growth rate (CAGR) for vacation rental revenue is projected to reach 7.28% between 2022 and 2066, with a market volume of $107 million by the year 2026
  • Current market user penetration is 9.2%, a number that is expected to be 11.3% by 2026
  • By 2026, 73% of revenue in vacation rentals will be generated through online sales
  • The United States is the leading market globally for vacation rental revenue

Source: Vacation Rentals data by Statista

Short Term Rentals Report by CBRE

  • Between 2010 and 2020, the short term rental market had meteoric growth, showing year on year increases of between 100% and 500%
  • Recent short term rental growth has been in suburban or rural areas, with only about 21% of STRs being in urban areas
  • There are new efforts to innovate on the traditional, individual-owned short term rental approach by creating branded hotel models, which could give larger entities a share in the short term rental market

Source: Short Term Rentals in a Maturing U.S. Market by CBRE

Short Term Rentals and Development by Harvard Business Review

One of the primary objections to short term rentals is the concern over its impact on long-term housing, and the wider real estate market. To address that, researchers at Harvard Business Review conducted a large-scale study of 10 years of Airbnb listings, cross-referencing them against residential permit applications for new constructions. They found that, “On average, a 1% increase in Airbnb listings led to a 0.769% increase in permit applications, suggesting that Airbnb can play a major role in supporting local real estate markets and thus boosting local tax bases. Given these findings, it follows that restricting STRs can have a significant, negative impact on local economic activity.”

Source: Airbnb Rentals Reduces Development by HBR

To begin or extend your journey as a short term rental property owner, you will want to decide which of the available platforms best support your business.

Platforms for Short Term Rentals

There are a few large short term rental platforms that offer websites, apps, and features to help you rent out your property.

Airbnb

Airbnb is probably the best known short term rental platform. It is available in many areas (200 countries) and has millions of daily users. You can book all types of properties and split booking fees with guests.

VRBO

VRBO is one of the earliest short term rental platforms, and is now owned by the Expedia Group. You can do an annual subscription or pay per booking. 

HomeAway

HomeAway is owned by the Expedia Group. You can buy an annual subscription or a pay per booking option. It uses the same platform as VRBO, it is just branded separately.

FlipKey

FlipKey is owned by TripAdvisor. One incentive for using FlipKey is that, sometimes, a property can show up on TripAdvisor’s search results, which could give you access to a broad audience of people looking for local lodging.

Booking.com

Booking.com is a digital travel company that has been around since the mid 1990s. It provides online reservation services for hotels, properties, temporary stays, vacation rentals, etc., operating in an agency model for a global commission rate of 15%.

Here’s how they stack up in terms of features, pricing, and reviews:

 

Airbnb

VRBO

HomeAway

FlipKey

Booking.com

Users

Several million

Several million

Several million

Several million

Around 1.5 million a day

Subscription price

$0

-OR-

$349/year for 

advertising package

$499/year

$499/year

$0

$0

Commission per booking

Split fee or host-only fee options – 3%-16%

8%

8%

3% owner fee, 6-16% guest fee

Variable commission per booking (15% global)

Can set house rules

Can set your own pricing

Can get reviews

14 day mandatory

Up to one year

Up to one year

   

Can review renters

Additional features

Known and used internationally

Cross posting on TripBoard

Access to all VRBO traffic and listings

Promotion in TripAdvisor search

Cross promotion with airlines, including American Airlines and EasyJet

Note: Depending on how you structure your payment methods, you may also pay a 3% transaction fee for credit cards on most of these platforms, or additional fees for different types of payments.

There are some smaller companies that offer similar products and niche features. Some of these include TurnKey (a few million users and a 17.5% commission fee) and Vacasa (two million annual users and a 35% management fee), or even out-of-the-box solutions like Facebook marketplace, eBay, or good ole’ Craigslist. 

Of course, the reason the majority of serious-minded short term rental owners use well known platforms is that they come with infrastructure to support operations. Without those, you are left to create a lot of the elements yourself.

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Pricing Platforms for Short Term Rentals

While some of the platforms above will offer pricing guidance, if you are serious about making money from your short term rental, you may want to dive deeper. For that purpose, there are a couple of tools that specifically help you price your short term rental, maximizing profit by gauging variable pricing for specific dates and times. 

Think about it: renting out your South Carolina beachfront home can be lucrative year round, but the two to three weeks of annual spring break? You would price that differently. 

