Airbnb has changed the way investors look at short-term rental prospects. There can be an immediate and substantial monthly return offsetting finance charges and creating positive cash-flow from the get-go. However there is a downside, and would-be investors need the knowledge to balance the attraction of a good ROI with the associated risks of the short-term rental model.
Income properties have traditionally been bought with residential rental in mind. Essentially a hands-off operation, they require minimal attention apart from maintenance issues, and income is generally guaranteed for set lease periods. Short-term rental, on the other hand, is unpredictable in terms of occupancy, needs close attention to meet the needs of guests, but has the potential for high returns.
Let’s have a look at these differences in a little more detail.
Tenants vs Travelers/Vacationers
Residential tenants have completely different needs than short-term or vacation rental guests, and it’s important to keep this distinction firmly in mind.
A tenant will be occupying the property long-term and their tenancy will generally be protected under state/provincial legislation. The property owner or manager will collect background information and references to determine suitability for the property and the ability to meet monthly rents. The property will most likely be unfurnished and the landlord has few obligations beyond ensuring regular and emergency maintenance is carried out.
A rental guest is generally a vacationer or business traveler who wants to have everything supplied, from comfortable and well-furnished accommodation to general supplies like toilet paper and soaps. Expectations of hotel-like services are common and many property managers and owners will provide concierge options for their guests. The owner of a short-term rental property will need to appreciate that to be successful, a strong understanding of the hospitality industry is required. They will also need knowledge of the market which is generally made up of:
- Vacationers looking for an alternative to a hotel to accommodate a couple or family on a city break
- Business people visiting for meetings or on short-term assignments
- Conference attendees and exhibitors
- Newcomers to the city wanting to experience different communities
- Home owners needing short term accommodation during construction on their primary residence
Residential tenants will look for the same features and facilities that residential home owners find attractive. School catchment areas, proximity to stores, a park etc.
Short term guests want to be near downtown attractions, theatre districts, hospitals and convention centres. Having said that, the idea of ‘living like a local’ gravitates many vacationers to popular communities in cities, such a Williamsburg and Hell’s Kitchen in New York.
Buyers looking to purchase a property for short-term purposes need to do their homework to ensure a steady stream of bookings. Check out how many properties are listed on Airbnb, Home Away and Trip Advisor.
A good investment will get you the return you want as well as positive cash-flow and short-term rentals can command almost twice as much rent as a regular tenanted apartment – sometimes more. However, it is not as simple as signing a lease for a year – there’s a lot more involved including furnishing, maintenance, property management, and professional cleaning, not to forget replenishing supplies for each changeover.
So we know there is cash flow and a good purchase will appreciate over time. However before your buyers get excited about the potential for increased income, make sure they are aware of the unpredictability of the revenue stream with the potential for vacancies and cancellations.
Most city property management companies deal wholly in residential rental and are not set up for the short-term rental model. Constant turnover of guests requires tight control of cleaning schedules and property inspection given there may be only 4 hours between one set of guests leaving and the next arriving.
For this a buyer may need to hire a local caretaker or cleaning company, but bear in mind that there’s a big difference between residential cleaning and vacation rental changeovers. Few Molly Maid type companies are prepared to do the extra tasks involved in prepping a property for travelers arriving so make sure you are not referring your buyers to providers that can’t meet these specific needs.
Educating owners into the ways of the short-term rental investment market takes time but will pay dividends as successful owners will come back for more as well as becoming key referrers. Learning everything there is to know about the market will enable you to pass the knowledge on and become the go-to expert in the business of selling this type of property.