STR investments come with important advantages over other strategies, which make them an excellent asset to add to your real estate portfolio.
Since the early 2000s, the short term rental market’s been experiencing major growth both in the US and globally. Indeed, Airbnb properties and other vacation rentals are turning into their own, independent investing strategy. The reason for such a massive expansion is the many benefits that the strategy offers over other real estate alternatives.
Table of Contents
- #1. High Rental Revenue and Profit
- #2. Passive Income
- #3. Tax Advantages and Benefits
- #4. Long Term Appreciation
- #5. Second Home
- How to Find Profitable STR Investments
- The Top 3 Cities for STR Investments
- Adding STR Investments to Your Real Estate Portfolio
In this article, we’ll highlight the five main reasons why you should consider investing in STR properties in 2023. We’ll also take you through the steps necessary to locate the top-performing short term rentals for sale and how the Mashvisor tools can optimize your results each step of the way.
To speed up the process for beginners, we’ll show you the three most promising markets for the said real estate investing strategy based on recent Mashvisor data and analysis.
By the time you’re done reading this article, you should be ready to dive into profitable STR investments.
#1. High Rental Revenue and Profit
The number one reason why you should include short term rental property investments in your portfolio is that they can potentially bring a lot of income and return on investment. In April 2023, the Mashvisor Data Team conducted nationwide rental market analysis comparing the performance of short term and long term rentals this year.
According to Mashvisor’s analysis, Airbnb hosts generate an average monthly income of $2,611 across all US markets, while the typical traditional landlord earns only $1,952 per month. It means that STRs result in 34% more revenue―on average―than their long term counterparts.
With regards to profitability, they are also the winning real estate strategy. The typical vacation rental investment property generates a cash on cash return of 3.67% and a cap rate of 3.73%. At the same time, the corresponding numbers for a long term rental are 2.81% and 2.86%. So, short term rentals bring almost one percentage point more in returns.
The reason behind the high rental income and ROI that STR investments yield is that rental rates are set up by day and not by month and can be constantly updated. When you rent out on a nightly basis, you can not only charge more (per night) but also make sure that your rate reflects the local market’s current demand and supply.
#2. Passive Income
The second reason why STR investments are a great real estate portfolio asset is that they can turn into a source of passive income. In other words, as a vacation rental investor, you’ll not only make a lot of money but you’ll do so passively, without being constantly involved in your investment.
It might sound counterintuitive because managing an Airbnb business requires a lot of day-to-day tasks like communicating with guests, cleaning, restocking, marketing, etc. However, you can easily get rid of all the said responsibilities by hiring one of the top property managers in your location.
A professional short term rental property manager will take care of all aspects of managing your property. Meanwhile, they will help you boost your income and profit even more as they have expert knowledge, access to a network of professionals, and discounts at local vendors. It makes Airbnb property management fees totally worth it.
Related: All You Need to Know About Short Term Rental Property Management
#3. Tax Advantages and Benefits
STRs are one of the best real estate investment strategies also because they provide important tax benefits. Since you are running a business, you can qualify for numerous sizable tax deductions.
If the home serves as an investment property and is rented out for the majority of the year, you can deduct business operating expenses, including:
- Property tax
- Mortgage interest and mortgage insurance premium (MIP)
- Vacation rental insurance
- Real estate depreciation
- Property repairs
- Advertising and marketing
- Supplies for guests
- Cleaning supplies and services
- Professional property management fees
- Home office supplies and traveling expenses
It’s important to understand all costs that you can legally deduct in order to maximize the benefits. In this way, you can push up your cash flow and ROI.
#4. Long Term Appreciation
Another major benefit of adding STR investments to your portfolio is that you get to make money in the long term, as well as in the short term. It is achieved through real estate appreciation.
Because of demographic growth and land being a limited resource, the prices of real estate properties increase year over year. While they might take an occasional hit during a recession and other crises, the long term trend is always upward.
Indeed, since 1991, home values in the US housing market have risen by an annual average of 4.4%. So, as long as you hold on to your short term rental property for a few years, you can make money from it without putting any effort into it. Real estate appreciation will take care of it.
Related: Cash Flow vs. Appreciation: What Should Drive Your Real Estate Investment Decision?
#5. Second Home
The last main reason to invest in short term rentals is the fact that they can easily double up as a second home or a vacation home. When listing your property for rent on a daily basis, you have the flexibility to save it for yourself from time to time to accommodate your own vacations and travels.
Consequently, with an STR investment, you gain not only an investment property but also a vacation home. However, you should be careful not to stay beyond the legal limit each year to be eligible for all tax benefits associated with a vacation rental property.
How to Find Profitable STR Investments
Now that you know why you should invest in a short term rental, the question becomes how to identify the best investment opportunities for the STR strategy. The process is not difficult even for beginners, as long as they follow certain steps and use the right tools.
Here are the four steps to take to find the most profitable STR investments in the US market:
Figure Out Financing
The first step in making profitable real estate investment decisions is setting up your budget and finding out how you’ll pay for your property. You need to consider your savings and your income to calculate how much you can afford to spend on a down payment.
Next, unless you can buy an entire property in cash, you need to look at the best loans for investment property with focus on financing options for short term rentals. Research different types of loans and various lenders to choose the most appropriate option for your particular budget, credit history and score, and repayment terms.
Related: 3 Best Investment Property Lenders for 2023
Locate a Good Market
Once you know your budget, it’s time to find the best short term rental markets for your specific needs.
You need to focus on locations with affordable property prices, strong rental income, good occupancy rates, above-average daily rates, and good ROI. They are usually cities with plenty of tourist attractions, lots of visitors, no seasonality, low crime rates, and good transportation.
