Short term rentals are in demand. So, investors are buying short term rental properties for sale because of the thriving vacation rental market.
Table of Contents
- Is Short Term Rental Profitable?
- How Do Short Term Rental Properties Make Money?
- What Is a Good Return on a Short Term Rental?
- Steps to Buying Short Term Rental Properties for Sale
- Cities With Profitable Short Term Rental Properties for Sale in 2022
- How to Succeed in Short Term Rentals
There is a high demand for short-term rentals nowadays. After more than two years in lockdown and the recent lifting of travel restrictions, most people are now ready to travel again. It is one of the reasons why many real estate investors are buying short term rental properties for sale. Investors want to take advantage of the anticipated demand for vacation rentals.
However, finding the best rental properties for sale can be challenging, especially if you want to earn a good return on investment. You need to consider several factors to ensure that you’re buying a profitable vacation rental property. Keep in mind that not all vacation rentals can generate sufficient profit, and not all Airbnb investors become successful.
It’s important to know what to look for in a short term rental property so you won’t be wasting your money on an investment that’s bound to fail. Knowing the crucial numbers of an investment property can help you make an informed decision. The best way to do it is to work with a real estate analytics platform like Mashvisor that can provide all the property’s relevant data.
In this article, you will learn:
- Why short-term rentals are profitable
- How to choose an investment property
- How to find a profitable investment property
Is Short Term Rental Profitable?
The direct answer to this question is yes—investing in short term rental properties can be very profitable. One of the dilemmas of many investors is that they’re not sure if investing in short term rentals can generate enough profits or not. Based on the experience of many Airbnb owners, as well as on the Airbnb rental data, short term rentals can make a lot of money.
However, it’s important to note that not all short term rentals are made equal. While there are several vacation rental investors who have enjoyed a good amount of returns, there are also some who were not as successful. Similar to any kind of investment, investing in vacation rentals comes with both risks and rewards.
To become successful with your vacation rental investment, it’s crucial to know how to choose the best investment property from all the available short term rental properties for sale. Also, choosing a location with high demand, like Orlando, Florida, is a good place to start. Plus, planning ahead can also help minimize the risks associated with vacation rental investing.
Benefits of Investing in Short Term Rental Properties for Sale
If you’re in doubt about whether investing in short term rental properties is a good idea or not, it’s best to know its benefits and why you should consider this venture.
Investing in short term rentals can be rewarding. Among the most common benefits of investing in vacation rentals include:
- Passive income: Short term rentals are usually a seasonal business. It can be an advantage because you will get to earn passive income without working on it on a full-time basis.
- Less wear and tear: Unlike traditional rentals, your guests will not stay on your property for the long term. It means that your rental home will not be used daily. It can substantially reduce the normal wear and tear of your property.
- High demand: Even though short term rentals are usually seasonal, you can expect high demands from visitors, especially during the peak season. It allows you to charge higher rent and earn bigger profits.
- Vacation home: If you choose to invest in a location outside of your hometown, you will essentially have your own vacation home. You will have a place to stay should you decide to go on a personal vacation without having to pay for a hotel.
- Tax benefits: Owning a short term rental also comes with tax benefits. Since it is a property intended for business, you can claim certain tax deductions, which can help you reduce your overall tax expenses.
Risks of Investing in Short Term Rental Properties for Sale
Any type of investment comes with risks, and investing in short term rental properties is no exception. As an investor, it’s important to know and understand the risks associated with an investment. This can help you decide which risks to take or not.
Here are the most common risks associated with investing in vacation rentals:
- Seasonal business: As mentioned, vacation rentals are mostly seasonal. It means that there will be days when your property will not be occupied. Thus, it won’t generate cash flow. To minimize this risk, it’s best to choose a location where there is a high demand for vacation rental at any time of the year. Florida is a great location for vacation rentals, because of its mostly warm climate all year round.
- High vacancy rate: Choosing the wrong location can be detrimental to your investment, whether you are investing in a short term rental or a traditional rental. If you choose a location that doesn’t attract visitors, you will end up having more vacancies. To avoid such a risk, it’s best to choose a location that is often visited by visitors. For instance, Florida is one of the most favorite tourist destinations because of its pleasant weather and beautiful beaches.
