Short-term rentals have become increasingly popular in the past few years, thanks to the growth in online rental portals like HomeAway.com and Airbnb.com.
Short-term rentals, often second-home and vacation-home rentals, are not new, but the dynamic nature of digital marketing by online portals has catapulted this unique form of accommodations into the limelight.
In today’s market, where bargain-seeking travelers and low-priced properties create an opportunity for an investment with a greater cash flow and larger investment return, short term rentals are attractive to existing property managers making the switch from long-term rentals as well as others testing the investment waters.
But is the potential return enough to offset the risks and challenges associated with the growing but volatile short-term rental market?
With increased public visibility, short-term rentals have come under the scrutiny of city councils, zoning departments, tax agencies and licensing mandates all of which add costs to the investment.
Anyone considering investing in the short-term rental market should consider all the risks before taking the plunge.
The legal considerations
Short-term rentals are often shrouded in a legal cloud and can be here today but gone tomorrow. Depending upon the location, short-term rental laws can come with extra costs, rental term limitations, outright bans and hefty fines for violating the rules.
Many cities, including New York City, have begun to take action against short-term rentals by restricting all rentals to 30-days or more.
Other cities have bans in place, but allow short-term rentals by levying a hotel occupancy tax on short-term property owners. San Francisco, for example, reaps a 15 percent tax from short-term property owners. In Austin it’s higher, 16 percent.
Still other cities are gripped in the throes of community groups wrangling over zoning issues to “protect” homeowners who fear purported soci-economic ills they believe short-term renting will rain down on their communities.
Costs that can come with short-term rentals need to be analyzed because they can wipe out expected profits, even with higher rents, and kill the deal.
The hotel occupancy tax is a primary cost to consider. It’s not just that failure to properly report rental income and pay the appropriate tax can result in a hefty fine, along with a back tax bill.
Occupancy tax rules typically come with annual costs — a license, a permit and, perhaps, inspections. Researching those fees in advance are key to decisions you’ll need to make about your investment.
Also consider property maintenance and upkeep. Unlike a long-term rental, short-term rentals must be maintained more often to continue to attract a steady flow of renters from business travelers to tourists. An attractive property is your ticket to regular rental income. Chances are, properties more appealing than yours, will rent faster than yours.
Along with those beautifying costs (including landscaping, furnishings, fresh paint and flooring), come the costs of advertising and marketing. You need to get the word out if you expect people to find your property and regularly promoting your property can be expensive. Unlike long-term rentals, which often advertise only when they are empty, short-term rentals, by nature, need a perpetual promotions.
Keeping up with the short-term Joneses
To beat the competition and maintain rental frequency, you’ll also have to offer both standard and creative amenities.
Some creative property owners and managers include locally relevant amenities – kayaks, bicycles and hot tubs. Others outfit the rental with simple, yet thoughtful desirables, including local pastries or hand-written guides to the city.
Added amenities mean added costs, but whatever your strategy, you have to pay the price to stand out from the competition.
The NIMBY (Not In My Backyard) factor
Last, but not least, is the potential financial impact of the surrounding community and that “There goes the neighborhood” sentiment.
Cities, neighborhood and community associations that adamantly oppose short-term rentals argue the community is at risk from a high rate of transient tenants — strangers. Neighbors complain about the potential for noise, increased traffic and parking problems. They express the fear of not knowing their neighbor, the potential for would-be criminal strangers and the potential for some other sort of neighborhood disturbance.
Before investing, you should be aware of any undercurrent of dissent about short-term rentals.
Dissent could cost you your investment, if you risk investing in a property in a community without restrictions, only to later lose the cash-flow to the passage of a local ordinance that heavily restricts or bans short-term rentals. It could also cost you, in both cash and time, to play the lobbist’s role, in an effort to keep the community free of short-term rental restrictions.
Bottom line? The profit potential in the short-term rental trend certainly is attractive today, but costs and restrictions can reduce or erase your return tomorrow.
Research and scrutinize all short-term rental issues.