What Investors Should Know About Short Term Rental (STR) Real Estate in 2023
June 28, 2022
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If you're looking at the housing market to buy real estate investments, you might consider short-term rentals. With the popularity of Airbnb house rentals continually growing, it's becoming a more popular way to invest in real estate.
Before jumping in headfirst, here's what investors should know about str real estate in 2022.
What Is STR? Short-Term Rentals
Short-term house rentals or vacation rentals are homes you rent for short periods. Unlike long-term rentals that usually have a lease of one to 12 months, short-term rentals are rented out for a few days or maybe weeks at a time.
The most commonly known form of STRs in the real estate market is Airbnb house rentals, but there are many ways to rent your available home, condo, or apartment as a short-term rental.
Many real estate investors make more money by renting for short periods than long-term rentals because they can charge more and turn the property over to more renters more often. Short-term rental properties can also be excellent for investing in rental properties for beginners.
STR vs LTR
Short-term and long-term real estate investing is often compared, and for good reason. Understanding the differences between the two can help you decide which meets your investment strategy and financial goals.
Long-term rentals have a fixed income or at least a more predictable income. You know how much to expect, assuming the tenants fulfill their lease obligations. Short-term rentals don't have a lease. There is an agreement of what renters will pay for the short while they are with you, but then you'll continue renting to other renters throughout the year. The market rent can change throughout that time, or you might have long periods of vacancies.
When investing in short-term rentals, you're constantly turning tenants over, which can be a lot of work. You must continuously be marketing the property to keep it occupied with people looking to rent for the short-term. It can also be harder to get financing for STRs because of their inconsistency versus LTRs with more predictable income. You may need to pay cash or look at alternative financing options.
You should also consider your exit strategies for both investment types. Long-term rentals with tenants have a limited audience of other real estate investors. House rentals for the short-term, though, won't have existing tenants, so you open up your audience to other real estate investors plus anyone looking for a primary residence. Even in times of strong economic growth, you should have an exit strategy in case you need to get out.
Investing in STR Sites in 2022
Before investing in short-term house rentals in 2022, here's what to consider in the ever-changing real estate market.
Don't assume every area is suitable for short-term rentals because they aren't. Instead, locate areas in high demand for tourists and business people. You want to invest in an area with economic growth, income growth, and increased demand for tourists to visit. Utilizing the consumer price index is a wise step to take. Don't forget to evaluate the global economy and its trends if you're planning on opening short-term rental sites abroad as well.
The trends could change year to year, so always be one step ahead of the latest data to determine if you should execute your exit strategy and invest elsewhere or stay put because there's a high demand to rent in the short-term.
Ways to Invest in STR
Real estate investors have two ways to invest directly or indirectly in short-term house rentals. Investing directly means the investor researches, looks at the housing market in certain areas, assesses the real estate demand, and ensures it's an area of high tourism and/or business activity. Then, the investor buys the property, monitors rental prices, and advertises the property for rent, maintaining the property and screening tenants throughout the year.
Investors can invest passively with real estate investment trusts if an active investment doesn't sound appealing. Instead of buying commercial real estate themselves, investors invest in a real estate company that does the investing for them.
All investors must do is fund their real estate investment trust account and let their earnings grow. Most REITs pay dividends, aka a share of their profits from rental income, back to investors throughout the investment. The principal investment is returned when the real estate company sells the properties.
Not all cities and states allow house rentals for the short-term, so always check with the local laws before investing. In areas of high tourism, short-term rentals are typically encouraged and allowed. In other areas, though, the local regulations don't allow rentals for less than 30 days or sometimes more.
Always check with the local regulations to see if business licensing is required. Not all cities and states require it, but some do. If you must have a business license, allow enough time to apply for and receive it before you're up and running.
It might be more challenging to get financing for short-term house rentals. Since it's not the home you're living in, you can't borrow any of the government-backed loans. Instead, you may be eligible for conventional financing, or you may have to find a private investor.
Your financing may be contingent on the net operating income you'll earn, the rental market demand in the area, and property values. Most lenders require a 30%+ down payment to reduce their risk in lending you the money.
Depending on the laws in your area, you may be required to collect and pay lodging or rental tax for your jurisdiction. Talk to your local government to find out what they need for real estate investing businesses operating short-term rentals.
