Investing In Short-Term Rentals & What To Look For When Choosing A Market

Short-term rentals, also known as vacation rentals, are becoming big news in real estate investing. With the rise of such programs as Airbnb and Vrbo, more and more people are seeing the short-term rental scene as a legitimate source of investment income. However, it's important to have a strategy based on solid research when approaching this type of opportunity. Otherwise, you risk losing a great deal of money. Here's what to look for when investing in short-term rentals.

Do Your Research

You've likely heard anecdotal stories of people making a killing on their rental properties, but there's a good chance you haven't heard the whole story. Sure, these folks may be able to charge a significant rate per night; however, there are a number of other factors to consider. Understanding the occupancy rate, gross annual income, and expenses of an STR is crucial to long-term forecasting. Without this information, you could be left with a hefty mortgage and little profit.

Short-Term Rental Markets

There are three main types of markets in the short-term rental field. These are metro markets, national fly-to vacation markets, and regional drive-to markets. Which one is best will vary based on your investment goals and your risk profile. Someone who wants to earn a steady income will have a different strategy than an investor out to make the most profits in a short amount of time.

Metro Markets

Metro markets are found in large cities that are popular destinations for visitors, but that don't rely on tourism for their appeal. These areas have strong economies supported by various industries and plenty of jobs. They also tend to be densely populated with permanent residents. Homes for sale in Kansas City would fall into this category. These properties attract diverse travelers such as those staying for business purposes and locals looking for a fun staycation. For this reason, they have the potential to earn a great deal of cash flow. They also come with high risk and that's because of the competition from hotels and stringent STR regulations.

National Markets

National markets are dependent on tourism. Places like Orlando, Aspen, Miami, and Honolulu are all vacation markets. For the most part, these rentals are quite stable. However, they will be the first to see a decline in the event of a recession. You also need to consider the local zoning regulations for each market, based on local resident pushback.

Regional Markets

Regional vacation markets are places where most visitors are coming by car. Branson, Panama City Beach, Big Bear Lake, and Gatlinburg would be this type of short-term rental destination. Like national markets, these places are almost entirely dependent on tourism for their economy. Regional markets may often be more affordable than their national counterparts. They have accommodating STR regulations as well because the local government depends on these rentals. For these reasons, these markets are likely the most stable investments.

Keep this information in mind as you start to research investing in short-term rentals. With proper planning, this type of investment can help you reach your income goals.