​Thinking of Buying a Short-Term Rental

Thinking of Buying a Short-Term Rental? Think Again

Short term rentals, or vacation rentals, are big business. Most of these properties are located in tourist areas that get a lot of traffic during their peak seasons - meaning they also generate lots of cash for the investors who own them. However, the sustainability of this investment strategy is questionable, and investors should think carefully before purchasing this type of property. Here’s why:

1. Tourism can be a fickle business. Everyone loves a vacation right? Of course! Unfortunately, not everyone can take one. This becomes even more evident when the economy takes a hit, and people start cutting back on their “extras” - and vacations definitely qualify as extra. Short-term rentals rely heavily on the tourism industry, so when the tourists scale back their vacations, there goes the income on that rental property.
2. Rental prices are artificially inflated. Another issue is that the prices owners are able to charge for the units aren’t realistic for most people. Sure, they can find travelers willing to pay sky-high rates during peak seasons, but that’s about it. The prices don’t reflect realistic market rates, so locals in the area - the teachers, police officers, skilled tradesmen - can’t afford it. If/when the tourism dies down, owners will find themselves scrambling to fill vacancies, and the only way to do it will be to drastically lower their prices. When they’ve purchased the property at a high priced based on the expected income, this really stings.
3. Annual returns may not be so great. Sometimes it’s hard to see the bigger picture when you’re focused solely on the fact that you can charge $3,000/week for your beachfront rental - and people are actually willing to pay it. But remember, this rate only flies for a few select weeks out of the year. Once that time is up, you’ll be forced to charge a much lower, standard rate, and you may not even have any takers then. When you factor in the nights rented vs. the night vacant, your annual return may not be what you hoped. Add in all the associated taxes and fees with property, and you might be in an even bigger pickle.
4. Increased competition among property owners. Your property isn’t the only vacation rental on the block. If you’re in a busy tourist town, most of your neighbors are probably renting out their places too. This creates an elevated level of competition among owner-investors, with each trying to outdo the other to attract renters. You’re either going to have to pour money into attractive upgrades or lower your prices to beat your competitors. Both lead to less profits. Ouch.
5. There are lots of “tenants” and they can be a pain. With short-term rentals, you’re looking at new “tenants” every week or two. Maybe in the off-season, you can get someone interested in renting for a couple months at a time. But either way, your property is getting a lot of traffic, and not all of it desirable. The wear and tear on the rental will be far greater than your average long-term lease, and it’s not uncommon for renters to have last-minute cancellations or other issues that will cause you a headache.

The Airbnb craze has turned many people into investors when they otherwise wouldn’t be. And this isn’t necessarily a bad thing. But when people are lured into investment under the assumption they’re going to be making thousands of dollars every week on their property, it can come back to bite them because that is rarely, if ever, the case.

If you want a reliable, sustainable property that will generate regular income over the long haul, a vacation property probably isn’t the best choice. You need a long-term, buy-and-hold property in a good market that you’ve carefully screened for profitability.