Short Term Rental Investment Property

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Pros Of An Airbnb Investment

How to Analyze a Short Term Rental Investment Property

Airbnb investing has many upsides. Here are the pros of an Airbnb investment.

More Profitable Than Renting

Several studies have shown that Airbnbs are more profitable than renting. This point is demonstrated by the considerable success of Airbnb over the last decade or so. Of course, to access these higher sums, Airbnb hosts need to do a bit more work marketing, cleaning, and dealing with the administration involved in renting a short-term property .

When renting out an investment property, much of the work happens annually, and from there, investors sit back and collect rent each month.

Flexibility of Property Use

Another plus with buying a shiort-term rental is that you have a lot of flexibility over the property. For example, you can choose when you rent the property out and when you use it. For a lake or beachside property, you can rent it out over the summer, but keep a week free so you and your family can enjoy it.

Additionally, you can choose to rent it out over longer or shorter periods, or weekends only.

Ease of Marketing With the Airbnb Platform of Property Use

Once youve taken photos and posted some information about the site, you can sit back and let Airbnb connect you with clients. Traditional methods of marketing properties, like short-term rental websites or listings pages, often charge a fee to post an ad.

With sites like Airbnb or VRBO, your home is marketed to Airbnbs huge customer base.

Airbnb Acts as a Facilitator

Putting It All Together

Now that weve gone over how to estimate your revenue and expenses, its time to analyze the deal. And lucky for you, you can use the calculator I made to do this in under five minutes.

Simply adjust the green cells on the inputs tab.

And then click on the Results tab to get your analysis! Its as easy as that. From there you can evaluate the results the same as you would for a normal rental, cash-on-cash return, and compound annual growth rate being my personal favorites for looking at the long-term returns on an STR.

Taking on this new strategy was a really interesting process for me, but I am so glad I did it! My property has been doing really well, generating great returns, and staying really hands-off because I hired a full-service PM company.

I also think it came out looking great.

Assess The Break Even Metrics

The next step is to calculate your net income what will you have left from your host revenue after covering all the costs you have projected. Obviously were looking for profitability as a starting point in your model otherwise youll need to go back to the drawing board and start over.

If youre projected net income is showing good profitability, then thats a great first step. Your next step should be to calculate your break even point at what level of revenues will your property just make enough to cover your costs? You absolutely want to avoid buying a vacation rental property that is loss making, so backing out what you need to make to cover those costs is a good idea. This analysis should also involve calculating the implied occupancy rates and prices that would make you just break even.

With those break even occupancy rates and ADRs, check out our historical Vrbo & Airbnb stats and check how frequently your competitive set saw their metrics drop below that break even level. If there are prolonged periods of below break even levels, which is common in highly seasonal markets, then consider your cash flow in those periods. Youll need to cover those costs out of pocket during those weaker periods.

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Weigh The Risks Vs The Rewards

In every financial decision, you must determine if the payoff is worth the potential risks involved. Does investing in real estate make sense for you?

  • Because your income is passive, notwithstanding the initial investment and upkeep costs, you can earn money while putting most of your time and energy into your regular job.

  • If real estate values increase, your investment also will rise in value.

  • You can put real estate into a self-directed IRA .

  • Rental income is not included as part of your income that’s subject to Social Security tax.

  • The interest you pay on an investment property loan is tax-deductible.

  • Short of another crisis, real estate values are generally more stable than the stock market.

  • Unlike investing in stocks or other financial products that you cannot see or touch, real estate is a tangible physical asset.

  • Although rental income is passive, tenants can be a pain to deal with unless you use a property management company.

  • If your adjusted gross income is more than $200,000 or $250,000 , you may be subject to a 3.8% surtax on net investment income, including rental income.

  • Rental income may not cover your total mortgage payment.

  • Unlike stocks, you can’t instantly sell real estate if the markets go sour or you need cash.

  • Entry and exit costs can be high.

  • If you dont have a tenant, you still need to pay all the expenses.

What Type Of Property To Buy For An Airbnb Investment

Home Ownership Matters  Infographic: Short Term Rentals

Now you know the best places to buy Airbnb property, its time to think about the type of property.

There are several types of properties:

  • City centre apartments, condos or houses in large cities.
  • Remote destinations, that are secluded from the hustle and bustle of daily life.
  • Vacation towns like Kelowna and Canmore that attract visitors year round
  • Mountain resort style areas like Kicking Horse or Whistler.
  • While we do operate a few short-term rentals in Calgary city centres can be difficult due to house pricing and regulations. Cities like Vancouver have imposed regulations to prevent most short-term rentals because of their housing crisis.

    Vacation towns and mountain style resorts typically have existing short-term rental regulations in place. This reduces risk.

