Are you considering investing in short-term rentals? As we emerge from the pandemic, travel and Airbnb short-term rentals are taking off again. While there has been a surge of investors in this red-hot market, there are short-term rental risks to be aware of before you make the leap.
Short-Term Rentals Defined
But let’s get our definitions straight first. What is a short-term rental? For the purposes of this article, a short-term rental is a property that is leased for less than 28 consecutive days. Whether it’s a beachfront vacation rental or an in-town furnished unit, if it rents for a few days at a time, a week or two, or even most of the month, it’s considered to be a short-term rental. For renters, they are a “homier,” more attractive option to a hotel room.
The Upside of Short-Term Rentals
The earning potential can be very lucrative. Well-managed, a short-term rental can bring in significant income if it is rented out continuously. If it is a property that you sometimes use, there is definitely flexibility when it comes to when you want to rent it out, as you decide availability dates. Both points are strong pros, however, there are some cons to think about as well.
Short-Term Rental Risks
Short-term rentals definitely have an allure, but they are not without their risks as well. Here are just a few:
Rental properties can be seen as a higher risk by some financial institutions. If the property is not just for personal use only, there could be more stringent qualifying criteria for a mortgage. Regardless of whether or not you plan to use it as a rental property, the mandatory minimum down payment to qualify for an insured or non-insured mortgage can vary on any property that is not owner-occupied.
Higher Upfront Costs
Many short-term renters are vacationers with families who want an alternative to a pricy hotel, vacationers who want a “local experience” by living in their desired holiday area, or business people who want a more home-like retreat. As such, short-term rentals are furnished and nicely decorated to create a home-away-from-home feeling. Appliances, furniture, curtains and kitchen basics (plates, cutlery, cookware, etc.) will all need to be purchased before you can rent your property out.
No Guaranteed Income
Even though the rent rates are much higher than for a long-term lease, vacancies are also higher and you cannot be sure that you will have continuous rentals throughout the calendar year. This may not be a problem during the peak season, but during the low vacation season, it can be hard work to find enough tenants and you may have to reduce the rent.
Short-term rentals by their very nature require more effort. Because of the frequent turnover of renters, short-term rentals are harder to manage, due to frequent cleaning and administration. You need to meet and greet your temporary tenants and be available in case they need something.
As guests arrive and leave every few days, or every week or so, it’s only natural that things get used or broken. Another one of the risks of short-term rentals is the amount of upkeep they require to keep things welcoming for guests. This includes a thorough cleaning between renters, as well as replacing staples, like towels detergent, shampoo, toilet paper, etc., that vacation renters expect. You may also have to make quick paint touch-ups to cover up scuffs on the walls. And, lastly, vacation renters are barely screened, and you do run the risk of renting out to a bad apple who just wants a space for a big, loud party.
Depending on the location, some areas of Canada have an extraordinary number of available short-term rentals available, and many owners find themselves vying for the attention of prospective renters.
Far more so than long-term lease properties, short-term rentals are review-driven. Low-star ratings can negatively impact your rental. Bad reviews cannot easily be removed. Short-term rental investors need to ensure a good customer experience to thwart bad reviews.
There is no doubt that a short-term rental can add diversity to your investment portfolio, and if rented consistently offer a good source of revenue. However, before you snap up that waterfront country house, be sure you have reviewed all the risks and are prepared. In many ways, long-term rentals deliver a steady income and are less hassle. Whether you are a short-term rental investor or a rental property investor with a large portfolio, smart property management software can help you run your business more efficiently and lower costs. See pricing and talk to us about how we can help.