What Kind of Short Term Rental Investment Should You Buy? 10 Questions to Consider
Short term rentals is a generic term that applies to renting to a tenant for a period that is less than a standard residential lease. From that definition, you can see the short term rentals could apply to a diverse set of assets or markets. I thought it would be useful to list a some of the decision points you need to make when choosing what kind of investment you’re making in practice:
Are you investing in urban markets or vacation markets? Urban markets target people who are visiting cities who would be there for work or pleasure. Vacation markets target people who are typically just there for vacation. Both markets carry regulatory risk, but urban markets probably much more so.
Are you investing in a small versus large property. Smaller properties tend to have a higher utilization rate, but at a lower nightly price. You can charge more for larger homes, but they might book less often. Larger homes can be more lucrative, but they carry more headaches and risks of attracting partiers who will disturb your neighbors and trash your place.
Are you going to manage the property yourself or outsource it to a property manager? Self management is more work and more lucrative. It’s also likely you’ll deliver a better experience to your guests because you are really committed to the success of this home. On the other hand, if you use a manager you don’t have to do much work and some of your bills might get covered.
Are you buying this home as a second home that occasionally you rent out, or an investment that occasionally you get to use (if ever)? If you are considering the home to be an investment, you can’t really use the home during prime season and holidays.
Is the home a “fly-to” destination or a “drive-to” one. Some of the most exotic locations in the world require getting on a plane for your customer. Some of the most popular vacation areas are also drives from large markets. Fly-to destinations may be more difficult and expensive to manage remotely, but they might be busy year round. Or, there could be a global pandemic and no one is flying!
Who is your target customer? Is it couples? A family? Multiple families traveling together? Large groups? Batchelor and Bachelorette parties? Family reunions?
What’s the ideal duration of your guests stay? Is it a few nights, a week, a month, longer?
Are you targeting corporate and business travelers or vacationers?
Is this your primary residence where you’re renting a portion of the property to travelers or a secondary/investment property that’s dedicated to short term renters?
Are you buying the home predominately to generate strong cashflow or because you think it’s equity will appreciate over time. If it’s predominately for equity appreciation, does the quality of its property management even matter?
Will all your purchases be in the same location, or will you purchase homes in multiple locations? It’s much easier to scale up if you focus on one market because you know the area well and you already have your “crew” in place. On the other hand, it’s not that much more work to spin up a new property at a completely new location. By investing in multiple locations, you also get some level of diversification to protect against regulations changing or a natural disaster.
Taken together, these questions could be helpful in refining what kind of investments you want to make. Or if you’re trying to a create portfolio of properties, you could balance it across various asset types. For example, you might want 75% small properties versus 25% large ones. Or 10% fly-to properties and 90% drive to ones. Or 60% business traveler properties and 40% vacation traveler properties. Or 67% cashflow-focused properties and 33% appreciation-focused ones. With the pandemic, it becomes very clear how having a diversified portfolio can help you weather unpredictable events.