You're about to discover a new twist, thanks to technology, on the age-old concept of short term vacation renting of a house or of a condo. Not just so that you can have a vacation home, like I described in a previous training, "How to Make Your Vacation Home Dreams a Reality". Instead, in this training, I'm going to take this concept to a whole new level and focus on short term vacation rental from an investing standpoint.
Five Steps to Short-Term Vacation Rental Investing
Airbnb, VRBO, HomeAway, and now to a lesser extent, TripAdvisor, have opened up an amazing way to make more money with a rental. I have a video called, "Three Ways to Turn a House into a Cash Flowing Machine", where I introduced the concept of producing more profits with a house by converting it into a short-term vacation rental.
In order for this concept to work, you don't necessarily have to be in some far off Caribbean island or a ski resort. Short-term vacation rentals can be successful in many locations because they are competing against the local hotels and motels. More and more travelers are travelling as a family and want more space when on vacation. Now, thanks to technology, we can put this altogether and put it directly into your hands instead of using a local property manager.
1. Do Your Research
Legality: The idea that someone can put their house up as a short-term vacation rental is a relatively new concept in legal terms. This means that a lot of these houses are in residential neighborhoods and are zoned as a single family home. Not all communities will have laws for short-term rentals but some will put a law in place that says you cannot rent for less than 30 days. Make sure you research the legality before converting a home into a short-term rental. You do not want to go ahead and turn your home into a short-term rental and secure bookings as far as a year in advance, only to be shut down by the government.
Market Research: To ensure your vacation rental will be profitable, you need to look into other vacation rentals in the area. Check out your competitors on HomeAway.com and AirBnb to see what their nightly rates are and then look at their calendar to see how booked up they are. You might even consider calling a local property manager for more information.
Profit vs Cost Research: You can use a booking agent to research some of your competitions profit statistics. Look at what they're bringing in, and most importantly their gross revenue. Gross Revenue is the actual rental money that could go to you as the owner.
Deduct Your Bills: If the gross amount is $45,000, then next you need to subtract any extra costs. With a short-term vacation rental you will be paying all utilities, cable and internet. Don't try to cut corners on the cable and internet because most travelers will want to have them available during their stay. Other expenses include things like lawn care or possibly pool care. You're going to need to look at what revenue the vacation home will generate. Is it significantly more than it would make as a normal rental?
2. The Sweet Spot
What type of property is going to give you the most beds, at the least amount of cost, but also has amenities? If you're in the Smoky Mountains it's going to need a view, be easily accessible by car, and preferably be a log cabin. If you're near the water you will want to be close to the beach, but you don't necessarily have to be waterfront. Waterfront properties typically cost more but they don't generate nearly enough revenue to compensate for the additional cost of purchase. It is best to be close enough to where it's not a long bike ride or a really long car ride to the ocean.
The best way to figure out what amenities your property needs is by studying what your competition has and what they are putting into their listings. Really research what they're offering to pick up on ideas on what amenities you should provide.
Another important factor is the number it sleeps. The number of people that a rental sleeps is a huge determining factor on how much money you can make. If a property has limited rooms, you can improvise by adding a pull-out couch or even bunk beds to a bonus room. The sweet spot property has the amenities, the beds, and then it has to have a "Wow Factor".
The "Wow Factor" is the reason why people love your property and want to take a vacation there. For instance, the Smoky Mountains has a great view or if you're just in a major city, it may be accessible to the subway, or have something there that people are really, really going to like.
3. Renovate and Furnish
Typically there are certain things that you need to accomplish in order to make a vacation rental more traveler friendly. You can win big by how you renovate and furnish your vacation home, so be sure to make it very homey and comfortable. Nice furniture, wall decor, and basic essentials a traveler would need like pots and pans, towels, and all of the little things, will help your guest feel right at home.
This is by far the biggest difference between a normal, traditional investing arrangement versus a short-term vacation rental. You're going to have to pay to get it furnished, and this can be $10,000, $15,000, or even $20,000. This will be more difficult for those that are cash challenged because you can't typically borrow money on furnishings unless you get a credit card with high interest rates.
If you look at the math and the property is going to be very profitable then the furnishings are negligible. I typically pay off the entire cost of all the furnishings for my properties in half a year or less.
