Many property investors today are considering putting their hard-earned money into real estate STR. But is it still a wise investment in 2023?
Real estate investments are always seen as an almost-certain way of building your wealth and obtaining multiple streams of income. We can see many smart investors becoming millionaires and changing their fortunes through real estate investments.
Table of Contents
- What Does STR Mean in Real Estate?
- Pros of Investing in Real Estate STR in 2023
- Cons of Investing in Real Estate STR in 2023
- How to Invest in a Real Estate STR Property
However, the past few years brought a lot of confusion to investors. With surging inflation and rising mortgage and interest rates, financial experts and investment advisors predicted an economic downturn in the offing. As a result, many prospective investors took to sitting on the sidelines and watching everything unfold.
However, we’re not seeing a slowdown at the moment. While mortgage and interest rates aren’t going down any time soon, they’re at least cooling off. In addition, the demand for real estate properties is also rising.
They are good signs to prepare to invest in real estate in 2023. Short term rentals (STR) are becoming an investor favorite for many reasons.
In today’s blog, we’re going to look at everything you need to know about investing in real estate STR in 2023.
What Does STR Mean in Real Estate?
Short term rentals are rental properties that are leased out to a tenant (usually referred to as a guest) for less than 30 days. Usually, the properties are well-furnished to appeal to the guest and give them a homey feel.
Short term rentals are also referred to as vacation rental properties. It is because they’re more likely to do well in busy tourist cities where visitors go for vacations.
They’re usually advertised on home-sharing platforms, where guests can search for vacation rentals in the city of their choice. The most common STR platforms are Airbnb and Vrbo.
Why do visitors choose STRs instead of hotel rooms, motels, and hostels? It is because vacation rentals feel like home. They’re just like regular homes or condos. Guests can cook their own food, do their own laundry, and don’t need to check out at a particular time.
Some property owners also rent out sections of their home, such as an extra bedroom or garage, to guests. In fact, some cities require the STR owner to live in the property during the visitor’s stay.
STR vs. LTR
Short term and long term rentals are often compared for many reasons. Understanding the differences between the two will help you choose the most ideal investment strategy for you.
Let’s look at the differences and similarities between short term and long term rentals:
Long term rentals are leased by tenants for a long period, say six months or one year, where they pay an agreed monthly rental rate based on the lease agreement. Such rentals give landlords an assured rental income every month, assuming the tenants pay their rent on time.
If a landlord leases their long term rental for $1,200 a month, they can expect an annual gross income of $14,400. Understanding how much you can expect makes it easier to budget for expenses, qualify for financing, and anticipate cash flow.
Short term rentals don’t come with a lease agreement. Your guests pay the nightly rate for the number of nights they’re staying in your property. Once they check out, you lease out the property to other guests at the same rate or a different one.
Several factors affect the short term rental income stream, including the average daily rate, competition from other STRs and hotels, and the average length of stay for every booking. The market might change during that time, or you might experience extended periods of low bookings.
As an STR owner, you need to know that the property maintenance and cleaning responsibilities fall on your shoulders. Since you’re frequently turning tenants over, they can be a lot of work. Long term rental tenants treat the property as their home, so they maintain and clean it regularly.
STR owners also need to constantly market their properties to generate more bookings from guests. Long term rental owners don’t need to worry about marketing and promoting their rentals.
Lenders love consistency. Long term rental landlords find it easier when it comes to accessing financing. The incoming cash flow usually convinces lenders that it’s enough to offset property expenses and mortgage payments.
Conventional financing options for a long term rental usually offer favorable interest rates. Borrowers only need a downpayment of at least 20% of the property’s purchase price.
Due to the inconsistency and unpredictability associated with the short term rental industry, it can be harder to get financing to invest in an STR compared to obtaining a loan for a long term rental. STR owners may need to pay cash for their properties or consider alternative sources of financing.
Some options for STR owners include a Home Equity Line of Credit (HELOC) and cash-out refinance.
Related: 7 Best Loans for Investment Property in 2023
So far, long term rentals may seem like the best investment strategy for investors. But there are plenty of reasons why you should consider putting your money in an STR.
When it comes to the exit strategy, long term rentals are harder to dispose of due to the limited pool of investors willing to purchase properties with existing tenants. While selling a property with a tenant in place isn’t always a drawback, the tenant may be compelled to leave. It often happens if the new landlord wants to convert the property into an STR or use it as their primary residence.
On the other hand, short term rentals don’t come with existing tenants. You open up your property to investors who may be looking for an LTR, STR, or primary residence.
Always come up with an exit strategy even when the economy is doing well, just in case you need a quick way out and to recoup your investment.
Let’s look at some other reasons why you should invest in an STR in 2023 below.
