What and Why Short-Term Rentals
Short-Term Rentals (STRs) are vacation home rentals (the beach condo, lake house, cabin in the woods, downtown flat, etc.). These homes are usually rented for an average of 7 days or less but could be more. They are furnished and most likely fully equipped with everything a guest would need to live at the unit for a short period.
I learned the term Short-Term Rental at the end of 2021. Before that, I would call any short-term rental Airbnbs, but Airbnb.com is just one of the many websites where you can list your vacation home for rent. You can list via Expedia, VRBO, or you directly through your website.
I had stayed in several Airbnbs, but I never thought I’d invest in one. I thought that it would be too much work and probably best to stick with the classic and boring long-term rentals (LTR). However, Instagram happened and I started learning more about STRs, the benefits and the returns they could provide. Some people were making $3,000 a month in net cash flow from a cabin in the Smoky Mountains. Say what! We average $100-200 in cash flow per month with our long-term rentals. Of course, money talks, and I was intrigued! I joined an online mastermind group to learn more. What sold me on STRs was that you could buy an STR with 10% down using a vacation home loan. That’s not so bad! Let’s say you buy a $500,000 cabin, you only need a $50,000 down payment and if you can make $36,000 a year. That’s roughly a 70% return accounting for closing costs, etc. You don’t get that anywhere else, do you?!
Assuming those returns, one STR could perform better than 15 LTRs! It would require fewer units to retire. I had to try it! I said to my husband, Ryan, let’s buy a Cabin!
Of course, I wouldn’t just jump into something new without having a clear path and neither should you. Here’s what I did prior, during and after purchasing my first short-term rental.
I started learning everything I could on how to analyze, buy, and manage short-term rentals.
- Joined a Short-Term Rental Mastermind. The group met every week and had speakers to discuss various topics. I attended every single meeting.
- Read several books, one of the best ones was part of BiggerPockets collection: “Short-Term Rental, Long-Term Wealth” by Avery Carl
- Searched and listened to podcasts of people investing in STRs
Selected a Market
A simple google search asking “Best vacation rental locations in 2022” will yield thousands of articles on the subject. Airdna.co or Mashvisor.com are good resources for this. At the time, Gatlinburg, TN (Smoky Mountains) was one of the best markets and Blue Ridge, GA was up and coming, but not as great.
I also asked the people in our mastermind group why they had chosen to invest in their specific market to understand what I needed to be looking for. Some said that they just wanted a place where they would vacation and that’s how they picked their market.
Gatlinburg, TN would have been the ideal starting point, but this was the beginning of 2022 and the market was at its peak. The prices were crazy high, so the numbers didn’t make sense. Therefore, we decided that Blue Ridge, GA would be the next best place for us. It is close to our home and it was a place that we would enjoy for vacation.
We used Mashvisor.com to research everything there was to know about Blue Ridge, GA. This was helpful because there are several sub-cities in the GA Blue Ridge Mountain area and not all are the same. I highly recommend giving Mashvisor.com a try if you are looking into buying an STR. They have a 7-day trial. We ended up paying for the quarterly membership until we purchased the Cabin and that was about $70.
Hired a Badass Realtor
I like to work with realtors when I don’t know the market well and don’t have the availability to go see properties in person. I met our realtor via a STR mastermind call (the power of masterminding). Being that STRs were new to us and we didn’t have much knowledge of the market, it was key that we worked with a realtor that understood, both the market and the short-term rental strategy.
Our realtor is an investor himself and had a cabin in Blue Ridge as well. Due to this, he was able to give us insights into the market that another realtor wouldn’t. For example, he told us that a firepit, a fireplace, and a hot tub were KEY to have in that market. He also told us that mountain views booked more and that 3-bedrooms were preferable. This information was crucial during our search. Hence, why I recommend getting a badass realtor!
Best way to find one? Referrals. Ask in STR/Airbnb Owner/Investor Facebook groups or people in your network investing in the market you are interested in.
