Short-Term Rentals: Investing in Property
Real estate makes a great investment vehicle for the right person. It provides relative stability over the equity market and lets individuals exercise a great deal more control over investing in property. You can even purchase real estate through a self-directed IRA, provided that you adhere to certain IRS regulations.
There are basically three different means of investing in property. Long-term investment properties are those where you hold on to the assumption that market value will increase over time. Meanwhile, you collect rent from occupants and use some portion of this money to pay maintenance, property tax, mortgage, and other related expenses.
If you have hands-on experience in the contracting or financial industries, a second investment option is to “flip” houses that you purchase for less than market value and rehab before selling them at a higher price. This can be a highly lucrative source of supplemental income for people who possess the right skill set.
The third option is to buy short-term rentals, otherwise known as vacation homes, that renters lease for short periods of time. Short-term rentals have become tremendously popular in the last decade thanks to hosting companies like Airbnb and Homeaway, which allow owners to advertise their own homes without the need of working with a leasing agent.
Why Choose Short-Term Rentals?
The main appeal lies in the much higher profit margin; you can double or triple your return on the investment by renting to short-term tenants.
In most cases you can enjoy the property yourself without incurring tax liability if you limit your stay to two weeks a year. Moreover, any additional time you spend renovating or restoring the property doesn’t count toward that two weeks. For DIY-ers who have limited cash on hand, investing in property can be a cost-effective way to spend time in a favorite location as well as a source of supplemental incomes.
What Qualities Should You Look for in Short-Term Investment Properties?
Where you buy the property is going to be the single biggest factor in its earning potential. Beachfront properties have a much higher potential to attract short-term renters, as do properties located in chic downtown neighborhoods and areas where there are tons of tourist and recreational opportunities.
The challenge for investors is going to be cost. If the property is in a desirable location, the purchase price will be higher. Consider hiring a real estate agent with a good track record for predicting trends, so that you can buy a place in the next hot tourist stop, or be willing to devote a lot of time and patience to scouting around your target market waiting for a bargain to turn up.
Next to location, amenities are key. You can convince families to rent a farmhouse in the middle of the countryside if there is a swimming pool on the premises and horseback riding nearby. For urban apartments, having a luxurious bathroom and double-paned windows increases appeal by turning your place into a cozy retreat guests can return to after a day of sightseeing.
In other words, when investing in property, especially short-term rentals, you need to consider – and in some cases, anticipate – the needs of your target demographic. Business through sites like Airbnb is generated in large part by guest reviews. Amenities that sync with the ambiance of the property can significantly increase your profit margin.
Short-term rentals can be a risky proposition with many hidden costs. Bad weather, or an economic downturn, may keep guests away for an entire season or more. If your property increases in value too much, you could face an expensive increase in property taxes. Renting short-term also requires you to carry expensive liability insurance that will increase your insurance rate. Also, if you are not nearby or available to supervise, you will have to hire a housekeeper and caretaker to maintain the property in your absence.
One final consideration involves local ordinances. Some cities and municipalities have cracked down on the number of investment properties allowed in order to protect year-round residents from potential noise and disruption. Make sure you can operate the property as a short-term vacation rental before you close on the purchase.
About Century 21 Peak
CENTURY 21 Peak serves the real estate needs of greater Los Angeles, with offices in Granada Hills, North Hollywood, Upland, and Warner Center. Our team of experienced real estate agents use the SMARTER. BOLDER. FASTER. approach to identify promising investment opportunities and help you achieve the best possible value. Follow Century 21 Peak on Facebook for market updates, behind the scenes tips and tricks and more.