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    Is Buying A Condo A Good Investment

    Condos can be a good option for rental property buyers because they tend to be more affordable than comparable single-family homes, and they are often located in desirable locations . Additionally, condos often have fewer maintenance demands because owners aren’t responsible for taking care of the grounds or the building’s exterior.

    Still, financing a condo can be trickier than getting a mortgage for a single-family home. For instance, most lenders require that at least 50% of the units are owner-occupied and that the homeowners association is in good shape. It’s also important to consider potential special assessments. You may be able to swing the monthly dues with no problems, but if the building needs, say, a new roof, you may owe a special one-time payment that could be thousands of dollars.

    The Importance Of Cash Flow

    If you are indeed using mortgage financing to buy a property, this leverage allows you to amplify your returns. In our above example, you could buy the property in cash for $300,000 and achieve a rate of return equal to the Cap Rate of 10%.

    Alternatively, you could finance your purchase with a mortgage and only pay upfront 20% of the property value . You will then be earning the CoC Return of 33.3%, being sure to include your mortgage payments in your operating expenses.

    Its clear the main advantage of mortgage financing is that with a smaller initial investment, you can secure much higher rates of annual returns on the same property.

    The downside with using mortgage financing for a short-term rental investment is that you will then have the risk of foreclosure if you dont keep up with your mortgage payments. This can happen for a number of reasons, but the most obvious would be if your average occupancy rate was lower than you expected and your property didnt generate the rental income needed for you to be able to meet your mortgage repayment obligations.

    Thats where cash flow comes in. Your monthly rental income minus your monthly expenses is the cash that is generated each month to help you pay these obligations. Choosing a property with enough positive cash flow is crucial.

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    Airbnb Investment: The Guide To Buying A Vacation Rental Property

    With the rise of the short-term rental industry, buying a property for the purpose of putting it on the vacation rental market is an increasingly appealing option to a variety of investors. Airbnb real estate investing can be a lot of fun, but is not without its challenges.

    Here at AllTheRooms, we talk to people looking to invest in an Airbnb property every day. Were constantly listening to their feedback and working on new tools and features to help them find the right vacation rental market and a profitable Airbnb rental property.

    When buying a short-term rental investment property, people tend to fall into one of two groups:

    Group 1: Investors Who Know What Market They Want To Invest In The vast majority of investors we talk to already know where they want to buy a vacation rental and they just need to work out which property to buy. These investors typically buy an Airbnb property in a market in which they want to own a vacation home for their own use either now or in the future, or in a market they feel they know well.

    Previously Occupied Vacation Properties

    How to analyze a Short-Term Rental investment property (Deal Analysis)

    The purchase of a vacation property that has been occupied as a place of residence or lodging since it was constructed or last substantially renovated is taxable where the vendor has claimed input tax credits for the GST/HST paid or payable on the last acquisition of the property, or in respect of improvements made to the property since its last acquisition.

    The purchase of a vacation property is also taxable where the property is not used primarily as the vendor’s place of residence and all or substantially all of the rentals of the property are for periods of less than 60 days . As a result, most purchases of previously occupied vacation properties that were placed in rental pools are taxable.

    If the vendor is an individual or a personal trust and is not a registrant, the purchase of a vacation property is taxable where the property is capital property used primarily in a rental-income business carried on by the vendor with a reasonable expectation of profit.

    If the vendor is an individual or personal trust that is a registrant, the purchase of a vacation property is taxable if the property was used primarily in making taxable short-term rentals, even though the individual or personal trust may not be engaged in a business carried on with a reasonable expectation of profit.

    Unless otherwise noted, the remainder of this info sheet will focus on the taxable purchase of a vacation property where the property is for use in making short-term rentals.

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    Can A Vacation Home Be Used In A 1031 Exchange

    Unless a property owner works as a professional accountant, understanding tax code and all the forms involved with property taxes can feel like a bad dream. Knowing the ins and outs of taxes for a vacation property might even feel a bit nightmarish. Especially when it comes to section 1031 of property taxes.

    A 1031 exchange just means exchanging one income property for another one. There are a few benefits to exchanging investment properties, but first, a property owner must qualify for a 1031 exchange. Even during this first step, there is some confusion among property owners, mainly because there is a variety of opinions on these property swaps.

    When done properly, though, it is entirely possible to use a 1031 exchange for selling and buying or should we say swapping a vacation home. There are a lot of grey areas with this type of property exchange, so read about the specific details below.

    Basics of the 1031 Exchange Procedure

    When reading the official documentation from the Internal Revenue Service on 1031 exchanging, there is very little clarity on the procedure. This is made obvious through this IRS statement:

    No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.

    Benefits of a 1031 Exchange for a Vacation Home

    What Is The Bottom Line

    Do your due diligence upfront and remain aware of the relevant law. Analyze the financial scenario using conservative numbers not only best-case scenario numbers.

