If you’re considering investing in real estate, you’re not alone. Most millionaires still agree that real estate is the best investment you can make today, and for good reason.
However, out of all your rental options, short-term rentals have made quite a name for themselves in recent years. That’s because, with the right tools, you might earn the best returns! Let’s talk about how to invest in short-term rental properties and maximize your profits. You guessed it – there’s a tax strategy and benefit involved.
Benefits of a Short-Term Rental
If you’re considering investing in rentals, then there are plenty of reasons to choose a short-term rental property. Here are some of the biggest benefits.
Higher Earning Potential
Assuming you have a place with year-round tourism, the earning potential is much higher than with a long-term rental. If you live in an area where you can charge $2,000 per unit for a long-term rental, and you have a mortgage payment of $800, then you’ve netted $1,200 before maintenance, insurance, taxes, and other expenses.
However, with a short-term rental, if you’re able to charge $150 per night or more, then your gross income will be $3,000 for 20 nights each month before those expenses for each unit. Also, that’s a conservative estimate, as $150 is often on the low end for Airbnb and other short-term rental platforms. Not only that, but that isn’t counting your cleaning fee!
Yes, short-term rentals will require more work on average, but the payouts are typically much larger. You will be compensated for the work that you put in.
When you commit to a long-term tenant, you’re taking a lot of risks. A lot of damage can be done over the course of a 12-month lease, and evictions are not easy for anyone involved.
With short-term rentals, people only stay for a couple of nights or a couple of weeks at most. This limits the risk of damage and makes it easy to get rid of unwanted guests. Short-term guests do not have the same rights as long-term tenants.
There are plenty of tax benefits of short-term rentals that you should use to your advantage. Cleaning and maintenance fees, furniture, depreciation, and more can be written off at tax time, and you may not even have to report all your income like you would with a long-term rental. Our tax team can help you make the most out of your real estate investments, contact us to learn more here.
Unlike long-term rentals, if you ever want to use your short-term rental as a vacation home for a few days out of the year, you certainly can! If you buy a property in a desirable vacation area, you can use it when it isn’t occupied. Sounds like a great plan if you love to travel or get away.
How to Get the Most Out of Your Short-Term Rental
Now that you know some of the benefits of short-term rentals, let’s talk about how to get the most out of yours.
1. Buy in the Right Market
Year-round tourism is what you’re looking for. Whether it’s a popular ski/hiking destination like Colorado or Vermont, or a year-round hotspot like Orlando, you don’t want to limit yourself. If you buy in a market with no tourists or no seasonal travelers at all, then you’re fighting a losing battle.
If you’re purchasing in the north, then you’ll want to find a location with summer and winter activities that draw tourists. This could be a major city like Seattle or Chicago, but it doesn’t have to be. For example, skiing, hunting, and snowmobiling are very popular winter sports in northern Maine, but the coast is typically only busy during the summer.
In the southern U.S., buying property near a popular tourist destination or a major city is going to be your best bet. Either way, just consider the year-round potential of your property before purchasing.
2. Buy the Right Type of Property
The property itself can either be a limiting or beneficial factor in your short-term rental business. The property and the location are the two main selling points, even if the price range is higher than average. If you’ll require people to live in close quarters with others (including you), share a bathroom, or sleep in a cramped room, you can’t charge as much.
However, if you have amenities like a pool, full kitchen, private units, or anything else, you can potentially charge more than your local competition. Accessory dwelling units (ADUs), multi-family homes, or guest homes on the property could also double your revenue by offering multiple units. The more you pay upfront for the right amenities, the more you’re likely to earn in the long term.
3. Keep Records Straight
Always keep diligent records of guests, finances, and more. Most likely, you can keep track of this on your platform, but it’s important to keep records on the side of any business expenses or separate income. This information could come in handy if there is a dispute, and you’ll need it during tax time.
