Ways to Invest in a Short Term Rental/ Airbnb
You’ve heard us say it before, we love short term rentals, and in our opinion we believe they can be an incredibly lucrative way to diversify your real estate portfolio. And we also love that they can afford a way to maximize profits and margins over that of a traditional long-term rental, which might mean the difference especially when investing in a competitive market where multiple offers eat away at a good price. That being said, we often hear that the initial investment into property for short-term rentals along with the cost to renovate and fully furnish can be a drawback upfront, and thus here we want to give other ideas on how to begin your STR investment journey.
In this comprehensive guide, we’ll explore four ways to get started including: arbitrage, house hacking, becoming a co-host and of course traditional property ownership. We’ll also give you the pros and cons of each type so that you can determine whether or not a particular option makes sense for your personal financial situation.
Arbitrage
Partner with a Landlord to lease a property where there is STR demand. In this scenario it’s imperative that you have approval to rent as an STR and start with a 1 year lease.
Pros:
low capital investment
Transition of property can be very quick
Offers flexibility in trying out areas
No closing costs, lender approval
Way to minimize risk
Cons:
dependent on landlord, little control
Potential lease restrictions
Hoa might change regulations
No opportunity to build equity
No tax depreciation benefit
House Hack
Think duplexes with an opportunity to rent a side that pays for your own. This is sometimes the only option in areas like our local downtown Charleston area.
Pros:
ability to live for free by taking money from rental to pay for other side
Builds equity in property
Tax benefits like depreciation apply
In certain cities this is the only means to short term rent
Cons:
sometimes can be difficult to live and manage property side by side
Some city zoning will not allow this option
Privacy is hard to come by and owner can’t escape the “business”
High initial investment
Higher amount of risk
Co-Host
Many owners don’t want to pay a large property management company a portion of their profits (to the tune of 18%+) and will often look for locals that will host and handle guest communications, coordination of cleaning... for less.
low initial investment
No need for property ownership
Offers flexibility in trying out/ testing areas
Way to minimize risk
Can learn from experienced hosts
Turn key way to generate profit right away
Cons:
dependent on owner/ host
Little control over property and entire experience
No opportunity to build equity
NO tax depreciation benefit
An example of this is working with a property owner to manage their waterfront condo. As a co-host you take the place of a traditional property management company, but still complete many of the tasks they would from coordinating cleaning and maintenance to communication with guests to handling bookings.
Ownership
Of course we are huge fans of owning your own because not only can it be a cash flow game but also you can see an incredible amount of appreciation and tax benefits. You can peep our rentals here!
Pros:
This is the only option to have complete control over all decisions
Ability to obtain appreciation and cash flow
Can utilize the property personally as a vacation home
Can benefit from all tax deductions
Build equity in property
Cons:
Higher risk
Harder to find properties in a tight market that fit margins needed
Responsible for all maintenance on property
Changes in market might affect overall profitability and thus put investment at risk
Clearly short terms rentals offer many options depending upon your risk tolerance and investment objectives. Whether you might like the flexibility that arbitrage brings, the collaborative setup of co-hosting, the potential to live for free with house hacking or the control over your investment you get with property ownership each method deserves a deep dive to understand if it makes sense for you. When you are ready to explore the potential that short-term rentals afford we’ll be here to assess the strategies, the market, and help define your vision for success as you begin.