Investing in real estate can be an amazing experience—and a great way to earn passive income while someone else (or a bunch of other people) pays your monthly mortgage. Home-share platforms like Airbnb, Vrbo, and other vacation rental websites have made it even easier for those who want to market their investment properties as short-term rental property.
Though you have to know your market and do your research before you invest in short-term rental properties, these can be very lucrative in the right markets. These include travel destinations where vacation rentals thrive and even locations that experience a lot of business travel, such as conference-heavy cities or markets with dominant industries, such as healthcare.
Fantasizing about purchasing oceanfront vacation rentals or a home near a large medical R&D campus can be fun, but making this happen requires a little knowledge. Thankfully, it’s nothing you, your real estate agent, and a trusted loan officer can’t handle.
We know you’re already itching to look at nautical décor, but first take a look at these tips.
Definition of a Short-Term Rental Property
Before we get into the nitty-gritty, let’s make sure we’re all on the same page in terms of what defines a short-term rental property. A short-term rental property is one you purchase with the explicit intent of renting it out to multiple people for multiple stays, the lengths of which may vary from a few days to a few months. (Of course, you must check with your city and HOA to understand the specific rules regarding short-term rentals in your desired area.)
You also have to consider what type of dwelling you want to purchase when investing in short-term rentals. These can be anything from single-family homes to condos, townhomes, apartments, and more. If you look on Airbnb, you’ll notice that people also rent out RVs, teepees, and even chuckwagons as authentic vacation rentals, but for our purposes—and in terms of financing—we’ll be referring to the previously listed dwellings.
The other thing to remember when buying short-term rentals is that they’re often confused with second homes. While you can buy a second house for you and your family to use, you can only rent that property out for two weeks or less per year. The type of financing you choose will dictate the function of the property (as will local rules and regulations), so you want to be clear that your intention is investing in short-term rentals.
Now let’s get into some specifics that you’ll want to know when buying short-term rentals.
1. Specialized Insurance Coverage
Many people are unaware that standard homeowner’s insurance may not totally cover their short-term rental property. In addition, most short-term rental platforms require their hosts—aka the homeowners —to have specialized insurance coverage that protects against potential damages or liability claims. This additional coverage is essential for safeguarding your investment and mitigating risks associated with guests staying at your property. You’ll want to talk with an insurance agent to ensure that you’ve got the right coverage in place.
Unfortunately, you have to think about the way people treat rental cars. In some cases, short-term rental housing may receive the same rough treatment. That’s why it’s always a good idea to keep valuables out of the home, establish clear house rules, and provide décor and furnishings that are pleasant but not irreplaceable.
2. Local Regulations and Zoning
You may have picked up that this one was coming. Just because you’re set on buying a short-term rental doesn’t mean you can purchase one in any market or community. You have to research and understand the local regulations and zoning restrictions that govern short-term rentals in your desired area.
Not all markets welcome vacation rentals. HOAs or local authorities can also impose limitations, bans, or moratoriums on short-term rentals. Failure to comply with these regulations can result in fines and legal issues.
So put your due diligence cap on, and be sure your investment goals jibe with local laws and regulations. A real estate agent can help, but city codes/zoning and HOA rules will be the final word when it comes to short-term rental investment viability in your market.
3. Financing Options for Short-Term Rentals
Financing a short-term rental investment is not much different from traditional mortgages for primary residences, second homes, or even long-term rental investment properties. It would be purchased as an investment property, but the rental income is a little tricky to predict or include in your qualifications. There is typically a larger down payment required than for a primary residence, but the rest of the process is quite similar.
It’s essential to consult with a knowledgeable APM Loan Advisor who specializes in real estate investments to explore the financing options available to you. They can help you find tailored loan programs that meet your needs.
4. Using Rental Income to Qualify
Let’s throw you a bone after that last downer: You can use short-term rental income projections when qualifying for a mortgage.
That’s because lenders consider the rental income generated from short-term rentals as part of your overall income when assessing your eligibility for financing. In other words, this potential income can boost your debt-to-income ratio and maybe even get you over the goal when it comes to qualifying for financing.
This gets a little tricky to use for the purchase, as it’s sometimes difficult or impossible to get a rental survey on an appraisal for a property that is intended as a short-term rental in an area where these are not common.
If the appraiser is unable to provide a rental survey with the appraisal report (this is often the case with short-term rentals), then rental income can’t be used for qualifying. The good news is that a year or two down the road, once you have that history in hand, you can refinance to more favorable terms if you wish.
Just like cities and HOAs, however, lenders do have specific guidelines and restrictions regarding the use of rental income. That’s why you need an experienced Loan Advisor to help you navigate these complexities and maximize your chances of qualifying for financing.
5. Evaluating the Market
Now you understand some of your financing, insurance, and other obligations when investing in short-term rentals. So let’s move on to whether buying a short-term rental makes sense for you.
Knowing if a short-term rental is allowed in an area—and whether there’s lots of demand for short-term rentals in that region—is a start. Then you have to assess your actual property and the potential fees associated. These can include property manager fees, maintenance costs, and operating expenses.
You also have to analyze the average daily rate and occupancy stats in your target market. All of this will help you get a sense of the investment’s realistic cash flow.
There are many, many people who enjoy the passive income that can come from investing in short-term rentals. Hearing a story or two from someone you know may even be one of the reasons you’re looking into owning short-term rental property yourself!
This is a completely doable goal—and not just for high-powered real estate investors. The short-term real estate market can be anybody’s playground, as long as you understand the rules of the game. APM does, and we’re happy to help get you started. Give us a call today.