- Require constant cleaning: Even if short term rentals experience less wear and tear, it requires constant cleaning because guests move in and out of the property on a short-term basis. You need to prepare your property for the next guests.
Cleaning and maintenance tasks can also be time-consuming if you don’t delegate them. If you don’t have enough time to do them, you can hire a cleaner to manage the cleaning of your short term rental property.
How Do Short Term Rental Properties Make Money?
Investors who buy Airbnb for sale know that owning a short term rental property is a great way to make money. In fact, even those Airbnb owners who don’t own a second home and only rent out their primary residence as a short term rental earn good returns.
Short term rental owners make money from listing their properties for rent on various home-sharing platforms, such as Airbnb and VRBO. These platforms act as intermediaries between the renters and owners.
Rental property owners list their properties on the above platforms, where guests can search for a place to stay. Once guests find a property that they are interested in, they can communicate directly with the owner through the home-sharing platform.
To make money from investing in short term rental properties, you need to make sure that you choose a good location that visitors frequent. In most cases, the primary customers of vacation rental owners are tourists. However, there are many business travelers who also prefer to stay in short term rentals instead of hotels.
If you’re looking for short term rental properties for sale, it’s best to consider a location that is a top tourist destination and which is also near a busy business district. It can help ensure that you will attract prospective guests from both business and leisure travelers. It can also help you generate continuous cash flow even during non-peak seasons.
Another important factor in ensuring that your rental property will generate income is to market it effectively. Using professionally taken photos that highlight your property’s best features can help attract guests. Remember that there are hundreds of thousands of vacation rental properties listed on various home-sharing platforms. So, it’s important to make yours stand out.
What Is a Good Return on a Short Term Rental?
In general, a good return on investment (ROI) for your short term rental should be around 15% or more. Most real estate professionals use the cash on cash return to determine the profitability of an investment property.
Typically, a good cash on cash return is 8% or higher. However, it will also depend on the location of your investment property. There are some real estate markets that provide cash-on-cash returns of around 3% to 5%, which can also be considered good.
Why You Should Estimate the Returns on Your Short Term Rental
The ROI of a short term rental property is an important factor that can give you a clear picture of the potential returns of your investment.
To calculate the ROI, you will take into consideration all expenses, fees, taxes, and other costs of owning a rental property investment. It will let you know whether your investment will be profitable or not.
Different Ways to Measure Rate of Returns
Before buying any of the short term rental properties for sale, you must first identify how much return you can possibly generate from an investment property. To determine the potential return on investment of a short term rental, you should know how to calculate the rate of returns.
The rate of return of a short term rental refers to the measure of an investment property’s performance over a period of time. It is expressed as a percentage of the vacation rental property’s initial cost.
Here are the different ways to measure the rate of return of a vacation rental property:
1. Internal Rate of Return
Internal rate of return, or IRR, is a metric that can determine an investment property’s profitability by analyzing its future value. IRR measures the average annual rate of return that investors expect to generate from a short term rental. IRR values are expressed as a percentage. Investors typically use IRR to measure the potential ROI of an income property.
To calculate the IRR, you need to set the net present value of the cash flows from an investment to zero. You should also set the profitability index to one. It’s best to use an online calculator to get the correct figure for your IRR calculation.
2. Modified Internal Rate of Return
Modified internal rate of return, or MIRR, is a modified version of the internal rate of return. The IRR calculation is adjusted to achieve a more accurate assessment of a short term rental’s profitability.
You need to consider the following three important variables to calculate the MIRR:
- FVCF: The future value of positive cash flows discounted at the reinvestment rate. It is also the cost of capital.
- PVCF: The present value of negative cash flows discounted at the financing rate. It is also the cost of financing.
- n: The number of periods.
The MIRR formula is as follows:
MIRR = (FVCF / PVCF)^(1/n) – 1
Similar to the internal rate of return, it’s also best to use a modified rate of return calculator to get an accurate computation of the MIRR.
4 Steps to Buying Short Term Rental Properties for Sale
Since we’ve already established that investing in short term rentals is lucrative, the next step is to know how to buy short term rental properties for sale that are profitable. In this section, we will discuss the steps involved in buying a vacation rental for sale. We will also cover the things that you should consider when choosing an investment property.
