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Key Takeaways:
- Short-term rentals typically generate about 30% more annually than long-term rentals.
- Local zoning and municipal ordinances dictate which properties can and cannot be used as short-term rentals.
- Operating a short-term rental is considered a business by most local governments, and owners must comply with specific workplace regulations and business licensing rules established in their local communities.
Short-term rentals, also known as vacation rentals, have always been an option when people travel, but it wasn’t until websites like VRBO and Airbnb came on the scene that interest ramped up with wider access to these properties.
Since then, buying homes with either the space for an STR or for the sole purpose of renting them out as a vacation property for income has gained momentum. While these types of properties look like an easy, cut-and-dried investment—and it’s true, they can yield dividends in ways that long-term rentals might not—but that doesn’t mean purchasing and managing a property as an STR is easy.
“Buyers are not incorrect in thinking that they can make more money in short-term rentals–typically about 30% more annually–than with long-term rentals,” says Nick Del Pego, CEO of Deckard Technologies, a data analytics and insights firm.
There are many things to think about and do to prepare for operating an STR, says Rob Copenhaver, real estate agent with REMAX Unlimited and owner of Vacation Rentals of Tampa Bay, Fla. “And the information can be really confusing and hard to find.”
With that in mind, it’s important to prepare clients for the realities of STRs. They can indeed be a lucrative investment, but buyers need to know what they are getting into when it comes to return on investment, regulations, taxes, and insurance. Dispelling myths for clients and leading them to the information they’ll need to maximize their investment is important when it comes to providing superior customer service.
Myth #1: Any property will make a good STR.
To profit from an STR, there are some important factors to consider.
“Zoning can be an issue,” says Copenhaver, noting that local zoning and municipal ordinances dictate which properties can and cannot be used as STRs. This differs from one city to the next. Likewise, municipalities might dictate how many properties within certain boundaries can be used as STRs.
For buyers, knowing what the zoning regulations are before purchasing a property is key.
“Requirements might be different even from one area of a community to another, such as with downtown areas versus neighborhood areas,” Del Pago says. This information is critical beforehand and, he says, is value-added information that brokers and agents can provide their clients.
With consumers expressing an ever-expanding interest in STRs, Copenhaver says it’s important agents do their own research locally, and it’s good business practice to know where to find the information.
“I had to go municipality to municipality and zoning site to zoning site to figure out what was legal and what wasn’t,” he says, speaking of his personal experience when he started investing in STRs. “It took a tremendous amount of homework, and this information is important for helping clients who are looking into this kind of investment.”
When it comes to the viability of profitable STRs, buyers also need to consider factors like location, amenities, and whether the property is appealing. Most people seek STRs in locations where they vacation, so proximity to attractions is important. Likewise, the property should cater to a variety of travelers. Couples, families, business travelers, and other users all require different amenities, and a property is more profitable if it can meet the needs of all potential clientele.
Myth #2: Getting a property ready to rent out will be easy.
Even if the property is turnkey, Copenhaver says investing in the necessities to ready the property for rental could be extensive.
“Clients will need durable furniture that can withstand everything a family to a wedding party might put it through, and then there’s all of the equipment you’ll need to run everything.”
From cameras to Wi-Fi thermostats and noise monitors to carbon monoxide detectors, there’s a wide range of necessary equipment to install in the property.
Buyers will also need to consider what supplies they’ll need to have on hand in the property, such as linens, kitchen supplies, and bathroom necessities.
Copenhaver makes it clear that onboarding a property is a hefty expense, and clients will likely want to know that up front, especially if they’re new to the STR world.
“Furnishing, equipping, and securing a single-family home or a property to make it safe and well-performing for STR purposes is not easy,” he says. “The cost outlay is so great in the beginning that it does actually take a decent amount of time to break even.”
Before a client even considers how to ready a property for rental, they’ll want to make sure they have the proper licensing and registration in place.
“Renting short-term rentals is considered a business by most local governments, and owners must comply with specific workplace regulations and business licensing rules established in their local communities,” Del Pego says. “They will also pay transient occupancy taxes that hotels are also required to pay.” These taxes, Del Pego says, can usually be collected from renters.
