Purchasing short-term rentals can be profitable, but also risky. For this reason, it is important to be cautious and perform thorough due diligence before buying. In this article, we’ll highlight some of the most important steps you can take to analyze the profitability and risks when buying a short-term rental.
Planning
Having a plan will make everything easier. A project becomes more achievable when you break down what seems to be something difficult into smaller pieces. Every professional sports team has a plan before their game, and even before practices. Because they know that having a good plan will bring them closer to success. Plans increase efficiency, create teamwork, reduce risk, and help your team make good decisions. If you surround yourself with a good team and follow a good plan, you will already have increased your chances of achieving your goal.
Credit Score
Your credit score will determine whether or not your bank or another lender will even consider lending money to you. Ideally, your credit score should be at least 620, with some lenders possibly accepting a score of 600. A score of 680 or above is considered safe in the eyes of the majority of lenders. To learn more about how to maintain a good score, read “What Affects Your Credit Report.”
Finding a property
Many factors may go into finding a short-term rental such as:
- Price – Before buying a property, you need to know if you can afford it and if it is a good deal. This includes knowing and acknowledging the down payment with interest, property taxes, maintenance, and additional expenses that come with owning a property. You should start calculating your estimated income and operating expenses in what is called a pro forma, to help decide if the property is worth it. A property may already have a pro forma, but it doesn’t hurt to make calculations yourself. When you have your gross income calculated, a good rule of thumb is that 50% of that total should be able to pay for your operating expenses.
- Location – The location of a property is a huge factor that helps determine the price people are willing to pay. To get an estimate of how much that is, use Airbnb’s map to see the average cost per night of properties nearby and similar to your property. In addition, looking at hotel rates in the same area can aid you in determining what a fair price is for your property. An ideal property is situated close to restaurants, shops, parks, transportation, and possibly even a lake or beach. Also, keep in mind how renovated and new your property looks. A property that is new and clean, while also in a good location will likely attract more guests and even encourage guests to come back.
- Proximity – It is typically much easier to buy a property when it is closer to you. It’s easier to gauge what a neighborhood is like when you’re in it. Simply driving through or walking in the neighborhood can give you an idea of what the area is like. However, this is much harder to do when buying a property hundreds or even thousands of miles away. Sometimes all you can rely on is pictures and people unless you visit the property yourself. If you are not from there, you will probably be unfamiliar with laws and codes. To avoid this, speaking with and asking questions to property owners in the area can benefit you, and give you an idea of what it’s like.
If you want to invest in properties far from home, you are also going to need a group of contractors in that area. No home is going to be perfect, which is why reliable contractors are a necessity.
Inspections
Inspections are extremely important when it comes to owning any property, and possibly even more important for short-term rentals. In a successful short-term rental, many guests are going to be in and out of the property, especially more than when compared to a long-term rental. That is why it is crucial to make sure your property is thoroughly inspected. Every time a new guest comes and goes you should be making minor inspections of the furniture, appliances, floors, etc. Although you may not want to spend the money or time, it is significantly better than an unforeseen problem hurting one of your tenants or damaging the property.
How is the process different from buying a long-term rental?
When owning a short-term rental, income is not at a fixed rate like it is with a long-term rental, meaning that you must consider this when calculating how much the property will be making. You must also calculate the cost of amenities that come with having guests such as buying soap, shampoo, and possibly beverages and snacks.
With any property, there is a break-even point. That is, there’s a certain number of nights per month that your unit should be rented in order for you to meet your monthly expenses. This is called the break-even point. Make sure that you know exactly what the break-even point is. Also, keep in mind that you may be making more or less money depending on the time of year. Your income is more variable than with a long-term rental, because of the unpredictable occupancy rate, the seasons, and additional costs.
In conclusion, a lot of factors go into acquiring and owning a short-term rental property. As we saw above, many potential risks must be addressed before acquisition. But if you have a good team, the will to learn, and you work hard, you could be on your way to owning multiple cash-flowing short-term properties.