    PRO-TIP Taxes are a critical part of remaining legally compliant. The complexity of these changing laws makes it a prudent idea to consult with a tax expert.

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    An Interesting Option If You Can Stomach The Fees

    The North Carolina Beach Rental Portfolio allows the average investor to build a vacation rental portfolio for a fraction of the cost. However, it comes with a different cost in the form of high management fees.

    Still, if you dream of owning a vacation rental property, this might be a good alternative, since you can start very small. Republic has a decent track record of bringing attractive real estate deals to its marketplace, making this one worth a closer look.

    Build Your Own Website For Getting Direct Bookings

    The Short

    Another way to reach new guests and increase your occupancy is to create your own business website to receive direct bookings. Having a business website formalizes your business in a more concrete way than just having listings.

    You can include information about your property on your website, as well as additional photos, and links to your social media channels. Also, you will have access to guests data which will enable you to make them recurring visitors by means of vacation rental marketing.

    About the Author

    Phoebe Gunning is a content writer in the Marketing Department at iGMS. She is passionate about the vacation rental industry, notably helping hosts make the most out of their vacation rental businesses. Some of her hobbies include reading, traveling and drinking a good cup of coffee.

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    Is A Vacation Rental Property A Good Investment

    The overall demand for short-term rentals is booming.

    Vacation rentals have been around since the 1950s. And with the rise of platforms like Airbnb and VRBO, popularity skyrocketed.

    Then came the pandemic.

    People started working from home, then realized home could be anywhere like a cozy Airbnb property up in the mountains.

    In fact, the number of digital nomads in the U.S. has more than doubled over the past couple of years. Remote workers are using short-term rentals to work while traveling the country.

    Compared to a hotel, a quality Airbnb rental offers more amenities, convenience, and comfort for remote workers. Its also easier to keep clean and sterile, which is a dealbreaker for many renters.

    Combine these ingredients, and you have the perfect recipe for vacation rental investment success.

    According to AirDNA, short-term rentaloccupancy hit an all-time high of 79.4% in July 2021. With high demand and limited supply, Airbnb prices are soaring up 35% from Q1 2020 to Q1 2021.

    In other words, its one of the best times in history to own a short-term rental property.

    That said, not everyvacation rental property is a good investment, so always evaluate your opportunities on a case-by-case basis.

    Easily Enforce Property Rules And Regulations

    Lets face it: No matter how clearly you set rules and policies for your guests, some guests will disregard them entirely. But with proptech, you can better maintain security and monitor activity on your property from afar.

    With cloud-based video intercoms, security cameras, and alarm systems, youll have access to real-time footage and data on whos coming and going from your property. So, if your property has a strict visitation or occupancy policy per unit, you can enforce those rules by addressing any unauthorized access activities with your guests.

    Whats more, you can facilitate amenity access based on whether your guests have paid for those services. You can customize access credentials for each guest you host according to which services theyve paid for and requested. For example, you might have one guest who paid for fitness room access and another guest who hasnt. So, each of those guests will have a different set of access permissions.

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    The Nuances Of Financing Vacation Rentals

    Investors typically turn to alternative lenders like Visio Lending for a few reasons. The first situation is if they are self-employed, including owning their own business. Another reason would be that they already own too many properties to qualify for another conventional mortgage. Finally, and importantly, they may turn to an alternative lender because they want to own their investment properties in a legal entity to protect their other assets. That is not allowed with conventional mortgages. Here are some of the key nuances of financing an STR or vacation rental:

    How To Find The Best Short Term Rentals Use The Rental Property Calculator

    Bend Oregon Short Term Rental INVESTMENT PROPERTIES

    How to make money in real estate? Choose one of best real estate investment strategies and the best short term rentals. Using a rental property calculator is a sure way of finding the best real estate investments. A rental property calculator is an online tool which helps you in performing investment property analysis quickly and accurately. The tool computes various real estate metrics such as cap rate, cash on cash return, return on investment, etc. Mashvisors rental property calculator shows you Airbnb occupancy rate as well as potential rental income. In addition, Mashvisors helper presents you with insightful information about the investment property itself as well as its surrounding areas. This is of key importance when trying to find the best short term rentals. It is also advisable to perform real estate market analysis and explore the market in depth before financing a rental property.

    Last but not least, do not forget that the best short term rental properties are not necessarily in the hottest real estate markets. This is due to the fact that such markets are typically more expensive and, thus, the profit you generate is lower. Our advice is: choose a profitable and suitable real estate market for short term rentals. Further, use Mashvisors rental property calculator to find and buy the best properties. Of course, the way you present and manage your Airbnb rental is crucial. So, put forth a lot of effort if you want it to be successful.

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