by Jovana Stankovic Last updated February 2023
If you want to venture into real estate, consider buying short term rentals. After all, a short term rental investment remains lucrative in 2023.
Despite the recent fears of a possible recession, real estate experts remain optimistic that the US real estate market will stay strong. Although we can expect a slight cooling off of the market due to increasing interest rates, the demand for real estate will persist. For real estate investors, investing in short term rentals continues to be the best investment strategy in 2023 and beyond.
With pandemic restrictions decreasing around the world, travel demand is increasing. More people are now eager to travel. Moreover, visitors can stay a little longer and discover a little more now that they are given the option to work from home. Private resorts in less crowded places with a home-away-from-home atmosphere appeal to today’s tourists.
The travel business is undergoing a significant shift due to popular home-sharing platforms like Airbnb. Large hotels and luxurious resorts are no longer the industry leaders in hospitality. Property owners and landlords are now seeing a growing market share in terms of hosting guests and travelers from around the world.
It’s best to buy a short term rental investment property this year. Aside from its profitability potential, you can enjoy many other benefits. Plus, it’s also a great way to mitigate the risks of investing in real estate.
What Are Short Term Rentals?
Short term rentals are property rentals that are leased out for a defined time, usually two to four weeks. Usually, short term rentals are furnished properties that are available for stays for 30 days or less. Most short term rental properties are typically in busy tourist areas, and the landlord is responsible for keeping it clean and ensuring that all needs are satisfied.
Short term rentals are also referred to as vacation rentals. They are typically advertised on home-sharing platforms that visitors use to find a place to stay when they visit a certain location. Unlike hotels and hostels, short term rentals offer home-like ambiance and amenities that make guests feel at home.
The major difference between short term rentals and hotels, motels, and hostels is that the former are just like regular homes and/or condominium units. Short term rentals typically allow guests to cook and wash their clothes on the property—just like they are staying at their own house.
Also, some short term rental owners only rent out a portion of their house to guests. In fact, some city ordinances require the owner of the short term rental to stay at the property during the guests’ stay. Also, short term rentals are typically not allowed to accommodate guests staying at the property for more than 30 days.
Important Things to Remember for Short Term Rentals
When renting out your house or a portion of it for a short period, there are a few things to keep in mind.
First of all, do your investigation before opting for a short term rental. Look at the reviews, compare pricing, and learn about the median rent in each area. Also, before deciding to buy the property, make sure to inspect it thoroughly. Performing an actual inspection will assist you in understanding any potential issues that may develop during your rental agreement.
Short Term Rentals vs Long Term Rentals
The most typical approach to investing in real estate is purchasing and operating a rental property, such as single family homes or multifamily complexes. Rental property in residential real estate is frequently categorized as either short term or long term. Both are investment strategies that determine how you rent out your property, as well as your target market.
Short Term Rentals
Short term rentals are usually rented on a daily or weekly basis. In some cases, short term rentals are also rented for up to one month at most. Vacation rental houses, a home hacker who leases out an extra room, a condominium unit are all examples of short term rentals. A single family rental property with a monthly lease belongs in the same category.
While the short term rental market is typically seasonal, many short term rental owners enjoy earning high profits from their investments. What’s nice about short term rentals is that you can charge more during peak season when demand is high. Short term rental owners can adjust their rates based on the seasonality of the business.
Long Term Rentals
Typically, long term rentals come with at least a one-year lease term with a preset annual rent. They are rented out to a tenant who will stay at the property for longer than one month. Most residential rental contracts are for 12 months, while some local landlord-tenant rules may enable more than a year’s lease.
With long term rentals, owners can expect to receive continuous cash flow because the lease term is usually longer. However, long term rentals usually need more attention, especially when it comes to maintenance. Although long term rentals provide more dependable rental income, there are specific reasons an investor would want to consider offering a short term rental.
Are Short Term Rentals a Good Investment in 2023?
The short answer is yes. Short term rentals will remain strong in 2023, amidst fears of a possible recession and a minor housing crash. In fact, vacation rentals will remain pretty profitable. People from across the US and all over the world are looking forward to traveling. And most of these travelers prefer to stay in short term rentals than in luxury hotels.
That being said, the profitability of a short term rental property depends on several factors. You need to consider many variables to become a successful short term rental owner. For instance, you must choose the right neighborhood for your rental. Also, consider the maintenance services and upfront fees to ensure your investment yields a better return.