Make your vacation rental wonderful; make it a home and it will have a huge impact on your star ratings which makes a big deal over time. This will also have a huge impact on the ability to get the vacationers to come back. Ideally, you will start building a brand where people want to stay in your properties because they're amazing and have all of the little things that most competitors don't.
4. Booking Agents
Short-term rental platforms like HomeAway, Airbnb, VRBO, and TripAdvisor, require you to respond in 24 hours or less. That's not freedom. With a traditional rental you just have to pick up your rent each month, maybe pick up a phone call or two, or you can hire a property manager to do it for you. A booking agent is kind of like a property manager only they're more suited for this particular industry. They're the ones that are handling the property inquiries that are coming in on a daily basis.
Evolve Vacation Rental Booking Agent
One of the biggest booking agent companies out there is Evolve Vacation Rental Network. This group is wonderful because they don't just pick up the phones, they also manage your listings. If you don't know how to set up an Airbnb, VRBO, or HomeAway listing account very well then you're going to be in trouble because that's where all the bookings come from. These people have already figured them all out and they'll manage it for you.
Another big thing a booking agent company will do is dynamic pricing. There are tools available that the hotel industry has been using for ages where they dynamically price the unit based on the time of year, whether it's peak week or not because there's an event coming to town, and based on what the competitors and hotels are charging. It's amazing. If you want to build your own vacation rental listing accounts then I would suggest using UseWheelhouse for AirBNB & TripAdvisor and BeyondPricing for HomeAway/VRBO. Pricing is going to make or break you in this game. If you price too low and someone books that slot of time, you won't get that money back. If you have short changed yourself, you're going to lose money. Dynamic pricing tools have been a game-changer for me because it maximizes my pricing. I was blown away by their algorithms because they were pricing some of the peak weeks a lot higher than I was. So I made the adjustments and still got the bookings, just more money. (A booking agent like Evolve will also dynamic pricing for you.
Short term vacation rentals require more robust bookkeeping above and beyond a typical property management system because of "occupancy taxes". This is what hotels and motels have been dealing with as long as it's been in place. 12.5% to 13% is normal. This gets paid above and beyond what you get paid. You can charge this to the guest so it's not going to be an expense to you, but you do have to pay the government on what you collect.
There's a service called My Lodge Tax that will do your bookkeeping for you. One of the most frustrating things about setting up occupancy taxes is the amount of time it takes to set up the licenses and get everything in place. One of my properties took over 10 hours to get set up just so I could pay the government. Mylodgetax.com will do this for you. I haven't used them but they're recommended by HomeAway so they might be pretty good.
And the tide is turning here because AirBNB and HomeAway ars beginning to collect occupancy taxes so that you don't have to. So the day may come when you won't even have to do deal with collecting and paying occupancy taxes because the big platforms will do it for you. (They are doing it based on new governmental pressures and litigation; they're not doing it to help you)
Other Benefits of a Vacation Rental
A short term vacation rental is obviously more complicated than a normal, traditional rental, but it can make way more money. Another benefit is that you don't have to evict anyone because they are travelers, they're checking in and then they're leaving a few days later. Evictions are non-existent. In the world of normal, traditional rentals, evictions are very common and it's frustrating because the laws are setup mostly to protect tenants, so landlords typically get screwed. Yet another benefit is that you get your money upfront, so you're not chasing tenants for rent. They're paying you a portion of the rental fee up to a year in advance, so you always get your rental money.
Short-Term Vacation Rental Summary
Research: Make sure you're picking up properties that are profitable, as well as legal.
Find the Sweet Spot: Have a good sleep number and the amenities that travelers are looking for.
Renovate and Furnish: The better you furnish the better off you're going to be
Hire a Booking Agent: Not only do they help with the listings and dynamic pricing, but they also can help coordinate with the cleaning and the maintenance.
Bookkeeping: It's important that you forward whatever occupancy taxes you collect to the appropriate government agencies.
All these things have to be in place. When you do that, this can be a magical real estate investment formula. You can make a lot more money for the same property you currently have that you might be doing a traditional rental on.
UPDATE! Here are 7 Advanced Vacation Rental Investing Tips to take your short term rentals to the next level!