Investing in real estate has become one of the most popular ways to quickly make money. This type of career choice gives real estate investors flexibility and diversity. They are able to choose when and how to invest, making sure each investment strategy matches their needs.
There are two main real estate investment strategies to choose from: long-term rentals (traditional rentals) or short-term rentals (Airbnb rentals). Each rental strategy has its own set of advantages that are worth taking the time to talk about. However, our main focus today will be on short-term rentals and everything you need to know about these types of investments.
Real Estate Investment Strategies: What Is Airbnb?
Since its establishment in 2008, Airbnb has attracted tourists and landlords from all over the world. Airbnb is an online platform that allows you to rent out your home (or part of it) or any property you have to people. Airbnb became one of the easiest ways for ordinary people as well as beginner real estate investors to increase their income and keep up with the increased expenses of life by using their homes to generate rental income.
Investing in short-term rentals can be a great experience, both for renters and landlords. The tenant, usually a tourist, gets to live in a homey atmosphere without having to waste money on expensive hotels. In general, the rental rate for Airbnb rentals is much lower than those for hotels. Moreover, landlords get to experience so many benefits. Landlords get to know about different cultures and traditions from different travelers without having to leave their home. Also, they get to enjoy the high cash on cash return that their property generates. Let’s now move on to some tips to keep in mind before investing in short-term rentals.
Tip #1: Understand Short-Term Rentals Regulations
Before you even think about renting your property through short-term rental websites like Airbnb, you need to understand your city and state laws regarding Airbnb rentals. Airbnb regulations vary from city to city and are constantly changing every day. That is why you need to always keep yourself updated on short-term regulations to ensure you don’t fall into anything illegal.
In some states and cities, more rigid laws and regulations are applied to Airbnb rentals. For example, New York has now set laws forbidding rentals for less than 30 days when the host is absent. Although rentals over a very short period of time can be very lucrative, breaking the law is even more costly. For real estate investment strategies like investing in Airbnb, you need to gain as much knowledge as possible of where Airbnb is legal and what regulations govern Airbnb in your area.
Tip #2: Consider the Costs
If you don’t consider all the costs that come with your real estate investment strategies of choice, you could end up dealing with a negative cash flow property rather than enjoying positive cash flow. With short-term rentals, for example, not calculating electricity in your costs can off balance your profit and possibly leave you incurring losses. It is your responsibility to consider all the expenses associated with your property. Some important expenses to take into consideration include:
- Monthly mortgage payment (if you’re paying for the property through a loan)
- HOA dues that fluctuate around $500/month, depending on the location
- Airbnb cleaning fee of about $50 per booking
- Supplies estimated at $150 to include complimentary treats and snacks
- Utilities (internet, power, and cable TV) of about $200
NOTE: Calculating costs can be a huge headache. You can easily calculate your associated rental expenses by using an Airbnb profitability calculator, otherwise known as an investment property calculator. This real estate investing tool assesses the viability of an Airbnb investment property. It generates automatic calculations and predictive outcomes as it estimates investment cost assumptions. You can find this tool and more here at Mashvisor!
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Tip #3: Airbnb Reviews Are Important
The key to succeeding with short-term rentals is making sure that your property always has good reviews. Airbnb users evaluate the livability of properties as well as the nature of Airbnb hosts through reviews. These Airbnb reviews will either make you or break you.
Bad reviews are harmful to your career as an Airbnb host because once a bad review is posted, it will stay there forever. Having as little as one bad review can force you to lower your rates in order to attract guests back. That is of course if you can get renters to rent out your property. So for real estate investment strategies like investing in short-term rentals, having a good reputation and great reviews will be your golden ticket to success.
Tip #4: Don’t Forget About Taxes and Insurance
Understanding policies for short-term rental taxes and insurance is just as important as understanding your city’s Airbnb regulations. In regards to short-term rental taxes, real estate investors can rent out their property for up to 14 days per year, and all the rental income received is tax-free, no matter how much they earn. However, if Airbnb rentals are rented for more than 14 days during the year, real estate investors have to pay income tax on their property’s rental income.
As for short-term rental insurance policies, if a tenant damages your home or your personal property, the loss may be covered by either homeowner’s insurance or renter’s insurance. Homeowner’s insurance will provide you with coverage if an accident happens on your property while renter’s insurance will prove you with coverage if your personal belongings are destroyed or stolen.
Some hosting companies like Airbnb for example, offer their own insurance or reimbursement plans. Airbnb has a “host guarantee” in which the company promises to pay up to $1 million to a host for property damage caused by a renter. Of course, that is a “guarantee,” not insurance.
Real Estate Investment Strategies: The Bottom Line
One of the most popular real estate investment strategies has been investing in short-term rentals. This strategy offers great opportunities for investors. Just be sure to take into consideration everything listed above before diving into short-term rentals. To learn more about this and other real estate investment strategies, visit Mashvisor’s knowledge center.
What real estate investment strategies have you implemented? Will you consider short-term rentals in the near future?
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