Pros of Investing in Real Estate STR in 2023
Here are more reasons why STR investing could be your best bet in 2023:
Pro 1: Industry Growth
Even with a potential recession, the STR industry is expected to be one of the least affected industries.
According to the US Travel Association, spending by US travelers reached $93 billion in February 2023. It represents a 5% increase from the spending in 2019 and 9% in 2022. In addition, leisure travel doesn’t seem to be declining any time soon, with more than 55% of Americans planning to prioritize leisure travel.
The above statistics are an excellent indicators that the STR industry will continue to be profitable in 2023. As travel numbers and expenditure continues to grow, many will be looking for affordable, flexible, and comfortable accommodation, making STRs a popular option.
Pro 2: Higher Income
A well-marketed STR located in a profitable location with a good occupancy rate will always beat long term rentals in the same neighborhood when it comes to monthly rental income.
For example, a long term rental in a certain neighborhood can generate a monthly income of $1,500. If the same property was rented out as a vacation rental, it could generate up to $4,000.
Keep in mind that short term rentals are undeniably more demanding when it comes to property maintenance, which in turn drives the property expenses up. But even considering the costs, the net income is always higher than if you rented the property long-term.
However, investing in any STR property in any market isn’t an assurance that it’ll generate more profits. There are a lot of variables to consider, such as location, average nightly rate, occupancy rate, seasonality, and more. In some markets, it’s possible that long term rentals bring in a higher monthly income than STRs.
That’s why it’s important to carry out in-depth research before investing. You can network and speak to people who own and manage vacation rentals in your desired market to gain an insight into what you can expect.
But there’s a better way to carry out your research. Stick with me to the very end to find out how.
Pro 3: Flexibility
One of the main reasons why STR properties are popular with investors is the amount of control and flexibility they give them. As a vacation rental owner, you enjoy the freedom to lower or raise your nightly rates depending on the season and demand.
Of course, you need to come up with a strategic and dynamic pricing strategy to ensure you maximize your profits during high seasons and encourage more bookings when the market is dormant.
For example, you can increase your rates once you’ve made improvements on the property. You can also offer discounts for guests who want to enjoy a longer stay.
Short term rentals also give you flexibility when it comes to your calendar. You can block off some nights when you desire to use the property yourself, for a vacation, to host friends, or when traveling for business.
As such, your second home can be a good short term rental.
Pro 4: Frequent Maintenance
There are always two sides to a coin. While vacation rentals require more maintenance, there’s a brighter side to it. You manage your property better by getting it cleaned and maintained frequently.
You can also get into your property each time a guest checks out, inspect it, and correct any arising issues before they morph into serious problems that are costly to fix.
Also, since guests only stay for a short while, they’re less likely to damage your property. Remember, your guests are visiting your location for leisure or business purposes. They’re only booking your property to have a place to rest at night. Your property experiences less wear and tear.
Pro 5: Value Appreciation
Real estate properties are known to appreciate in value. Interest rates can go up or down, but your property will barely lose its value.
The longer you keep your property, the more its value will appreciate. It means you’ll fetch higher profits from it when you decide to sell much later.
Also, note that your property’s value appreciation rate is determined by your location. Some markets see a higher appreciation rate than others. Your property’s value will appreciate by a huge margin in just a few years should you invest in such markets.
Related: Is It a Bad Idea to Invest Solely for Real Estate Appreciation?
Pro 6: Diversified Risk
Short term rentals are less risky since you attract a diverse range of tenants. With long term rentals, you carry more risk should your tenants fail to pay rent or delay making payments. You won’t make any rental income unless you evict them, which also costs money. It’s even riskier if they damage your property since you’ll be paying from your pocket.
If you own an STR, you don’t need to worry about evicting a tenant. You host many different tenants every month who pay before checking in, so you won’t go months without receiving rental income.
In case a guest causes damages to your property, some booking platforms offer a special kind of insurance for properties damaged by guests. In some instances, the guest is liable for the damage.
The best thing is that the damage with vacation rentals is barely extensive. It’s usually small things such as broken plates or lamps.
Cons of Investing in Real Estate STR in 2023
While short term rentals seem like a perfect investment strategy, they definitely aren’t error-free. There are a few potential downsides to investing in one.
Here are some cons you need to consider before you purchase an STR:
Con 1: They’re Expensive
If you want to purchase a rental property to use as a short term rental, it’s important to understand that it’s not the only investment that you’ll need to make.
Remember, vacation rentals are used by guests who forego hotels, motels, and hostels in favor of short term rentals. As such, you want to make them feel comfortable and at home.
It’s up to the short term rental landlord to do all the furnishing. You must purchase all the furniture, appliances, and decorations. Besides, guests also expect additional amenities, such as WiFi, a coffee maker, towels, and so on.
