So you want to buy and operate a short-term rental, eh? Well, before you go closing on homes around the country and building out your portfolio, there a few key things to look for to determine if you're in the correct market for a STR (Short-Term Rental). In this post we'll dig into several things to consider before closing on a STR such as:
Analyzing the above will be absolutely imperative to your overall profitability, so do yourself a favor and take the time to research the above before blindly diving into a purchase. Let's take a closer look and get into the weeds. Here we go.
Vacation Destination Desirability
Not all STR's are created equal. What I mean by this is you could have found a unique, desirable home that will appreciate at a phenomenal rate, but will not produce a monthly return as an STR due to the lack of vacation rental demand. Probably the #1 thing to consider when conducting your research on potential STR's is the average occupancy rate for that area. Not only will your property need to standout from the competition, but there first needs to be an established vacation market in the given area to drive demand. Without this underlying fundamental there will be no one booking and driving revenue.
There are several resources available to compare occupancies of previously established STR's. One of my favorites is data.rabbu.com. This FREE service allows you to search a given location and pull all the STRs listed on Airbnb for that area. It compares Average Daily Rate, Occupancy %, and Revenue for the current month. You are also able to project revenues on a seasonality basis. This is a priceless tool, as it allows you the ability to view fairly accurate data for a particular area. You can then take this information and plug it into your revenue projection calculator, which I detail how to create in a separate post and can be found here.
Of course there are several other paid subscription options available such as:
These are all useful tools, however in my opinion, you really can't beat the free version offered by rabbu. Regardless, each service will give you a more in depth look into the perspective market and allow you to run a more accurate projection based on location.
Another reason why I love rabbu is they send out a weekly STR opportunity. They find STR's around the country and send them out to their customer base. They also include the underwriting (financial analysis) of the property in an easy to read format.
Local Real-Estate Market Strength and Appreciation
Owning an STR offers two main sources of value - revenue generated thru occupancy, and appreciation. If revenue isn't a major concern of yours, then appreciation more than likely is. This dual threat advantage of owning an STR offers multiple ways of creating wealth. Choosing the correct market is a key factor in benefiting from appreciation. A home purchased in the Midwest is guaranteed to appreciate well below one purchased in the rocky mountains of Colorado, or one located on the beaches of California.
A simple search on zillow.com or realator.com will give you historical appreciation averages. You can also conduct a basic search on Google to find historical home values and average appreciation rates for any given market.
Calculating appreciation is vital if your STR strategy involves holding for a short period and offloading or selling. Obviously, no one can predict what the market will do over time, but by following historical averages you can get a pretty good idea of the value of a particular property 'X' amount of years out.
Local STR Codes (friendly vs unfriendly, taxes, and permits/fees/waitlists)
Along with analyzing the local market, understanding the local codes and enforcement is also a crucial step in the process. The last thing you want to do is close on a home in a beautiful area only to find out later that they don't allow short-term rentals, or the permitting process is so stringent that you will be on a waitlist for years to come.
Over the last several years many municipalities and counties have been cracking down on short-term rentals. The reason being is STR's take away available housing options for locals, and in today's market with low inventory of available housing this is one method to ensure locals can find long-term housing solutions.
A quick internet search of the town/city/state's website should turn up their policy on STR's. For example, here in Durango where I am located, the City only allows one STR per block in certain areas of the city. If a permit is already in use in a particular block then your thrown onto a waitlist which you could be on for a very long time. Some areas in Durango are zoned differently and allow an unlimited amount of STR's. These areas are uncommon in the city, but very sought after properties. Along with acquiring permits, there will typically be an application fee. Here in Durango that fee is $750 although it is only a one-time fee.
Taxes, taxes, taxes. This is another item to look into and include in your underwriting. Each state, city, and county will have differing lodging and sales taxes, which you will have to collect and pay (depending on your hosting platform). Lodging taxes can be as high as 15% in some states, but may have lower a sales tax.
Typically you would pass these taxes on to your guests. Some hosting platforms will collect and pay these taxes on your behalf, while others will put the responsibility back on to you. Understanding what your local taxes are is always a good idea.
Local Competition (market saturation)
This item could be grouped in with Vacation Destination Desirability, although there are some nuances between the two and worth looking at in more detail. Understanding what market you are getting into, as well as how much competition you will be up against are key factors in figuring your bottom line. In order to properly forecast your profitability you will have to come up with an accurate occupancy rate (discussed above). Taking a detailed look at your competition will be necessary in determining your occupancy rate.
A few key techniques can be deployed when analyzing the local competition and how your property will stack up.
First, we need to determine that there is a market for vacation rentals in the first place. This takes us back to the beginning, which we detailed in the Vacation Destination Desirability section. Once you have determined there is a market you can then begin to look at the different styles of properties and how each performs relative to other like kind properties.
Second, what type of property are you looking to get into? Are you buying a townhome, condo, or stand alone house? Is your house located in the city, suburbs, rural or mountainous/beach areas? Narrowing down your search field will help in analyzing like kind properties, which will in turn give you a better idea of the local competition you are up against. If there is a lot of competition, how will your property standout? Is there enough market demand to sustain a large pool of properties, or will your property be overshadowed by several more exotic, updated properties nearby? These are all questions to ask and details to look into when analyzing potential properties. Again, data.rabbu.com is a great tool to utilize during this phase of market research.
Lastly, once you find a property that you feel can hold its own in its perspective market, what updates or additions could you do to give it that extra boost above the competition? Could you add a hot tub or pool? Could you provide cruiser bikes to get around town on? There are several techniques to create demand for a certain property that we won't dig into here, but keep these tactics in mind when searching for your next STR.
The first step is to know the market you are getting into, then analyzing the competition you are up against, and lastly getting creative with ways in which to enhance your property to stand out from your competition.
Final Thoughts
To wrap all this up into a tasty final thoughts burrito, in order to set yourself up for success you first need to do your due diligence and research the market you are getting into. Ask yourself and be able to answer the following questions and you will be on your way to owning and operating a successful STR:
Are people traveling regularly to the city/town I am looking to buy in?
What has the real estate market looked like historically and how has it performed recently?
How does the local municipality/county treat short-term rentals?
What does the local competition look like and how will I be able to set my property apart?
As always, good luck in your endeavor and enjoy the journey!
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