Some of the names to Facebook Groups:
- Female Short-Term Rental Investor
- Short-Term Rentals from Owners
- Managing Airbnb and Short Term Rental
- Airbnb Professional Hosts
Analyzing short-term rentals is slightly different than long-term rentals given that income is not consistent from month to month. Therefore, you need to use an average nightly rate and occupancy rate to calculate revenue. You also have to account for the cost of maintaining the property operational for guests (utilities, cleaning, toiletries, linens, furniture, etc.). Here is what you will need to analyze an STR:
- Average nightly rate – you can use Mashvisor.com, Airdna.co, or Pricelabs.com. You can also use Airbnb.com by looking at the prices of nearby listings (be sure to check different months)
- Occupancy percentage- you can use Mashvisor.com, Airdna.co, or Pricelabs.com. You can also check other listings in Airbnb to see if they are booked.
- Cost of furnishing – even if already furnished, you will likely need to buy some items to update it. Estimate around $3,000-$5,000 per room if not already furnished. At least $5,000 total if already furnished.
- Cleaning costs – find out what cleaners in the area charge for the type of property you want.
- Utilities – find out what utilities are needed plus you will need to add internet as well.
- Fixed maintenance costs – you might need landscaping, pest control, hot tub or pool cleaning, etc.
- Cost Toiletries, Linens, and Kitchen Essentials– depending on the type of service you wish to provide, you will need to budget for this. Some cleaners will provide linens and toiletries included in the cleaning fee.
- Software – If you plan on optimizing your systems with smart pricing software like Pricelabs.com or streamlining with management with software such as Hospitable.com, you will need to include this.
- Management fee – if you don’t have the time to self-manage, find out pricing for STR management companies in your market and what they include. These are normally higher and range from 15-30%.
- Taxes and permitting – find out the short-term lodging business requirements in your market. Some markets will require you to pay an annual permit fee, as well as additional county taxes like sales tax.
- Repairs and capex – similar to long-term rentals, you will need to estimate these costs. Let’s be real something will break at some point, especially with constant use.
- Real estate taxes and insurance – for insurance, you will need contents insured and good liability coverage. It will likely be a bit more expensive than standard long-term rental. I found them to be very strict too. They had us add railings to the firepit area for compliance.
- Premium mortgage insurance (PMI) – if you are buying using financing and utilizing a second home loan with less than a 20% down payment, you will have to pay PMI. Make sure that you account for this as additional monthly costs to the mortgage expense.
- Airbnb fees – this is generally 3%
Below is a quick demo of the analysis for my Cabin.
Made Offers – lots of them!
Don’t get stuck in analysis paralysis! Start making offers ASAP! If the numbers don’t work at the listing price, send offers at the number that works. When we bought our cabin, the market was at its peak, so we kept getting outbid. It was a nightmare and we were getting discouraged, but we kept trying until one stuck!
FYI, I wrote a blog post on making offers. In that post, I give specific examples of what we had to do for our Cabin purchase. -> Time to Buy- How to Make a Winning Real Estate Offer
Built My Team and Vendor List
While under contract, we began working on building our team. Our realtor provided some recommendations, but I also looked on my own. These are some of the key players you may need in your team:
- Manager (if you will be hiring one)
- Cleaner and Handyman (if using a management company, they will likely handle this)
- General Contractor (if rehab needed)
- Plumber (assuming self-managing)
- Hot Tub/Pool (if applicable)
- Furnishing company (if you plan to hire out)
At a minimum, you MUST have a cleaner readily available. In my opinion, the quality of your cleaner will break or make your short-term rental business. Imagine a cleaner doesn’t show up for your next guest. There goes your 5-star review out the window.