If you’re to list your vacation rental on platforms such as Airbnb and Vrbo, keep in mind that they might require you to stock up on basic toiletries and cleaning supplies.
Short term rentals are also quite expensive when it comes to operating expenses. Remember, all the maintenance and repairs responsibilities fall on the landlord’s shoulders. STR guests don’t pay the bills.
All utility bills, such as water, power, internet, and gas, must be paid from your income. If you aren’t making enough, you’ll need to pay for them from your pocket. It can be a big issue if your guests aren’t focused on conservation.
Con 2: More Demanding Maintenance-Wise
All your guests expect to come to a clean space at the bare minimum. You must clean your property between every tenant. It can become too demanding and exhausting if there are guests who are only staying for a night.
Besides, if you’re not in a position to clean the property yourself, you might need to hire a professional cleaning service, which ends up adding to the operating costs. It entirely depends on whether you want to remain active in your investment or make it passive.
It is one important thing to consider before buying a vacation rental property. Decide whether you want to be hands-on and take it as a full-time job. If you have other demanding engagements, you might need to treat it as a passive investment.
Con 3: Monthly Income Isn’t Guaranteed
No single vacation spot in the US can be considered a year-round destination. Regardless of how high the occupancy rate might be, the truth is that there are high and low seasons. It affects your booking rate, which in turn affects your rental income.
At best, you can expect to reach your maximum income potential during the high season. During the low season, you can expect lower traffic. At worst, your STR might become stagnant and turn into an expense rather than an asset.
The best way about it is to put a dynamic pricing strategy in place. A dynamic pricing strategy is one that changes based on seasons. You can increase your nightly rate to reflect the demand during the high season and lower it during the low season to encourage more bookings.
All in all, you must consider that rental income from a vacation rental is unstable before purchasing one.
Con 4: Unfavorable Laws and Regulations
Short term rentals have become extremely popular that they’ve displaced some long term tenants. STR listings and purchases have also affected the property selling and renting markets. For the said reasons, there has been a lot of pushback.
The pushback has resulted in increasing regulation of the short term rental industry. Some cities have strict laws with tough repercussions, while others have banned vacation rentals outright. Owners may also need to collect occupancy tax, just like hotel rooms.
In addition, some homeowner’s associations may also have their own regulations. Some HOAs prefer that all properties within the association only be used as long term rentals. They argue that short term rentals have no way to guarantee the security of the association because of the many guests coming in and out.
Other HOAs may impose a cap on the maximum number of nights you can rent out your property as a short term rental.
For this reason, be sure to carry out in-depth research on your local vacation rental laws and regulations to avoid falling into trouble with the local authorities or your HOA.
How to Invest in a Real Estate STR Property
Now that we’ve looked at everything you need to know about investing in short term rentals in 2023, how do you actually get started?
Here are some steps to follow when investing in STR real estate and ensure you start on the right foot:
Set Clear Goals
Before kicking off your search for a profitable STR property, you need to define what your goals are. This step is important since it helps you create a business plan. Your business plan will define where you are today, where you want to be, and what steps will help you achieve these goals.
Every investor has a unique set of goals. Some want to build a diversified portfolio to help them retire early. Others want to simply generate a secondary stream of income. Others may also want to have a vacation home that generates income when they’re not using it.
Your goals will also determine the ideal location for you to invest. If you want a property that generates the maximum potential profit, then you’re better off investing in a tourism hotspot. If you want to buy a second home that you can retire to, then the location needs to match your dreams.
Work With Professionals
Working with a team of professionals is extremely important, especially for beginners. You need people to hold your hand and make the investing process simpler and seamless. Hire a team of professionals to help you find, make an offer, purchase, and manage a profitable STR property.
Your team of professionals should include a real estate attorney to help you navigate the legal aspect of transactions, contractors who can respond swiftly upon request, and property managers with hospitality experience. Hire a cleaning company to ensure the property is cleaned every time a guest checks out.
Also, find a real estate agent with short term rental experience. A knowledgeable agent will help you save both time and money. To help you understand your agent’s experience when it comes to STR properties, ask them the following questions:
- How many STR properties have you sold?
- How do you evaluate the property’s fair market value?
- How do you estimate a property’s potential monthly revenue and ROI?
- Are you certified as a short term rental agent?
Carry Out a Comprehensive Market Analysis
Owning a vacation rental is similar to owning a hotel. You must think like a hotel business owner when looking for a profitable market to invest in. Remember, we said that investing in a random STR property located just anywhere doesn’t mean that you’ll get good returns.
If you have a certain market in mind, the best place to start is by researching the local short term rental laws and regulations. While you want to understand whether STR properties are legal in that location, you also want to know the tax implications associated with owning and operating an STR.