Step 1: Choose a Location
Since location is a crucial factor that can either make or break your investment, you need to spend more time doing proper research before deciding on a location. Ask yourself whether you want to invest in your home state or out of state. Also, you need to consider the following factors when choosing a location:
- Tourist attractions: A good location for vacation rentals should be a tourist’s favorite. For example, if you want to target beachgoers, buying a beach house somewhere near Orlando, Florida is a good idea.
- Home value appreciation: Another factor that makes a location ideal for investing in short term rentals is the appreciation rate of home prices. You would want to invest in a place where your property will likely increase in value over time.
- Economy: Aside from a thriving tourism industry, you should also look at the overall economy of the location where you plan to invest in. Are there sufficient job opportunities in the area? How are the local businesses doing? They can also affect your overall profitability.
Step 2: Set a Budget
The next step to do before buying one of the available short term rental properties for sale is to plan a budget carefully. Your budget should not only include the selling price of the property. Also consider other possible expenses, such as closing costs, repairs and improvement costs, mortgage interests, insurance, taxes, and other fees.
Once you’ve selected a location and set a budget, it will be easier for you to search for an investment property for sale. The best way to find a short term rental property is through an online database search. You can use Mashvisor’s investment property search feature to explore a wide range of available properties for sale across the US.
What’s best about Mashvisor’s search feature is that you can easily find a list of short term rental homes for sale based on your chosen location. You just need to type the city or neighborhood of your choice. Plus, you can also set your preferred budget to filter the results according to what you can afford to buy.
Step 3: Calculate Your Potential Income and Expenses
Another important step in buying a short term rental home is calculating your potential income and expenses. This way, you will find out if such an investment is worth your time and money. You also need to make sure that it can generate positive cash flow, and whether you’ll be able to afford it despite inevitable vacancies.
However, finding all the short term rental data manually can be a laborious task. It is also time-consuming and usually prone to errors. Fortunately, if you use Mashvisor’s database to search for a property for sale, you can totally eliminate doing your research manually. Mashvisor provides all the information that you need about the property to help you make a decision.
Once you’ve found a rental home that interests you, you just need to click on that property, and you will see an overview of all the important real estate data. The information includes the average monthly income, cash on cash return, cap rate, and expected expenses. You’ll also get an overview of the neighborhood comps and short term rental analytics.
In addition, you also get access to the investment property calculator that allows you to compute your potential income after all expenses and financing costs. You can customize your financing options, as well as input your own expenses, to get a more personalized result. Through this, it would be easier for you to see whether the property is really profitable or not.
Step 4: Finance the Purchase of the Property
After establishing that the property will be profitable, then it’s time to find financing options for the purchase of your short term rental. Typically, short term rental properties are funded through a portfolio loan, conforming loan, or multifamily loan. In some cases, investors take short-term loans like hard money loans or bridge loans to finance a vacation rental.
When choosing a financing option for your vacation rental investment, make sure to shop around first and compare the rates. Choose the one that offers the most favorable terms. Use the rental calculator provided by Mashvisor to calculate your potential income while taking into account the interest rate and terms of your chosen loan.
8 Cities With Profitable Short Term Rental Properties for Sale in 2022
The best cities with profitable short term rental properties are those that are frequently visited by both local and international tourists. For instance, buying short term rental properties for sale in Florida is a good idea because of the influx of tourists who love to visit the beaches.
Also, choose a location with a good home value appreciation rate but still offers affordable housing options. We’ve selected cities that generate an Airbnb income of over $2,000, have an occupancy rate of 50% or higher, and with median housing prices of less than $1 million. We also look at the cash on cash returns. In addition, having high walk scores is a plus factor.
According to Mashvisor’s data for August 2022, here are the top eight cities for investing in short term rentals. The locations are arranged from those with the highest to the lowest cash on cash return.