In any case, buyers will need to know what’s required for their property before they even consider listing it. Since regulations vary from one community to another, it’s important for real estate professionals to have a working knowledge of the requirements.
Myth #3: As long as I have general knowledge of how to operate a safe STR, I should be fine.
Most people have stayed in a hotel, Airbnb, or other STR. From the outside looking in, it might seem pretty easy to run one on one’s own. What’s behind the scenes is intricate, though. Knowing local regulations is crucial to operating an STR, especially when it comes to safety measures, Copenhaver says, which is why it will be important for agents and brokers to either educate themselves so that they can educate their clients or at least know where to point their clients.
When it comes to safety in particular, Copenhaver says regardless of local regulations, certain measures are necessary for every STR.
“For the protection of the buyer and the protection of whomever may stay at the property, it’s best to have certain practices in place. Change the lock code on the doors after every guest; make sure there are smoke detectors and carbon monoxide detectors installed and working; make sure there is signage if there are steps in hard-to-see places or for anything that might be a hazard; think about what safety measures might be needed to prevent slip-and-falls,” he says
And when it comes to swimming pools, a whole host of safety measures is needed.
“Basically, treat it like a hotel pool. Don’t provide floaties. Have guests bring those if they want them. Have pool rules posted in a conspicuous location and make that set of rules clear. Use depth markers for the deep end of the pool. Make sure there’s an easily accessible lifesaving device,” Copenhaver adds.
Myth #4: The local government has no idea if my property is an STR or my primary residence, so I don’t need to worry about regulations or taxes.
“Owners of STRs should not think they can outsmart the local governments,” Del Pego says. “Cities and counties are becoming much more savvy on tracking STRs, using data mining and machine learning, with our product Rentalscape and other technologies.”
Right now, governments are able to find out when, where, and for how long properties have been rented. As technology continues to expand, it’ll be important for buyers to make sure they are adhering to local guidelines; otherwise, their investment might cost them in fines and legal fees rather than make them money.
Again, it’s important to remember that having an STR is considered running a business, and each community has specific requirements for business licensing.
“Buyers need to know when and if they can apply to even get a license,” Del Pego says. “Many communities have limitations on how many STRs can exist in any given area. So, while someone else you know or read about on social media may be registered to rent, that doesn’t necessarily mean you will be, even in the same community, if the licenses are already at capacity.”
Myth #5: All I need is the standard preapproval and I can start looking for an STR.
Since STRs are rental properties and therefore investments of a specific nature, the normal loan preapproval likely won’t be enough.
“A lot of lenders will not finance for STRs,” Copenhaver says.
When shopping for a mortgage preapproval, it’s important to make clear to the lender how the buyer intends to use the property, and merely stating that it will be used as an investment isn’t enough.
“Buyers need to be clear that the property will be used as a short-term rental,” Copenhaver says.
Likewise, a regular homeowner’s insurance policy won’t cover an STR either. Though STR outlets like Airbnb cover quite a bit as far as liability is concerned, Copenhaver suggests to his clients that they shop for STR-specific insurance on their own as well.
Other Factors To Consider
Many clients find regulations, taxes, and safety policies to be more than they bargained for, but it’s still true that STRs can be a good investment for buyers. It’ll be the real estate agent’s task to convey the perks. That means, of course, that agents and brokers will need to be well-versed in what the perks are.
Likewise, regulations and rules aren’t necessarily set up to deter STRs as investments, but to keep communities happy and safe overall. Regulators realize that STRs can benefit everyone when operated correctly. Charging things like taxes and transient occupancy tariffs usually go right back into the local community.
“TOTs are needed to pay for essential services such as schools, firefighters, safety, infrastructure, parks, and often, tourism marketing,” Del Pego says.
Agents might want to convey these communitywide enhancements to their clients as an incentive to invest and remind them that when an STR adheres to regulations and is maintained properly, it provides benefits to all.
“Even if the buyer doesn’t live in the residence being used for the STR, it is important to be a good neighbor,” Del Pego adds. “It is important to think about the impact the rental will have on the surrounding community and that renters know the acceptable limits. And this is also important for real estate agents, as they continue to maintain good relations in the communities in which they work.”