This is why we stated that you need to find an agent who’s well-versed in the vacation rental market in that specific market. If you’re upfront with your agent about your needs, they’ll help you find a property that fits your requirements and also generates enough to settle the property expenses.
The market’s political climate towards STR properties is also important. Ask the following questions to evaluate the political climate:
- How long have vacation rentals been legal?
- Are there any current bills that could affect the market if passed?
- Are there permit fees?
- What are the registration requirements?
- Am I required to pay transient occupancy taxes on annual revenue?
Once you’re done evaluating the political climate, you can now start analyzing the location further. Your analysis should include:
- Proximity to tourist attractions
- Business locations
- Access to roads, airports, and public transport
- Demand for STR properties
- Crime rate
- Number of active vacation rentals
While the above data points and metrics are extremely important, they can be a tough nut to crack, especially if you don’t know where to get started. But Mashvisor has the perfect solution.
Related: How to Do a Competitive Market Analysis in Real Estate
Mashvisor’s Market Finder
The Market Finder is one of the latest tools from Mashvisor. It gives you an aerial view of the US real estate market to help you choose the most ideal locations for your STR investment.
The tool lets you zoom in on your desired locations to see whether they match your search criteria and what more they can offer. The best thing is that it gives you access to other Mashvisor tools so that you can see whether your desired location is indeed worth your time and money.
For example, it gives you access to the heatmap tool, which uses colors to show you how the location performs based on your search criteria.
Speaking of search criteria, the tool comes with various filters that allow you to customize your search criteria. They include:
- Mashmeter Score
- School Rankings
- Crime and Safety
- Home Value
- Property Type
- Monthly Rental Income
- Cash on Cash Return
- Cap Rate
Sign up today and access your 7-day free trial to start analyzing your next investment market!
Conduct an In-Depth Property Analysis
Once you have a few markets with great STR potential, it’s now time to search for properties in those markets and analyze them. Mashvisor’s Property Finder tool is the best listing platform to help you locate the most profitable vacation rental properties.
But searching for properties isn’t the end of the road. You need to crunch those numbers up and estimate the one-time and recurring expenses to evaluate its profitability.
Remember, STR properties are different from LTRs. While they share a few expenses, such as maintenance, repairs, management, and taxes, they also have unique ones, such as furnishing, restocking supplies, and cleaning.
As you can already tell, carrying out the above process can be extremely time-consuming. Doing it manually can expose your findings to a lot of inaccuracies. In addition, some of your data sources may be inaccurate and present you with outdated numbers.
This is why you need a tool like Mashvisor’s investment property calculator.
Investment Property Calculator
The investment property calculator helps you conduct an in-depth analysis of any property listed on the platform. If the property isn’t listed on Mashvisor, you can enter its physical address and access its details.
The tool gives you access to all the crucial metrics you need to analyze a property. They include:
- Monthly rental income
- Cash flow
- Cap rate
- Cash on cash return
- Occupancy rate
The above metrics are precalculated based on real estate comps and data from actual vacation rental hosts in that specific location. Besides, you don’t need to worry about data accuracy and reliability since we pull the data from credible sources, such as Airbnb.
Most rental property calculators available online focus on either long term or short term rental strategies. However, our calculator stands out since we provide you with analytics for both strategies so you can carry out a thorough comparison and choose the optimal strategy for your goals.
Make an Offer
Now, you can set the ball rolling and make an offer. Making an offer for an STR property is similar to buying any other investment property. Once the purchase price and contract terms and agreed upon, the lender (if you’re getting financing) may request an appraisal and property inspection.
Before making an offer, make sure you’ve asked all the necessary questions. They include:
- What’s included in the purchase price?
- Are there any existing bookings?
- Is the furniture included in the sale?
- What is the exact date of closing escrow?
As we’ve mentioned before, work with a professional agent to walk you through the entire offer process.
Investing in real estate STR has become a popular way to generate income. Many real estate investors are interested in investing due to the high potential income, flexibility, and property value appreciation. Short term rentals also allow landlords to diversify their risk since they’re not relying on one tenant for rental payments.
However, short term rentals also come with a few potential downsides that you ought to know about before you invest. Such properties tend to be more demanding when it comes to landlord responsibilities, property expenses, and maintenance.
Also, the monthly income isn’t guaranteed. You risk going a whole month without any bookings, especially during the low season, if you don’t invest the right way.
To invest the right way, first, define your goals and formulate a business plan. Work with professional lawyers, real estate agents, contractors, and property managers who’ll help you make your investing journey seamless.
Most importantly, use the right real estate investment tool. Mashvisor is your best friend when it comes to fulfilling your investment needs.
Book your demo today and see what our tools can do for you.