Pricelabs and MarketMaker™ are two of the most popular software options for pricing short term rentals.

There are also other types of technology that further support managing a short term rental property. For instance, AirDNA works with Airbnb’s API to aggregate data and analytics into actionable insights. Guesty streamlines operational management of short term rental properties. So do Lodgify, Hostaway, Kigo, and a host of other newer entrants in this space.

Ultimately, you want to make sure you understand all of your operational processes, especially when it comes to the legal considerations and finances/accounting for short term rentals. As you grow, you will need to have a team of experts in these fields to advise you.

If you’re feeling excited at the prospect of owning a short term rental, let’s dive into what it takes to get started.

Who Invests in Short Term Rentals?

A short term rental can make you anywhere from a few hundred to several thousand dollars each month. If you go all in, you could own several short term rental properties and generate a healthy, six or even seven figure income from your earnings. Of course, there are numerous legal hoops to jump through and important tax and accounting considerations, but we’ll talk more about that in the moment.

First, let’s talk about the types of people who are eligible to jump into this arena, and what you need to get the ball rolling.

Know you need a specialized real estate CPA to jump-start your short term real estate investment play?

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What you need to get into the game

It is possible to get a mortgage for a short term rental — and many people do. You will need to prove your financial health to a lender. This means having some collateral, assets, and proof of income. You also need enough capital to get things started (we’ll cover start-up costs in a minute).

Once you know you’re financially viable, you’ll want to pick the location of your short term rental. While some people may be able to look at the stats and pick the hottest location for STRs, it may be wiser to start close to home. 

Consider the complexities introduced if you can’t physically get to your short term rental property. While plenty of property management companies exist to serve in that situation, you will still be ultimately on the hook for the property, and may want to be able to get to it fast if need be.

So, money: check; property: check; all that’s left is to go through the process. 

How to Get Started in Short Term Rentals

From day one, you should be thinking about running a business. The danger of going headlong into the STR game is that you don’t order the business correctly, don’t take it seriously, and don’t realize what’s at stake. 

For instance, do you know the potential tax liabilities of your STR? Do you understand the legalities of owning an STR in a different state than your primary residence? Do you know how many days you can stay at your STR, versus renting it out? How about a financial buffer if it sits vacant? All of these are important points of consideration that should be considered before you even begin. 

Let’s talk $$$.

Early investments and start-up costs

The most obvious expense of a short term rental is the property itself. All in, you’re looking at the following:

  • Down payment (may be higher than a primary home = 20%+)
  • Mortgage, which could run a little higher (+0.5-0.75%) than your primary residence
  • Property taxes
  • Homeowners insurance + special insurance coverage, like landlord insurance (may be required in some states)

Home repairs and updates

You will also want to tally up any changes or improvements you will make to the property to get it rental ready. 

Updated design/look — Keep in mind that everything from decor to appliances to landscaping should be in the mix, as the better your property looks, the better chance you have of it getting picked on an app or website.

Security — With strangers traipsing in and out, it’s probably worth investing more in security systems, digital locks, and outdoor video cameras.

STR property management

A good property manager can be worth their weight in gold, but it will cost you a little to get them. On average, you may pay between 15-35% for those services.

STR software

We already reviewed the many software options you have for a short term rental property. Each will run you a little money in either an annual subscription or monthly fee. Make sure you include those costs when you think of your all in number for launching a short term rental property.

STR lawyer

Knowing your legal responsibilities is essential to starting a short term rental property business. Depending on the type of STR business you have now, and what your goals are, you will need a lawyer who specializes in this to give you the right counsel so you make all of the right decisions.

STR bookkeeper and accountant

Keeping clean books is super important to running your short term rental the right way. A bookkeeper may be one of your first hires. You also want to make sure you have an accountant who specializes in real estate give you advice, direct your year round tax planning, and make sure you are operating in compliance with state and federal standards.

Check this out:

Checklist for Launching a Short Term Rental Property

This may feel like a lot, and in one sense, it’s good that you would feel that way. It is a lot. There are a lot of success stories out there, which is great, but can mislead people into thinking that this is a plug and play endeavor. There are a lot of up-front components. If you get them right, you can set yourself up for major success. 