4. Screen Guests
Screening tenants for long-term rentals is a very involved job, but for short-term guests, it doesn’t have to be. Thanks to platforms like Airbnb, it’s easy to read reviews and testimonials from previous hosts about a new guest before accepting them. Always read through these if you use these platforms, or develop another system to screen guests without these platforms.
Even for short-term rentals, one bad guest is all it takes to cause serious repairs or problems. Contacting guests directly to make sure they understand the rules and procedures of the property is also a good idea.
5. Fix Problems as They Arise
Keeping up with maintenance and repairs is essential to a successful real estate business of any kind. The longer issues persist, the worse they become.
Not only that, but if guests notice these problems, especially if they interfere with their stay, it could lead to negative reviews or reporting you on your rental platform. Always remain proactive when owning a rental. It could save you a lot of money.
6. Stand Out
There are many ways to stand out from your competitors, and we encourage you to get creative! It could be as simple as a unique marketing strategy, decorating theme, new amenities, or exceptional customer service. Whatever it is, use it to your full advantage and try to get the most out of your rental.
Some of the most profitable short-term rentals have a fixed niche that helps them stand out. For example, there are plenty of “shipping container homes”, tree houses, Disney-themed rooms, and so much more on Airbnb. These are excellent strategies to stand out from the competition and charge more, but they may also decrease the size of your target audience.
Also, there are plenty of free marketing tools you can use to your advantage. Simply by doing a good job and providing exceptional customer service, you can facilitate word-of-mouth marketing, which is said the be the most effective. Ninety-two percent of consumers trust the word of their friends over online promotions and advertisements.
Other than that, you can try marketing your listing on Instagram, Pinterest, or other social media platforms for free. If you have a fixed niche, this is a great way to build exposure. Each share could expose your platform to hundreds of more people!
7. Track Returns and Maximize Profits
As time passes, find where you’re spending the most money, how much is coming in, and how you can improve these numbers for your bottom line. For example, if you aren’t bringing in enough revenue due to a lack of business, then consider spending more on marketing. If too much money is going to cleaning, consider increasing your cleaning fee.
Once you develop a tracking system that works for you, keep a close eye on it. If your rental investment is in the right location, then you’ll likely generate a profit quickly. However, there is always room for improvement, so track everything and continue looking for new ways to save or earn more for the best results!
What The Richest Doctor Has to Say…
If you’ve read David Auer’s book The Richest Doctor: A Modern Parable of Financial Independence, then you know that the fifth step is “Understand Risk.” This holds true for short-term rentals, as there is risk involved.
Our physician characters in the book consider these and other investments during their careers outlined by the book. It’s important to understand the different investor levels and knowing which level of risk and time investment you are comfortable with.
Level 1 is our “Too Busy to Learn” Investor that would prefer to turn their money over to a financial advisor or institution to manage it for them.
Level 2 is our Accredited Investor. These investors are unique in that they must meet an income test or a net worth test. An individual must have an annual income exceeding $200,000 or $300,000 for joint income with a spouse. After receiving accreditation though, you are open to investing in more opportunities.
Level 3 is Business Owner Investors. Just like the education it took to become a doctor, an investment in learning business basics is necessary to become a successful business owner.
Level 4 is the Real Estate Investor – and the most likely to be interested in short-term rentals. Real Estate Investing is extremely popular right now, but does take a fair amount of learning and due diligence to make sure you’re securing smart investments.
Level 5 is the Serial Entrepreneur. This type of investor owns several businesses and real estate investments. Serial Entrepreneurs know the value of passive income and have a diverse array of investments.
If you want more information on reaching retirement and financial independent faster as a physician, get your copy of The Richest Doctor at www.therichestdoctor.com.
Start Earning Today
Now that you know the benefits and how to successfully run a short-term rental, why wait? Short-term rentals done correctly are highly profitable and can help you ease into retirement or supplement your income in no time.
Feel free to contact us with any questions or for help with your new endeavor!