Evaluate a Property's Value
The real estate industry has seen a lot of changes over the last couple of years, one of which is higher property values. This doesn't mean every property is worth enough to invest in, though. Work with a real estate agent or appraiser to determine the property's fair market value to ensure it's worth enough.
Even though you'll hold the property and rent it out, you want to invest in a property where housing sales are good, and the market is liquid should you decide that short-term rentals aren't right for you.
Prepare for Renovation Costs
When you own rental properties, you are the landlord. This means you're responsible for the regular maintenance, repairs, and necessary renovations, or upgrades like luxury appliances or energy efficiency focused systems. Essentially, all short-term rental property management is usually up to you. Therefore, it's best if you have an emergency fund set aside or if you can save some of the rental income you receive for renovations to continually make the property more attractive and increase property values.
8 Best Cities in 2022 for STR Real Estate
- Atlanta, GA
Atlanta, Georgia, is home to many professional sports teams, exciting nightlife, theaters, museums, and historical landmarks, making it a popular tourism spot. However, to own a short-term rental in Atlanta, you must get a short-term rental license and renew it annually.
- Austin, TX
Austin, Texas, has the largest restrictions on short-term rentals, but it's a hot area for tourism, so it can be an excellent real estate investing strategy. To own an STR in Austin, you must get a license for the type of property you rent out, whether a single or multi-family property that you don't live in or the home you do live in.
Austin regulations have the toughest requirements on renting out homes that aren't your primary residence. Mostly, you're restricted to certain areas of the city, as not all areas are eligible.
- Columbus, OH
All Airbnb owners in Columbus need a permit to rent out their property. The local government wants to ensure that all short-term rentals don't hurt the local property values or the area's character. Permits ensure the homes are well cared for and a large enough housing market supply for people looking to own homes for their primary residence.
- Denver, CO
Denver is a hot spot for short-term and long-term rentals. Because it's an area many people move to eventually, there is a large demand for the long-term rental market to either check the area out or for a temporary place to stay while they find something more permanent.
You must have a short-term rental license in Denver. However, you can only rent out your primary residence. You can't own a property you don't live in and use the short-term rental strategy.
- Miami, FL
Miami is a tourist hot spot, so it's no wonder it's on the list of places to invest in a short-term rental. Miami has a diverse zoning map that allows for different real estate uses in each area. You don't need a permit, but it's a good idea to check with the local enforcement agencies to ensure the property you want to rent is eligible for short-term rentals. You may be eligible to apply for an exception permit if you want to rent out a home that's not in a designated short-term rental area.
- New Orleans, LA
You need an owner-operator short-term rental license to operate a short-term rental in New Orleans. You'll need a different license for each type of owner you are, whether a resident renting out their own property or a commercial real estate owner renting out real estate they own.
- Seattle, WA
You can own up to two short-term rentals in Seattle, but one must be your primary residence. You'll need a license for each, and you must renew it annually with your license number appearing on any advertisements for the rental.
- Washington, D.C.
In Washington D.C., you can have short-term rentals, but if you aren't present at the property, you're limited to 90 days total per year to rent a property. If you're present, though, you can rent it out as often as you want throughout the year, such as renting out a room or basement. You'll need a short-term rental license to rent the property out.
STR Real Estate FAQ
Is Short-Term Renting Real Estate a Good Investment in 2022?
Short-term renting often brings in more income than long-term rentals when you rent in the right area. But, first, you must abide by the local laws and regulations. For example, you won't make as much in an area that restricts you to up to 90 days of rental income versus a place that doesn't have time restrictions on your investments. Research trends in the economy and factor in details like rising interest rates and inflation. Overall, though, rental income is higher on short-term rentals.
Is Real Estate Better Than Stocks?
There's no way to predict if real estate investing is better than investing in the stock market because no one can predict economic growth or declines. However, there are times when real estate investing is better than stock market investing and vice versa. The best investment advice you can receive is to diversify your investments, putting money in both real estate and stocks to get the best of both worlds.
How Much Profit Can You Make on an STR?
No two investors make the same profit on short-term rentals. It depends on many factors, including the geographic area, pent-up demand, if there are supply chain issues and the average market rent prices.
The Bottom Line
Investing in short-term rentals can be a great way to diversify your portfolio. While the popularity of Airbnb house rentals is high now, no one can predict how long it will last. Don't be afraid to speak with a financial professional for guidance. So before investing in short-term rentals, understand what investors should know about STR real estate in 2022 to make the most of your investment income. Learn more by signing up and visiting our blog.
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