Here’s a checklist to simplify what’s on your to do list:

  • The property:
    • Find a realtor
    • Shortlist properties
    • Pick a property
  • Financial organization:
    • Personal finances organized
    • Apply for a mortgage for the selected property
    • Put in offer
    • If accepted, get financing and go to closing (30-60 days)

While you work on the purchase:

  • Research short term rental platforms/software
  • Pick the software and set up your profile
  • Meet with a lawyer
  • Meet with an accountant
  • Make a plan for bookkeeping
  • Make a plan for property management

Once the purchase is finalized:

  • Hire repairpeople/do all home repairs
  • Decorate home
  • Take professional photos and videos of the home
  • Make final pricing decisions or use a variable pricing tool
  • Create an online listing for the short term rental
  • Market your short term rental

Ongoing:

  • Keep monthly books
  • Get reports from the property manager
  • Maintain high bookings by soliciting and posting reviews
  • Consider using paid ads during slow periods
  • Continue to improve and maintain the home

Note: At some point, your business may require you to institute a legal framework, such as forming a limited liability company (LLC). This is a conversation to have with your lawyer.

Growing a Short Term Rental Business

If you master this process, you can easily buy additional properties to profit from. It simply takes time, becoming familiar with the rhythm, and the help of a good lawyer and an accountant who can advise you every step of the way.

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Here are some steps you can take to start buying more short term rentals:

  • Perform an analysis of your existing property, understanding what makes it successful, what your profit margins are, and how you can maximize efficiency and profitability.
  • Consider nicheing. Many of the “top rated” hosts or owners on platforms like Airbnb or VRBO have a theme to their properties (if they have more than one). This can either strengthen the value of a single property or open the door for you to own more of the same.
  • Join STR groups online: there are plenty of high-profile influencers who have made it big renting short term, and plenty of people who, like you, are breaking into the game. There is a lot of free advice you can get from Facebook groups, YouTube channels, and even Reddit threads. Of course, you get what you pay for, so take free advice with a grain of salt.
  • Increase the occupancy potential. There are trends, and you may want to stick with condos or tiny houses, but higher occupancy homes or properties give you a much higher cost per night earning.
  • Get better about marketing. STRs are popular for a reason, and their rise in popularity also means that more people are aware of (and trying to take advantage of) the opportunities here. You’re in an increasingly dense crowd: stand out by being creative about everything, from how you write the listing to the types of video tours you shoot.
  • Leverage automation to send reminder emails, follow up emails, review requests, and more. Many platforms will do this for you, allowing you to personalize your communication.

Accounting Software for Short Term Rental Businesses

Alright, now this is where our expertise comes in. We specialize in real estate accounting, which means that plenty of our clients are like you: hustling in the short term rental gig. You don’t have to have millions of dollars to get into this, but you could make millions of dollars from it, so hear us loud and clear: you need to organize all of your bookkeeping and all of your accounting.

Short term rentals are one of the key ways you can save money on taxes. They can yield great income and save you tons of money. If you do it right. So, the first thing you need is a solid accounting software for short term rentals that lets you keep everything straight.

Because STRs are such a key tax strategy, you may want to save this video for later and talk it through with your real estate accountant:

We would pretty much always recommend Quickbooks. It’s the industry standard and has everything you need. It can also scale with you, which means that, as your business grows, you won’t outgrow it.

Here are some other options if you’re not a QB fan:

  • Hospitable, which we mentioned for some other features but it also has bookkeeping functionality.
  • Guesty, same deal – does a lot with data and can handle your books.
  • Stessa is a popular one you’ll see come up if you’re Googling this. It has some automated tools, expense tracking, banking integrations, and more.

Most property management software programs have some bolt-on product that supports bookkeeping and accounting. Our only caution with that is that you will get out of it what you put into it. If you aren’t keeping your personal finances separate from the business finances, if you aren’t tracking or recording payments correctly, if you aren’t recording maintenance fees. . . you get the idea. If you don’t put in the work of keeping the books (or hire someone to), then no system in the world can make up for that deficit.

This is one of your roles if you own a short term property. Even if you only own one, you are the boss of that business, and you need to run it using best practices.

Real Estate Accountants for Short Term Rental Investors

If you’ve made it this far, congrats – you must be very serious about making money from a short term rental. And for that, we applaud you. We personally invest in real estate and support real estate investors all over the country. This is a powerful way to build generational wealth, creating a source of passive income that yields immense dividends.

If you own a property already and are looking for short term rental accounting and tax advice or services, we can help with that. We work exclusively with real estate investors, and our highly qualified real estate CPAs are standing by, ready to lend a hand so that you see the return you want.

Contact us today to learn more about how to become a client.