Flexibility during peak demand
Flexibility is one of the main benefits that real estate owners can expect through a short-term rental strategy. Long-term rental properties primarily provide income, while short-term rentals can be used for multiple purposes. This includes the flexibility for owners to stay at home, book a home for friends and family, postpone costs or make a profit when renting a home.
The flexibility of property usage allows owners to take advantage of rates during peak rental seasons, which may be more advantageous in some locations. Long-term rents are fixed on leases, so owners may not benefit from increased demand and increased profitability.
Rental properties are undeniably illiquid investments that can support a diversified portfolio, but should not be done at the expense of long-term goals. Owners of rental properties lack the ability to withdraw from the property when needed. This should be considered before investing.
Investors should also consider incidental costs that can be high with short-term rentals. The higher the sales, the higher the wear, and the higher the cost of furniture and cleaning. While these costs can be passed on to some extent, the owner must also build while the house is empty to allow cleaning and the transition of renters. Owners should also be aware of surprising hurdles regarding start-up costs, potential rent reductions from gates, and other cash flow challenges.
As short-term rentals grow in popularity, there are restrictions around them. Owners need to conduct an investigation to ensure that they understand the potential of the lessor and local law.
Future real estate owners may not have a crystal ball, but they need to carefully consider their investment potential to gain confidence in their economic feasibility.
Before committing an investment, the prospective owner needs to make sure that the property fits well with the overall financial strategy. Do property maintenance costs hinder financial soundness? How does the inevitable empty period affect cash flow? Do unexpected challenges, such as recession, upset medium- to long-term goals?
Short-term rental and future prospects
Lifestyle changes caused by pandemics have had a major impact on the short-term rental market. Since 2020, the telecommuting boom has allowed consumers to move around, making one- or two-month rentals a more viable option. In fact, short-term rental properties are expected to reach record highs in 2022, following last year’s 9.4% year-on-year growth. According to GlobeSt..
Whether seeking temporary privacy expansion, larger living space, or revitalization of the new environment, consumers are taking advantage of the new slate for short-term rentals available. If these consumption habits become more pervasive and remote work is gaining popularity among employers, owning a short-term rental property can become even more profitable.
Recent growth in demand has countered the decline in home inventories, and if it is maintained, owners should be able to rent a home at a premium.
With these benefits in mind, investors should be aware of the recent rise in interest rates due to the Federal Reserve. Higher funding costs can increase the cost of entering the short-term rental market, making it difficult to earn profitability and requiring adjustments to your rental strategy.
Evolving market conditions
Whether people are thinking of renting an existing home or interested in buying real estate for a short-term rent, careful research and comparison of evolving market conditions with basic investment realities It is essential to consider. A wise balance of these factors allows stakeholders to own, share, rent, invest, and profit from their (or lessor’s) dream home.
David Mount is Director of the Wise Investor Group at Robert W. Baird and Company in Reston, Virginia. Baird does not provide tax, legal or real estate advice, nor does it provide mortgages or services.