Investing in Your First Short Term Rental Property
Taking the plunge and buying your first investment property can be exciting and daunting at the same time. There are over 150 million people using Airbnb worldwide today, and hosts today have collectively earned over $110 billion, so it’s easy to see the allure and opportunity of hosting your first Short Term Rental (STR). What could be better than someone else paying for your mortgage and growing your equity in real estate? We’ve done it a couple of times now and despite having a few missteps here and there, we’ve been largely successful. Before making that first investment, here is what we advise on:
1. Research Your Desired Location: Location is the most important aspect of launching an AirbnB or VRBO. Tourism, occupancy, pricing, and local labor are all driven by the local market. When we first got started, I thought I only wanted properties on the beach in Cape Cod, and I wanted nothing to do with New Hampshire. Well, once we started crunching the numbers, we quickly realized that we would be unable to maximize income on Cape Cod. Here’s a quick comparison of the two locations:
You can see that despite Cape Cod having higher nightly rates, we’d more likely be able to maximize our income in the White Mountains because our upfront investment was much lower and our occupancy, or likelihood to rent more nights out of the year, was a lot higher. The White Mountains have year-round attractions as compared to Cape Cod.
Having this baseline understanding of your local market is critical. There are several ways to research the town or city that you’re interested in:
USNews or other travel publications often release yearly lists of top US travel destinations - a quick google search of your town of interest will give you an idea of popularity
Search AirBnB, HomeAway, and VRBO for current properties in the area you’re looking to buy in - understand their pricing and their calendars will give you a sense of occupancy and pricing
Spend time in the area itself - get to know the people (particularly those in the real estate market), the attractions, restaurants, and overall vibe
Join Facebook and Instagram communities in the town - a great way to get connected to the local community and insight into issues surrounding the town you may not otherwise hear about
2. Calculating Investment and Future Cash Flows: Calculating income and cash flows should be pretty straightforward, right? Before you dive in, there are a number of assumptions in your future cash flow modeling that you should consider. Take a look below at the major revenue and cost drivers of a STR investment.
There are a few other important considerations to make when creating your first income and cash flow model for your STR:
How long will renovations take? The longer it takes for you to put your house on the market for rent, the more money you will lose as you will need to cover expenses out of pocket.
Marketing and advertising: Upfront costs like photography and a website can be costly, but super beneficial to getting the word out about your Airbnb.
Will you use a Property Management company to turn over your home? These companies tend to eat into your margin quite significantly, touting the benefit of advertising and maintaining your listing in addition to cleaning and home maintenance.
Your taxes, if you’ve set up your STR as an LLC company, will (generally) be at your personal income rate. If you make a loss in the first year, that loss will roll over and be deducted against your following year’s income. You can be strategic about the timing of your investments to help minimize tax exposure or consider incorporating entirely to realize the benefit of a lower tax rate.
Nailing some of these assumptions will help you determine whether or not your STR is a good investment or not. If you’re interested in a free template for calculating your cash flows, check ours out here! (This is literally the one we used!!)
3. Financing your Real Estate Investment: There are a lot of considerations here but we’ve got you covered in some of the major questions you should be asking:
Typically interest rates for second homes are similar to your primary home but will go up once you purchase your third, fourth, and so on as it becomes clear to the bank that you plan to earn an income off of these homes. Shop around on interest rates to understand the market.
The purchasing process for a secondary or investment home is ultimately very similar to the purchase of your primary home. There is a balance to be struck around how much to put down on the house. You’ll likely want to avoid PMI fees and put down enough to avoid those, but you’ll also need cash to make other immediate upfront changes to your property including furnishing so that you can start renting ASAP.
We highly recommend getting a homeowners’ insurance policy that will cover you as a short-term rental.
There is a lot to consider when investing in your first STR, but the beautiful thing is that when done right, it can be a major additional income stream for families. We’ve been successful in balancing conservative assumptions but maximizing the opportunity of our property. If you’re interested in learning more about our experience, contact us for a free consultation.