How To Analyze A Short-Term Rental In 2023

In This Article

Short-term rentals (STRs) have become popular investments over the past several years, and for a good reason. They tend to cash flow well and can be extremely profitable.

If you’re thinking about investing in an STR, you need to learn how to analyze a deal properly, as it’s a bit different than analyzing traditional rentals.

What is Short-term Rental Analysis, and Why is it Important?

An STR analysis is when you gather all the information you can about a potential investment property and use it to determine the profitability the property can offer. The concepts and metrics used to analyze the profitability of STRs are the same as they are with traditional rental properties. However, gathering the right data to input into your STR analysis is a bit trickier, and there are a few extra factors to consider.

Income, rehab costs, utilities, property management, and other details are still the foundation of this analysis process. However, the problem comes in finding good data on STRs, as it varies widely based on the area. It can pose a challenge to alter the assumptions you might make when analyzing the nuances of an STR compared to a long-term rental property, but when understanding what data you need to have can make it much easier. 

With the right information, you can more accurately predict your expenses and profits when you get into the STR game. This can really help your cash flow, improve your revenue growth, and help you feel all the benefits of investing in real estate.

Short-Term Rental Revenue

Unlike traditional rentals, STRs have variable income. You don’t have a lease with a fixed monthly rent. Instead of being able to estimate rent based on a fixed amount, you can consider both occupancy rates (the percentage of nights per month you have a guest in your property) and average daily rates (the average price a guest pays for a night in your property). Multiply the occupancy rate by the number of days in the month by the average daily rate (ADR) to get your estimated monthly income:

Occupancy rate x calendar days in month x average daily rate = estimated monthly income

If you are analyzing a deal in a metro area where bookings are consistent year-round, that’s all you need to do. You have your estimated revenue! But if you’re considering an STR in a vacation destination, then you’ll want to get a bit more sophisticated in your analysis and account for seasonality.

What Is Seasonality In An STR Analysis?

Seasonality is a statistical term that measures patterns in data over time; it doesn’t actually have anything to do with the seasons. Many STRs experience what is known as annual seasonality, where revenue follows a similar pattern each year.

That pattern may mean a huge spike in revenue during the ski season, followed by a slowdown in the spring. Some STRs might have their best months over the summer, followed by a down season come fall.

A pattern of peaks and valleys likely occurs every year, so it’s important to factor seasonality into analysis to ensure that it’s as accurate as possible and that there’s no risk of cash flow shortfalls during slower periods.

How To Analyze A Short-Term Rental Market

While analyzing a traditional rental market has similarities to analyzing an STR market, there are many details that make the process different. Let’s look at how to analyze a short-term rental market and what goes into it so that you can make the right investment choice: 

Estimate monthly revenue

In order to estimate the monthly revenue that an STR can offer, you need to create a table with the following data for each month:

• ADR
• Occupancy rate
• Days in a month
• Occupied days

You can lay it out in a chart like this one:

Use the occupancy rate and number of days in a month to calculate the occupied days and then multiply that by the ADR to get your estimated revenue. You can input your numbers into the BiggerPockets calculator to help you with your revenue analysis. This table can give you a good idea of your cash flow for the entire year and for each month. Seeing the data laid out this way will help you understand how much you need to keep in reserves during slower seasons.

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Find occupancy rates

If you’re wondering where to get data on occupancy rates, there are two good places.

Your first option is AirDNA, which is a company that provides all the relevant data you need to run a good analysis of an STR deal.

Here’s an example of one of their dashboards:

They show high-level stats about the market and occupancy rates, and ADR by month, enabling you to thoroughly analyze your potential rental income. Prices depend on which market you want to look at but generally run about $30 to $50 per month per market. Not bad for helping you make a good decision on an investment.

If you don’t want to pay for the data, you can opt for the second option: Airbnb, VRBO, or other sites that help you calculate these numbers yourself.

Using Airbnb, you can determine occupancy rates by clicking on any property calendar. This lets you see how many days a property is occupied for the month. In the image here, you can see that the vacation rental is occupied for 25 out of 31 days in May, or  81% of the month, and 30 out of 30 days in June, or 100% of the time — that’s great occupancy.

You can also see the ADR on the site, which looks like this:

If you’re going to calculate your own numbers using Airbnb or another vacation rental website, make sure you’re thorough. Look at several properties that are good comps for your deal and look at their calendars year-round to account for seasonality.

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Determine cleaning fees

Although you don’t have to charge a cleaning fee for your STR, most investors choose to do so to keep their properties looking good. The amount you charge will depend on:

• The size of the rental.
• The cleaning service you use.
• The number of days a guest stays.
• The amount your competition charges.