Prepared for Launching
While waiting for closing, we began purchasing any furniture or supplies needed for the cabin. We also drafted the Airbnb listing. Once we closed on it, we had our cleaner go for a deep clean and our maintenance guy do some general maintenance (pressure wash, and clean exterior). We also went to furnish it with the items we purchased and scheduled the photographer. Our initial pictures didn’t have all of our upgrades, but because the property was already furnished and looked cozy, we were okay listing it as-it was. We didn’t want to delay listing the property just because we were missing a decorative rug (I always say: progress over perfection). Once pictures came in, we went live for a future date. We closed on March 7th, we listed it on Airbnb on March 15th for a live date of April 1st. This gave us 15 days to continue working on it while getting bookings.
We ended up paying to fine-tune our listing, create a Welcome Guide, and set up automation with the management software. I wanted to make sure it was done correctly and didn’t want to delay the process with my learning curve.
I used Daniel Rusteen, the author of Optimize Your BNB for this. I paid about $425 for everything. This is the link to his offerings: Optimize My Airbnb – Packages (P.S. I am not an affiliate). You can check-out my listing here Alone At Last
Hosted our First Guest
Our first stay was nerve-wracking because I was like “What if we don’t get a 5-star review, it’s over!” I’m a bit dramatic like that, but thankfully, we got a 5-star despite a few little hiccups! Phew! I realized that having good customer service and being quick to respond is KEY for the Short-Term Rental business. Every guest receives a message after they book asking them for ways that we can improve. This has helped us improve one guest at a time and it lets guests vent before leaving a review. I’m learning to take the feedback as an opportunity to improve instead of taking it personal.
Below is what our first review said and the private feedback received:
Wrapping It Up
Was Self-Managing a Good Idea?
At the time of this post, it’s been 7 months since we launched our Cabin, Alone At Last. We are still learning as we go, but it’s gotten much better. The system automations we implemented have allowed us to self-manage without having to spend a lot of time. Some guests go and we don’t hear from them at all. Communications are mostly automated (check-in, check-out, next morning, review request, etc.), Our cleaners are automatically notified of new bookings via hospitable. They get email and text alerts with reminders. This way, we don’t have to worry about it.
I purchased a guide that taught me how to set up Hospitable.com for better hosting. It’s a bit pricey, but it was worth it! This is the guide link: The Young Retiree’s Guide to Airbnb Hosting. (P.S. I’m not an affiliate)
Was it Worth it?!
Yes, we love our cabin! However, this property won’t retire us any time soon. Given seasonality changes, we need a full year of financial data to get a better idea of where we stand financially. Some months have been great (highest was $1,000), others have not been so great ($100). November and December are the peak months and we still don’t know what January and February look like. I think it’s a combination of things: the market selected, the timing of purchase, and the type of property purchased in addition to the learning curve. I believe that 2022 will be much better given that we would have graduated from the rookie phase.
Let’s not forget the intangible benefits that come with owning a short-term rental. For example, you get to own a vacation home that is fully paid for by others and can potentially save thousands of dollars in taxes with the STR tax loophole. For us, those two things make it worth it.
I won’t go into detail on the tax matter because that’s an entire blog post, but I recommend reading the following blog post by The Real Estate Tax CPA: STR 01: How The Short-Term Rental Loophole Can Save You Thousands in Taxes
Would we buy another one?
Definitely! In fact, we are looking into buying a Beach House next. We are waiting on our 2022 taxes so that the income of the cabin can offset the mortgage expense and be eligible to buy another. We will use another 2nd home mortgage because… in case you didn’t know… you can have multiple 2nd home mortgages as long as they are more than 50 miles away from each other. Did I mention that the refund we get from using the STR loophole may be enough for the down payment of the next one?! I leave with that final nugget!
Hope this was helpful! If you did, please give me a like below and let me know what you thought about the post in the comments!
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Related Blog Posts
- How to Fund Real Estate Investments – Part 2: Hard Money – In the event you can’t use a 2nd home loan. A DSCR Loan Product can work.
- How to Fund Real Estate Investments – Part 3: Private Money – You can also work with private lenders to buy Short-Term Rentals.
- Our Real Estate Buying Criteria and Why it is Important to Set Your Own – Similar to Long-Term Rentals, you need to set your criteria for Short-Term Rentals.
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