LIVING WELL—Real Estate:
Short-term Rental Investment Properties: Are They Really a Great Moneymaker?
[March 2020 | By Ninah Hunter, Real Estate Editor]
The sharing economy has taken the world by storm. As a result, many homeowners with a vacation home have turned it into a short-term rental (STR). If you already own a second home, it may make sense to rent it out short-term for part of the year when you’re not using it. But if you are looking to buy another home solely for that purpose, consider the following.
Expenses. Your expenses will be considerably higher than for a long-term rental in the way of license fees, sales and lodging taxes, marketing costs, and cleaning costs, wear and tear, and repairs.
Consumable items like kitchen, laundry, and bathroom supplies will need to be provided and replaced regularly, as well as such items as towels and bedding.
Although you may be able to charge a higher nightly or weekly rate, you may experience a much greater vacancy rate than a rental that is rented 6 months or a year at a time.
Location. The maxim “location, location, location” equally applies to an STR, if not more so. Your second home, or the one you are looking to buy, should be in a location that is a popular destination for tourists and travelers.
Competition is also an important consideration. If your contemplated purchase is in a town where many STRs already exist, you may have a harder time keeping it rented.
Area support services are also important to consider, such as restaurants, shopping, entertainment, attractions, walkability, parking, and internet and cell service. The less these amenities exit, the less likely your STR will attract a lot of tourists or business travelers.
Local Zoning and Regulations. Most municipalities now have some form of regulation that may restrict or even prohibit STRs. These regulations usually require a special license that must be renewed (and paid for) on a regular basis, and the number of STR licenses that can be issued may be limited. You’ll also have to pay local lodging and sales tax, although some platforms like Airbnb will collect those from the guest and pay them for you.
STR regulations generally require that a manager be able to respond within a short period of time, typically 20 to 30 minutes, to complaints by guests or neighbors. So, if you don’t live nearby, you’ll have to hire a management company, which can be a significant expense.
Many municipalities are beginning to resist or restrict STRs due to affordable housing concerns. Colorado Senator Bob Gardner recently submitted Senate Bill 20-109 that would classify STRs as commercial property for real property tax purposes. That would nearly triple real property taxes on an STR! Although it’s doubtful it will pass this time around, it’s a potential risk in the future.
If you consider the pros and cons and crunch the numbers, short-term renting a second home may prove to be a great way to supplement your income or pay for your vacation home. If it proves not to be, or is not possible due to zoning prohibitions, then what’s the alternative?
Rent it out long-term! It might actually result in greater net income, less headache and wear and tear, and a warm feeling that you are helping the affordable housing crisis in your community.