Doing sufficient Airbnb market research to find such markets takes a ton of time if done manually. But smart STR investors can use Mashvisor’s Market Finder tool to facilitate and optimize their market search.
You can search for the most appropriate cities and neighborhoods for your investment requirements using the following filters:
- Mashmeter score: This is a Mashvisor-developed proprietary algorithm that evaluates how good a certain market is for investing in rental properties.
- Crime and safety
- Regulatory environment
- Property prices
- Property type
- Monthly rental revenue
- Airbnb occupancy rate
- Short term rental cap rate
As soon as you’ve selected your criteria, the Market Finder tool will provide you with the top-performing cities for you. You can continue zooming in and refining your search until you find the best neighborhood because different areas in the same city might offer very different STR opportunities.
When you find a few good markets for short term rental investments, you should check out the local laws, as some cities impose various restrictions on the said real estate strategy. You can visit the Mashvisor short term regulations page to be sure. You can see there if non-owned occupied vacation rentals are legal and relatively unrestricted in your selected markets.
Search for Money-Making STRs
The next step in the process of finding profitable STR investments is searching for short term rentals for sale with high potential. You can deploy a wide range of strategies, such as checking out newspapers, talking to other investors in the area, working with an agent, or visiting real estate websites.
However, you will get the optimal results if you choose a resource that focuses on listings that are appropriate for vacation rentals rather than primary homes or long term rentals. The leading source of STRs for sale in the US market is the Mashvisor Property Finder. The tool uses big data and machine learning to find the best STRs for your specific needs.
You can use the following filters to narrow down your search:
- Property type
- Property size
With the help of the above filters, the Property Finder will be able to offer you a list of available properties for sale that provide the highest cash on cash return for the short term rental strategy.
The tool allows you to like and dislike proposed properties, and your actions will further teach the tool about your preferences. So, the more you interact with the Property Finder, the better results you’ll get. In a matter of a few minutes, you can locate the most profitable short term rentals in any US market.
Analyze the Investment Potential of the Top Listings for Sale
The last step necessary to locate the best STR investment opportunities is to conduct a detailed short term rental property analysis. You need to find similar active rentals, get their data, and use it to analyze what nightly pricing, occupancy rate, monthly income, and ROI you can expect from your chosen properties. Needless to say, they can take months for a beginner investor.
The better way to conduct rental property analysis is with the help of the Mashvisor Airbnb calculator. The tool allows you to calculate key investment metrics for any residential property in the US market based on rental comps.
You will get access to the following short term rental data points:
- Average daily rate
- Occupancy rate
- Rental income
- Rental expenses
- Cash flow
- Cash on cash return
- Cap rate
It’s important to focus on positive cash flow and cap rates between 8% and 12%. In terms of occupancy, it’s good to choose a property that can stay occupied at least half the time. With regards to cash on cash return, it’s best for this ROI measure to be above 8%, but there isn’t really a recommended upper limit.
To find the most profitable STR investments in the US market, sign up for a 7 day-free trial of the Mashvisor platform.
The Top 3 Cities for STR Investments
As we discussed above, finding the best short term rental markets is at the core of making profitable STR investments. Thus, we ranked the three absolutely best US cities for the STR strategy in April 2023.
We collected nationwide real estate market data from reliable sources like Airbnb and the MLS, and we analyzed it to find out which three markets offer the highest cash on cash return. We focused on locations with median property prices below $1 million (for affordability) and above 100 active Airbnb listings with 50%+ occupancy (for strong demand and supply).
Nevertheless, you need to keep in mind that the following markets might face some STR regulations, so you need to confirm it before buying a property there.
Ranked in descending order for cash on cash return, the top three cities for STR investments at the moment are:
1. Harvey, LA
- Median Property Price: $341,114
- Average Price per Square Foot: $156
- Days on Market: 49
- Number of Short Term Rental Listings: 1,029
- Monthly Short Term Rental Income: $3,944
- Short Term Rental Cash on Cash Return: 8.27%
- Short Term Rental Cap Rate: 8.42%
- Short Term Rental Daily Rate: $202
- Short Term Rental Occupancy Rate: 56%
- Walk Score: 52
2. Rileyville, VA
- Median Property Price: $353,448
- Average Price per Square Foot: $234
- Days on Market: 7
- Number of Short Term Rental Listings: 154
- Monthly Short Term Rental Income: $4,105
- Short Term Rental Cash on Cash Return: 8.15%
- Short Term Rental Cap Rate: 8.27%
- Short Term Rental Daily Rate: $235
- Short Term Rental Occupancy Rate: 56%
- Walk Score: 10
3. Columbia, MO
- Median Property Price: $273,020
- Average Price per Square Foot: $132
- Days on Market: 151
- Number of Short Term Rental Listings: 289
- Monthly Short Term Rental Income: $2,837
- Short Term Rental Cash on Cash Return: 7.78%
- Short Term Rental Cap Rate: 7.98%
- Short Term Rental Daily Rate: $145
- Short Term Rental Occupancy Rate: 56%
- Walk Score: 30
Adding STR Investments to Your Real Estate Portfolio
For the five reasons covered above, adding STR investments to your real estate portfolio is an excellent idea. You will not only enjoy strong revenue and profit but can also make money in the long term. Moreover, you can take advantage of various tax benefits.
However, there are certain steps that you need to take in order to optimize the performance of your short term rental. Not any residential property come with the potential to become a profitable STR. You should budget carefully, find the top market, ensure legality, search for top opportunities, and choose the best property for your needs.
While the above process entails a lot of data collection and manual analysis, you can achieve faster and better results with the top real estate investment tools like the Mashvisor platform. You can locate markets and properties that meet your exact requirements while offering the highest possible ROI.
If you’re ready to start making money from profitable STR investments, schedule a demo of Mashvisor to learn more about how we can help you.