When you compare two similar properties in the same neighborhood, a short term rental will typically generate at least two to three times the rental income of a long term annual rental. Furthermore, holiday rentals provide more possibilities to update the rental cost, making them an ideal inflation shield.
Renting for a short time offers other advantages. They can, for example, help you pay for your housing bills. Short term rentals might be an excellent alternative if you live in a city and need extra income without buying an additional property.
Furthermore, short term rentals are a good option if you want a second home in a different location. You can use it as your personal vacation home for yourself or your family. Because of the numerous advantages, a short term rental is an excellent investment.
Here are a few reasons why you should consider investing in short term rentals:
1. Higher Income
A well-marketed short term rental property in a desirable location will always beat a long term rental property in terms of profitability. It’s crucial to perform your research on rental demand in the neighborhood. However, there’s no denying that vacation rentals generate more cash than standard annual leases.
As mentioned, the short term rental market is a seasonal business. That is why it’s important to be prudent when pricing your property. Typically, during peak holiday seasons, when the demand is the highest, you should price your property higher than usual. It allows you to generate extra cash that will help you throughout the low season.
2. Easier Maintenance
Regarding short term rental property management, short term rentals enable you to manage your investment better. With shorter stays, you can get in and get the house cleaned more frequently, detecting any maintenance problems before they become too serious to fix. Many vacation rentals charge a cleaning fee, so you won’t need to pay for any maintenance yourself.
Additionally, since guests only stay for the short term, they are less likely to damage the property during their stay. Additionally, most short term rental guests are visiting the area for leisure or business purposes. Most of them are only staying at the property to rest at night, which means the property will experience less wear and tear due to the guests’ stay.
3. Control and Flexibility
You have total control over the calendar and when your short term rental is available. If you decide to undergo kitchen repairs, you can cut off a month on your schedule and complete the project when it is most suitable for you. If you want to use the property yourself, you can block off your preferred schedule so it will only be available when you want it to be.
You are also allowed to change the pricing as you see appropriate. If you wish to charge more per night after your kitchen makeover is finished, you can do so. If potential visitors want to stay for a month, you can alter your rental rate to be more competitive. Most individuals prefer staying at short term rentals than in hotels because it gives them more freedom and flexibility.
4. Value Appreciation
Aside from the monthly income flow, your property’s value will increase yearly. The longer you keep your rental property, the more valuable it will be when you choose to sell. Interest rates can go up or down, but real estate does not lose value.
It’s important to note that choosing the right location for your rental property is crucial. There are real estate markets that have a high appreciation rate. It means your property’s value will increase significantly in just a few years. In some markets, however, appreciation rates may be slower. It may take several years for you to actually see a significant difference in the value.
5. Tax Advantages
Short term rentals offer a variety of tax benefits that make them lucrative. For starters, if you purchase the property through a loan, the interest is tax-deductible. Also, let’s not forget the additional deductions for upkeep, management, advertising, insurance, and other expenses. Moreover, you can also deduct the cost of the property’s depreciation.
6. Cultural Interactions
Owning a short term rental home allows you to meet people from diverse cultural backgrounds worldwide. It can be appealing if you enjoy meeting new people and learning new stuff. Additionally, you can also invest in different locations other than your home city. It is a great way to explore other locations and people—including both locals and tourists.
7. High Market Demand
Another reason why you should buy vacation rental property is that there is an expected high demand from travelers from across the country and around the world. As mentioned earlier, people are still eager to travel despite the anticipated minor recession in 2023. In addition to leisure travelers, you can also expect rental demands from business travelers.
Keep in mind, however, that not all locations are ideal for short term rental investments. To enjoy the high demand for short term rentals, it’s important to find a location where there are plenty of attractions. Also, investing in an area where business districts are close is a good idea. You can easily attract guests who are visiting either for leisure or business.
8. Ease of Access
Unlike other investments, you can apply for a loan to buy the property and use the borrowed funds to generate additional income. It’s especially beneficial for first-time investors who don’t have a lot of cash. You can generate wealth much quicker when you understand how to use debt efficiently and manage a short term rental agreement.
In addition, there are several properties for sale that can be good candidates for short term rentals. When searching for the best investment property for sale, make sure to access its financials, as they can help you make the right decision.
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