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April 14, 2022

How to Invest in Short Term Rentals

Investing in short term rentals (STRs) is a great way to earn money and save on taxes. Some people build huge businesses renting out properties on Airbnb or one of the many other short term rental platforms. 

Wondering how to invest in short term rentals?

There are a few prerequisites to getting in the game. Let’s review all of the basic initial steps and how you can start a reliably profitable short term rental business.

Feel like you need a whole crash course? Our firm has put together the ultimate Guide to Short Term Rentals. Bookmark that to read next, and contact us directly if you see the need for a real estate CPA to help you launch your STR business.

First: Assess Your Buying Power for STRs

A preliminary step to investing in short term rentals is assessing your own buying power. This early step is where you enlist your first team member: a certified public accountant (CPA), preferably one who specializes in real estate investments. Having a pro will help you assess your own finances and make the smartest possible decision.

To start, consider:

What resources can you allocate for this property?

You’ll generally need to put a downpayment of 20-25% on the property. In addition, you’ll need money for closing costs, which can be anywhere between 2-4% of the property purchase price. 

As short term rental accounting experts, we’d be remiss to not remind you of the other costs you should factor in. For instance:

  • Property renovations and improvements
  • Fixing or upgrading home features/appliances
  • Furnishing the rental

This can amount to thousands, if not tens of thousands of dollars.

Create an all-in number that you can afford, and you can move on to step two.

Second: Find Your STR Market

There are two tasks as you find your short term rental market:

  1. Market analysis — Where are short term rentals most profitable? There are some markets that command high prices, some that command high prices only seasonally, and others that may command lower rents but have more predictable year-round occupancy rates. 

You also want to investigate licenses. Some areas and some neighborhoods prohibit short term rentals. Make sure you fully understand what you are and aren’t allowed to do, and whether you can even acquire a license for STRs in your target market. Do a thorough market analysis to understand where your best bets are for a profitable short term rental.

  1. Convenience — What is a realistic place for you to own a short term rental or vacation rental property? This will come down to operations: do you plan to manage the property yourself or hire a property management company? Do you want to be able to physically get to this location often, or are you willing to buy a short term rental in a different state or area of the country? Go over all of the pros and cons as you shortlist markets for your short term rental business.

Once you’ve done your due diligence, you’ll move to step three.

Third: Start Looking for Your Short Term Rental Property

For the third step, you’ll enlist your second team member: a real estate professional. Real estate agents are essential, because they know the ins and outs of the market you’re looking in. It’s also important that you link up with a great agent early on if you want to own several short term rental properties. You need a reliable scout in the market to find you the best properties and give you early access to bidding.

Your real estate agent can give you advice on the area, tip you off to comps, and can get their hands on average rental rates. While you may have investigated this in your market analysis, now may also be the time to dive deeper into the hard numbers around rent in a certain neighborhood. There are special pricing tools that help you do this with precision. Air DNA is an Airbnb pricing tool that uses algorithms to deliver smart rates, helping you with variable pricing to maximize profits year round.

Work with your agent to identify a few short term rental property possibilities. Once you’ve picked the one you want, you’re ready for step four.

Fourth: Work With a Lender and Buy the STR Property

In step four, you’re ready for your next professional connection: a lender. You’ll want to get the ball rolling with financing as you work on finding the right property. In this step, you will actually move forward to purchase the property. 

We also suggest that you now evaluate the exact property you’ve chosen to make some important calculations. For instance, now that you have a property you’re moving on, you’ll know details like property taxes, insurance, utility averages, and similar fixed expenses. Measure this against the rent rates and days available to make sure you can cover both the mortgage and those fixed expenses.

As you move ahead into actually owning a short term rental, we suggest a fifth step that’s going to be a big part of your success.

Fifth: Find Other Short Term Rental Owners

It’s important that you have your team: your accountant, your real estate agent, a property manager (if you’re going that route), and a cleaning crew. If you grow your business, you’ll probably need a lawyer, a bookkeeper, a personal assistant, and some additional staff. All of these professionals will keep you from making rookie mistakes or missing opportunities. But we also suggest that you plug into a network of other short term rental owners or real estate investors. This is important because, like your realtor, they’ll also have the inside scoop on market dynamics. You can investigate places like Reddit, and we definitely recommend the Tax Smart Investors™ Facebook Group

The short term rental loophole is a huge incentive for buying into STRs, but it’s important you understand the parameters and how to make that work for you. All of that is regularly discussed on the TSI Facebook Group, and you can also subscribe to our Tax Smart Insiders group to get weekly newsletters, loads of useful content, and access to a team of real estate CPAs (at a fraction of the cost of individualized tax planning).

Investing in Short Term Rentals

Investing in short term rentals can be a great choice, if you do it right. Follow these five steps and you’ll cover most of the ground you need to. But of course, every situation is unique. If you find yourself with additional questions, and want guidance, we invite you to reach out to our firm today. We help STR investors like you every single day, and we can help you make the most of STRs in any market nationwide.