For example, you wouldn’t charge the same amount to clean a one-bedroom apartment as you would a five-bedroom house. Whether you’re cleaning the place yourself or having a company provide the cleaning service will also factor into the cleaning fee you decide to implement. If you charge the cleaning fee once when the guests book the rental, you may eliminate one-day bookings that require you to clean the unit more often. Check out what the comps charge for cleaning services, and ensure you keep your rate competitive.

The cleaning fee is likely to be eaten up by, surprise, the cleaning service. But in some cases, it’s possible to charge a little extra to pad your STR revenue.

Understand historical performance

Historical performance is how well the vacation rental has maintained occupancy in the past. This can be difficult to determine for new investment properties, but looking at other STRs in the area is helpful to see how often they stay occupied. Understanding historical performance helps you learn the seasonality of the area.

You can also look at tourism trends to understand how often you can expect demand for your rental to be high. Try to look at the last three years at a minimum, but using five years’ worth of historical data can lead to a better STR analysis.

Learn about future demand

Like historical performance, learning about future demand can help you analyze a short-term rental’s potential for revenue. You may have lower demand starting out in an up-and-coming area, but as the popularity grows, you’ll see more people wanting STRs in the location. On the same note, an area that may be losing popularity due to over-tourism might experience a downturn. Although the area could bounce back, it will affect the revenue potential in the interim.

Use precision filtering

Use precision filtering on sites like Airbnb and VRBO to hone in on properties that are similar to the one you want to invest in. This feature allows you to select the number of rooms, types of amenities, and the number of people the rental can sleep with. Using the filter tool can not only let you see properties that better match the one you want to buy, but it can also help you see what types of units people are interested in or which ones the area may be lacking. If you notice that most of the rentals are three-bedroom houses, you may benefit from being the only one renting a one-bedroom apartment or vice versa.

Filtering helps you see ADRs and occupancy rates, and you can use these numbers to create your analysis.

Track your competition

Looking at the comps in the area is a big part of determining your potential annual revenue. The comps allow you to see when the slow times are so you can calculate this into your final profit and loss statement. It’s helpful to see if there are certain times when you may be able to increase your rates or seasons when rates might have to be a little lower. Even after you make your investment move, you’ll want to watch what your competition is doing. Because if they raise their rates, you probably can too.

Tools To Help Analyze a Short-term Rental Market

When it comes to STRs, it’s all about what the market can bear. There are several tools available to you that will help you get a better understanding of the STR market, including:

Airbnb calculator

Find an Airbnb calculator to help you learn your average occupancy rate and the ADR you can charge. These are the big numbers that will determine your monthly and annual revenue. Using data that Airbnb tracks allows you to get a good picture of what your competition is charging and how many rentals are already in the area.

Market research

Doing a lot of market research will ensure you understand the area and what to expect when getting into the STR market. Because a short-term rental property is different from a long-term rental, you’ll need to look into the market with other factors in mind. For long-term rentals, the job market and amenities like doctors, schools, and parks are important determinants for success and keeping occupancy high. 

But when it comes to STRs, you’ll need to understand seasonality and an area’s attractions. The more you understand the market, the more prepared you’ll be for your actual earning potential.  

Estimating Expenses In An STR Market Analysis

You need to include expenses in your STR analysis. The expenses for a short-term rental are similar to those for a long-term rental, but you can use this list to see where they might vary:

• Furnishing costs: Furnishing costs aren’t something you have to consider with a long-term rental, but there are ways to keep this expense low when you have an STR.
• Financing: Mortgage rates may be different for STRs depending on your loan provider. Make sure you know what your rate will be when creating your analysis.
• Taxes: Regardless of the type of rental property you own, you’ll have to pay taxes. Look into what taxes you’ll pay on a short-term rental, as they could differ from other property taxes.
• Insurance: You may need additional insurance coverage for a short-term rental property since it sees many guests, which can make it a higher liability.
• Property management: If you employ a property management company like Airbnb, you must understand the fees they charge for accurately estimating your revenue.
• Rehab costs: If something happens to the rental property or it needs to be rehabbed when you buy it, it also needs to be figured into your analysis.
• Repairs and maintenance: Repairs and maintenance are inevitable costs that you’ll have to add to your analysis to ensure you keep money set aside for this.
• Utilities: Unlike long-term rentals, you’ll be responsible for paying all the utility bills at a short-term rental property. Put this in your analysis and make sure that you estimate these costs a little higher, as tenants may use more than you expect.

Putting It All Together

So that’s it. To estimate short-term rental income, learn how to start an Airbnb, figure out ADP, occupancy rate, and seasonality. Once you have those numbers, you can plug them right into the calculator and start analyzing your deal.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.