Are you looking for a lucrative real estate investment opportunity? With so many options available, it can be overwhelming to choose the right asset class. While multifamily real estate syndications have been popular, there is another avenue that offers even better cash flow - short-term rentals (STRs).
In this article, we will explore how you can invest in STR real estate and maximize your returns. But first, let's understand what STRs are and how they differ from long-term rentals (LTRs).
What is a Short-Term Rental (STR)?
A short-term rental property or STR is a property rented out for less than seven days at a time. Often referred to as vacation rentals, these properties cater to travelers and business professionals who seek temporary accommodation. The rise of online platforms like Airbnb and VRBO has made it easier than ever for property owners to list their homes as STRs.
Not only do STRs provide flexibility and convenience for tenants, but they also offer higher income potential for property owners. By charging more for short stays and accommodating more renters, STRs can often generate double the cash flow compared to long-term rentals.
Caption: Airbnb has revolutionized the short-term rental market
STR vs LTR Investing
Let's delve deeper into the key differences between STR and LTR investing.
#1. Income Stream
Long-term rentals provide a more predictable income stream due to fixed leases. In contrast, STRs experience fluctuating income influenced by factors such as nearby competition, seasonality, average guest stays, and average daily rates.
However, it is worth noting that the short-term rental industry can offer a higher income stream overall. According to STR data research firm AirDNA, full-time STR listings earned an average annual revenue of $56,000 in 2021.
#2. Financing
Financing options differ for LTRs and STRs. LTRs, with their stable income stream, are generally easier to finance. Traditional lenders offer competitive interest rates and lower down payment requirements for long-term rentals.
STRs, on the other hand, may face more stringent lending requirements. However, alternative financing options like asset-based loans, cash-out refinancing, and home equity lines of credit (HELOCs) can be explored for STR investments.
#3. Tenant Turnover
Long-term rentals typically experience lower tenant turnover, thanks to longer leases. However, landlords may face challenges with difficult tenants, such as property damage or rent nonpayment.
Short-term rentals, with average stays of 5-7 nights, have higher turnover rates. Owners must actively market their properties to maintain a consistent income stream. On the positive side, STR owners can adapt quickly to changing market conditions and choose from a variety of exit strategies.
#4. Exit Strategies
When selling a long-term rental property with a tenant in place, the pool of potential buyers is limited to other LTR investors unless the tenant can be convinced to leave. In contrast, STR investors have more flexibility in choosing their exit strategy. They can sell to investors interested in STRs, LTRs, or even owner-occupants looking for a primary residence.
#5. Lifestyle Investing
Long-term rentals might not provide personal use opportunities as they are typically located away from high-demand tourist destinations. In contrast, STRs are often situated in popular vacation spots like ski resorts, beach communities, and bustling resort towns. This allows owners to enjoy their income properties while creating unforgettable experiences for themselves and their families.
Now that you understand the key differences between STR and LTR investing, here's how you can get started with STR real estate.
How to Invest in STR Real Estate
#1. Set Your Goals
Like any investment, it's crucial to define your goals before diving in. Determine if you want a vacation home that generates income before retirement or if you're looking to build a cash-flowing rental portfolio. Once your goals are clear, you can proceed with the necessary steps.
#2. Understand Local Regulations
Familiarize yourself with the STR regulations in your chosen location. Regulations vary across different vacation markets, and some areas may not even allow STRs. Consider hiring a local agent who is well-versed in the regulations to guide you.
#3. Research the Market
Conduct thorough research on the short-term rental markets you're interested in. Look into average occupancy rates, average daily rates, operating expenses, seasonal rates, and the area's biggest draws. Utilize platforms like Airbnb and VRBO to gather property-specific data, including property taxes, insurance costs, and rental/occupancy rates.
#4. Crunch the Numbers
Running the numbers is essential in the STR market. Use real-time data from resources like Airbtics, Vrolio, AirDNA, and Roofstock STR Marketplace to evaluate financial performance metrics such as average length of stay, cash flow, occupancy rate, cash-on-cash return, average daily rate, revenue per available room, cap rate, and annualized return. Don't forget to factor in maintenance and property management costs, if applicable.
#5. Make an Offer
Whether you're working with an agent or not, when making an offer on an STR property, ensure you have a written purchase and sale agreement (PSA). The PSA should include key terms and conditions such as property address, purchase price, financing details, earnest money amount, and any contingencies.
#6. Closing the Deal
Once your offer is accepted, conduct due diligence, including property inspections. If everything checks out, the lender will initiate the loan underwriting process. Closing is typically handled by a real estate attorney or title company. Ensure a smooth transition of any existing bookings and payments, and take possession of the property on the closing day.
In Summary
Investing in STR real estate can be a rewarding endeavor, providing solid cash flow, tax benefits, and potential appreciation. Consider your level of involvement, your goals, and the specific market dynamics before diving into the world of STR investing. If you're looking for a passive investment opportunity, join our Passive Investors Circle to explore the STR deals we offer. Maximize your returns and create unforgettable experiences through STR investing.
Join the Passive Investors Circle now to kick-start your STR real estate investment journey.
