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Pros and Cons of Short-Term Rentals

By Thomas O'Shaughnessy | October 6, 2020

Until recent years, finding a place while traveling was synonymous with hotels or other professionally run establishments. In the past decade, however, the long-established order was revolutionized by the arrival of a new player on the market: short-term rentals. This newer form of hospitality represents an unprecedented opportunity for travelers — and also for investors.

Platforms such as Airbnb, HomeAway, and Vrbo allow landlords to offer their properties for rent to travelers for a few days or a few months with little hassle. The arrangement tends to be more lucrative than typical long-term rentals. Therefore, countless homeowners, especially in touristy locations such as Oceanside in San Diego, have converted their properties to vacation rentals.

The realm of short-term rentals, however, comes with its share of potential issues. If you are considering investing in this new type of housing, read on to find out the advantages and disadvantages of short-term rentals.

Pros of short-term rentals

Investing in rental properties is mostly about maximizing your income. You can use a rental property ROI calculator to find out how your property could be performing. You should also use a budgeting software such as Every Dollar or YNAB to determine how much money you need to make. The nightly rent for short-term rentals is typically higher than what someone would pay per day for the same property monthly. 

For example, you could charge $150 per night for an apartment typically rented for $1,000 per month. The $1,000 you'd earn per month for a long-term rental can be earned in just one week if you made it into a short-term rental.

Vacation rentals also offer the possibility to raise the nightly fee on the days when demand is higher, such as the weekends, holidays, special events, and so on. Although the vacancy rate for short-term rentals is generally higher than for long-term rentals, the additional income typically covers the difference.

Short-term rentals also offer more flexibility than properties with a monthly or yearly lease. It is an excellent opportunity for homeowners who wish to have access to the property occasionally, such as a second home. With vacation rentals, you can easily block nights or weeks off the availability calendar for your use. You can also temporarily withdraw the property from the rental market with short notice should the need arise. It is a great way to generate an income from a property that is vacant part-time while still using it as needed, such as an investment property you are planning to buy and hold.

In addition, short-term rentals also offer a great opportunity when it comes to tax deductions. Using the property as a vacation rental allows you to claim multiple deductions. It could include cleaning and maintenance fees, insurance (beware that your typical homeowners insurance policy may not cover some common issues for short-term rentals), or property management fees.

Finally, issues with short-term tenants are often more manageable than those you would have with a long-term tenant who is under a lease. Travelers usually occupy the property for a short time, and all transactions are made using your platform of choice. Therefore, common landlord issues such as unpaid rent or dealing with evictions are highly unlikely in a typical short-term rental scenario. For a long-term rental, unless a tenant explicitly does something that's against their lease, you're likely stuck with them until their lease is up.

Cons of short-term rentals

Although short-term rentals hold many advantages, there are numerous reasons why investors may want to think twice before converting their units to vacation rentals.

Short-term rentals tend to be riskier investments than long-term ones. Unlike typical tenants, visitors for short-term stays are not thoroughly vetted. Most landlords require extensive background checks for long-term tenants, including credit and employment history, references from previous landlords, and so on. Although there is no way to guarantee there will be a good tenant, homeowners can put all the chances on their side for the rental experience to be a good one. 

When it comes to short-term rentals, however, landlords have little control over who they can rent to. Most home-sharing platforms have developed a review system that allows previous homeowners to share their experience with each guest as well as identity verification systems. Nevertheless, the system remains largely incomplete and potentially biased compared to traditional background checks.

Another significant disadvantage of short-term rentals is the lack of income predictability. Vacation rentals have a significantly higher vacancy rate than regular rentals. The majority of guests stay in the same property for a couple of nights at the most, often leaving the property empty for several days before the next check-in, especially in the off-season. Last-minute cancellations are also frequent. Therefore, property owners are betting on higher nightly rates to cover the expenses. However, as many people found out during the COVID-19 pandemic, the travel market can be unpredictable. 

Short-term rentals are also a significantly more time-intensive investment than traditional rentals. The property needs to be thoroughly cleaned and restocked between each reservation, and replying to booking inquiries or other questions timely can often turn into a full-time job. Besides, maintenance needs tend to be higher because short-term rentals are typically furnished, and everything is up to the property owner. Using a scheduling software for property managers can help streamline the process. Some investors also prefer to use a property management company's services, especially if they own several units.

Finally, the short-term rental industry is still in its infancy, and establishing the market comes with many growing pains. The local rules regarding vacation rentals and other forms of home-sharing are always changing and can vary depending on your location. Before buying a property with the intent of using it as a short-term rental or listing your home on Airbnb, you should consult with a real estate attorney to check that such use is compliant with your local zoning or the rules of the homeowner's association if applicable.  

Turning your existing properties into short-term rentals or purchasing a building to use as a vacation rental can be a very lucrative move for investors, especially in markets with high tourist demand. 

However, it is not as simple as sharing your listing on one of the multiple platforms available. Although returns can be attractive, short-term rentals are also a riskier and more time-demanding investment than traditional long-term rentals. You will also need to consider the legal ramifications of your project.As always, when it comes to investment properties, your success will depend on weighing the pros and cons of each option and carefully selecting the property at the best price, such as by using the services of a discount brokerage such as Home Bay and Redfin.

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