1. Saugatuck, MI
- Median Property Price: $822,200
- Average Price per Square Foot: $433
- Days on Market: 267
- Monthly Short Term Rental Income: $6,262
- Short Term Rental Cash on Cash Return: 5.79%
- Short Term Rental Cap Rate: 5.87%
- Short Term Rental Daily Rate: $350
- Short Term Rental Occupancy Rate: 55%
- Walk Score: 59
2. Anaheim, CA
- Median Property Price: $821,183
- Average Price per Square Foot: $548
- Days on Market: 47
- Monthly Short Term Rental Income: $6,348
- Short Term Rental Cash on Cash Return: 5.12%
- Short Term Rental Cap Rate: 5.17%
- Short Term Rental Daily Rate: $286
- Short Term Rental Occupancy Rate: 69%
- Walk Score: 51
3. Nashville, TN
- Median Property Price: $769,473
- Average Price per Square Foot: $436
- Days on Market: 42
- Monthly Short Term Rental Income: $4,539
- Short Term Rental Cash on Cash Return: 3.97%
- Short Term Rental Cap Rate: 4.03%
- Short Term Rental Daily Rate: $376
- Short Term Rental Occupancy Rate: 50%
- Walk Score: 35
4. Cary, NC
- Median Property Price: $594,817
- Average Price per Square Foot: $261
- Days on Market: 52
- Monthly Short Term Rental Income: $3,739
- Short Term Rental Cash on Cash Return: 3.88%
- Short Term Rental Cap Rate: 3.95%
- Short Term Rental Daily Rate: $146
- Short Term Rental Occupancy Rate: 68%
- Walk Score: 65
5. Vero Beach, FL
- Median Property Price: $728,534
- Average Price per Square Foot: $296
- Days on Market: 75
- Monthly Short Term Rental Income: $3,010
- Short Term Rental Cash on Cash Return: 3.34%
- Short Term Rental Cap Rate: 3.42%
- Short Term Rental Daily Rate: $159
- Short Term Rental Occupancy Rate: 56%
- Walk Score: 78
6. Missoula, MT
- Median Property Price: $662,065
- Average Price per Square Foot: $387
- Days on Market: 149
- Monthly Short Term Rental Income: $3,695
- Short Term Rental Cash on Cash Return: 3.19%
- Short Term Rental Cap Rate: 3.24%
- Short Term Rental Daily Rate: $144
- Short Term Rental Occupancy Rate: 64%
- Walk Score: 30
7. Morton, PA
- Median Property Price: $317,093
- Average Price per Square Foot: $197
- Days on Market: 37
- Monthly Short Term Rental Income: $2,450
- Short Term Rental Cash on Cash Return: 3.12%
- Short Term Rental Cap Rate: 3.21%
- Short Term Rental Daily Rate: $104
- Short Term Rental Occupancy Rate: 65%
- Walk Score: 50
8. Orlando, FL
- Median Property Price: $465,154
- Average Price per Square Foot: $281
- Days on Market: 59
- Monthly Short Term Rental Income: $2,834
- Short Term Rental Cash on Cash Return: 2.46%
- Short Term Rental Cap Rate: 2.51%
- Short Term Rental Daily Rate: $127
- Short Term Rental Occupancy Rate: 52%
- Walk Score: 42
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
How to Succeed in Short Term Rentals
Aside from choosing a good location when buying short term rental properties for sale, you also need to make sure that the property you buy generates good returns. Moreover, there are several other tips that can help you become a vacation rental investor, such as the following:
1. Make Your Property Appealing to Guests
Before listing your rental home on various home-sharing platforms, make the necessary repairs and improvements to make it appealing to prospective guests. However, do not go overboard with your budget for improvements. There are several ways to make your property attractive without spending too much money.
2. Attract Renters Using Extensive Marketing Strategies
An effective marketing strategy is essential to every rental property owner’s success. If you want your vacation rental to stand out among all the vacation properties listed on various home-sharing sites, you should know how to highlight its best features. This way, you can easily attract renters to book your property.
3. Price Your Vacation Rental Accurately
Accurate pricing is also important to attract renters. In most cases, vacation rentals are priced depending on the season. You can use Mashvisor’s rental comps to know how to set the correct price for your short term rental property.
Invest in Short Term Rentals With the Help of Mashvisor
Investing in short term rental properties for sale offers a lot of opportunities for earning good returns. Use the tips mentioned above when it comes to finding the most lucrative investment property available. When in doubt, it’s best to work with a reliable real estate analytics platform to help you in every step of your real estate investment journey.
Mashvisor can help you find a profitable investment based on your budget abd preferences. With Mashvisor, you can easily make an informed decision because you’ll get access to all of the real estate data that you need. You don’t need to make second guesses anymore, and you can be assured that every decision you make is based on a comprehensive real estate analysis.