Short-term rentals have become a multi-billion dollar global market in fewer than two decades. What began as a solution to give travelers more choices in their accommodations became an income stream for property owners who provide them. Airbnb, which started it all, has grown to include more than 5 million hosts worldwide.
This put short-term rentals on the map and made investing in these properties accessible to a wider audience. People who would have likely never considered owning investment real estate now have one or even multiple properties that give them a tidy profit.
But there are catches. A person can’t purchase a property just anywhere and expect a good return. There are good areas for short-term rentals and not-so-good areas. Additionally, buying a property for a reasonable price and earning enough rental income to cover monthly expenses isn’t as straightforward as it sounds.
Is Investing in Short-Term Rentals a Smart Financial Move?
Short-term rentals offer impressive potential for a pretty healthy cash flow. However, there’s more to this venture than meets the eye. Investors face certain challenges that long-term rental properties do not present.
The short-term rental market has become highly competitive, so investors must more carefully maintain properties and monitor the business end of the venture. Regulations for short-term rentals vary from state to state and even within cities and counties. New York City enacted short-term rental restrictions in 2023. Several California communities, especially in vacation heavy Los Angeles and Orange County have very specific guidelines and fees. Investors must stay abreast of their region’s regulations.
So, while short-term rentals are easier to run than other real estate investments and offer extra cash flow and tax benefits, drawbacks include higher costs due to frequent turnover and varied monthly income.
Airbnb or Hotel: What Do Travelers Say?
For centuries, hotels were the accommodation of choice for weary travelers. When Airbnb introduced the concept of short-term rentals instead of hotels, it changed how the world travels.
Today, the burgeoning short-term rental market has gone far beyond its air-mattress-on-the-floor roots. Rentals offer many accommodations ranging from palatial estates to quirky travel trailers and everything in between. They have also added categories for experiences like “castles,” “icons,” and “OMG!”
In a survey conducted by Clever Real Estate, respondents disclosed their preferred travel accommodations. In addition to standard criteria like good reviews, amenities, location, and pet policies, other requirements — affordable price (67%), privacy (45%), and layout (44%) — suggest consumers desire intimacy and value.
More and more travelers are turning to short-term rentals because they get more space and privacy at similar or cheaper rates than a hotel stay.
The Best and Worst Markets for Short-Term Rentals
Short-term rentals fare better in some regions than others, but research and analysis can determine the best locations. After all, it’s no use having one if it never gets rented out.
Cleveland, Ohio, Hartford, Connecticut, and Kansas City, Missouri, top the list of cities with the highest return on investment, primarily due to lower real estate costs. The cities with the lowest return on investment include San Jose, Los Angeles, San Francisco, CA, and Austin, TX, primarily because of the high home cost.
When determining if a market is good, purchase price is not the only consideration. Local attractions such as beaches, amusement parks, and skiing can boost occupancy rates. Properties near military bases or colleges are also good locations for short-term rentals.
Crowdfunding Short-Term Rental Investments
There are other options for those looking to invest in real estate but don’t have the money for a down payment or interest in running a short-term rental. One popular strategy is real estate crowdfunding, which allows companies to pool money from multiple investors to purchase and manage a property. The investor earns rental income based on their ownership percentage. When properties sell, they also gain based on their ownership percentage.
Arrived Homes is among those innovating this market segment. It offers the traditional crowdfunding approach and allows investors to fund other real estate purchases for a higher return.
The downside to using a crowdfunding platform is a person’s ownership percentage. While it is convenient to invest $500 and gain access to rental real estate, that amount of money will equal less than 1% ownership, meaning the income stream will be small. However, as an investor invests additional money, it can prove to be lucrative.
The BRRRR Method: The Old Fashioned Way
If crowdfunding is not of any interest to an investor, the old-fashioned BRRRR method: Buy, Rehab, Rent, Refinance, and Repeat. Investors have used this time-honored technique for decades.
The investor buys the property for a discounted price, rehabs it, and rents it. Once they build up enough equity, they refinance and do it again with another property.
Additionally, investors may purchase a duplex, live in one unit, and rent out the other. The goal is for the rental income to offset most of the monthly mortgage payment. In time, the investor buys a new property to move into and rents out the previously occupied unit. Of course, the downside is finding these properties and having the money to purchase them.
To determine a suitable investment path, list the pros and cons of investing in real estate. Remove any bias and list all the advantages and drawbacks to arrive at the best decision.