Short-term rental properties are among the best sources of income in our modern times.
With travel becoming more accessible and hotels becoming more expensive, services that streamline the process of renting out homes to short-term tenants have become a major influence in the housing market, and several investors have made millions of dollars from investing solely in short-term rentals.
So, what are short-term rental properties? What are the advantages and disadvantages of investing in and owning them? And how could you benefit from one?
Let’s find out!
Short-term Rental Properties
Short-term rental properties are real estate properties – single-family homes, studios, condos, townhomes, etc. – that are rented out to tenants for short periods of time.
The main advantage of short-term rentals is that homeowners can simply rent out their property or a part of their property to tenants to make some extra cash without having to actually commit to becoming a landlord or managing an actual rental property. In our age of travel, it is becoming more and more common for homeowners to rent out their homes when they’re traveling on a vacation, for example, in order to make use of their temporarily vacant home, which is an effective way to cut down on some of their travelling costs and expenses by generating a bit, or in some cases a lot, of extra cash while they’re away.
One of the reasons that gave rise to such a common rental strategy is the existence of websites and companies that facilitate and encourage the process of renting out a home for a short-term tenant such as Airbnb, FlipKey, and VRBO. These companies, and especially Airbnb, specialize in streamlining the process by creating a medium for tenants who are looking for a short-term rental property as well as homeowners who are looking to rent out their property, helping both of these groups of people find what they’re looking for online.
Additionally, in many cases, short-term renting can actually generate much higher returns and be more profitable for homeowners than traditional renting, especially in areas where tourism is popular, as tourists are becoming more reliant on such properties than on overpriced hotels for their short-term stays. However, although short-term rentals have several benefits and advantages to them, there are a number of disadvantages and considerations that landlords, homeowners, and real estate investors should keep in mind when considering a short-term rental strategy for their real estate properties.
Short-Term Rental Properties: Laws and Regulations
One of the biggest concerns for homeowners looking to rent out their homes as short-term tenants is related to the laws and regulations that are constantly shifting the industry and controlling its viability. In several cities around the US, there have been laws and regulations that prohibit and/or limit short-term rentals such as Airbnb due to a number of different reasons which are mainly related to the hotel industry.
For one, the hotel industry and lobbies have been pressuring the authorities to place restrictions on Airbnb and other short-term rentals due to their claims that short-term rentals are threatening the jobs of hotel workers.
Additionally, due to the similar nature of short-term rentals to the hotel industry, some governments believe that the same regulations, inspections, and standards that apply to hotels should also apply to homes that are rented out to short-term tenants in order to avoid safety hazards and other similar concerns. This has led some cities to place restrictions on the total number of days that a property can be rented out throughout the year, as well as placing laws that require homeowners to be occupants of the property that they’re renting out for a minimum amount of time each year. This drastically limits the amount of profit that homeowners can make from short-term renting in many cities.
We recommend that you check with your local government to make sure that you have a complete understanding of the laws and regulations that are related to short-term renting in your area before taking any further steps towards investing in a short-term rental property.
Short-Term Rental Properties: Taxes
One of the things that any real estate investor or homeowner should take into consideration when renting out a property is taxes. Since short-term rentals will generate profits over a short period of time, it is important to have an understanding of the taxes that apply to your investment, if they apply, and when they apply.
For example, in most cases you don’t need to report the money that you earn from renting out your home for a short term if you meet these requirements:
- If you rent it out for less than 15 days/year
- If you live in the property for over 14 days or over 10% of the total days that you’ve rented it out during the year.
These requirements are used by the IRS to determine whether a real estate property is considered as a residence or a rental property.
We also recommend that you check with your local government or a tax expert to understand which taxes apply or don’t apply to your home when renting it out. You can also check out Forbes and TurboTax for more information on taxes.
Short-Term Rental Properties: Costs and Expenses
Many real estate investors and homeowners don’t realize the extra costs and expenses that might apply to their properties if they decide to rent them out for short term. One of the main expenses that should be taken into consideration when renting out is the extra insurance cost. If you’re renting out your home, then you will need an extra insurance, which means an extra insurance bill.
While some services, such as Airbnb, provide a free primary liability coverage for up to $1,000,000 per occurrence, with other websites offering additional coverage through partnerships with insurance companies, a homeowner or a landlord should always consult an insurance agent or get professional advice related to insurance to make sure he/she has it covered and to include the extra expenses in his/her calculations.
In addition to insurance, most short-term rental services require an additional cost or fee in exchange for their services, such as Airbnb and FlipKey charging a 3% host service fee, and VRBO having an option to pay-per-booking or an annual subscription fee.
We highly recommend any real estate investor or homeowner to consider a short-term rental strategy for his/her home or properties that he/she owns, as short-term rentals can generate extra cash, and in some cases a sufficient amount that can be turned into a business on its own.
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