There are plenty of stories out there about someone who successfully transformed their home into a dream investment that pulls in thousands every month. So you may be tempted to romanticize a reality where the home you currently occupy, or a second investment home could become an instant cash cow.
We are believers in the power of thoughtful and strategic real estate investing. However, the path to success in any kind of investing can involve a fair amount of dead ends, pitfalls, and educational situations.
I happen to have a strong personal preference for the Long Term Rental. It’s not as immediate or as hands-on as a Short Term Rental. It’s a way to build equity in an investment home while having your mortgage paid every month. It brings me a steady and predictable income, and there is typically less of an investment involved on the front end.
My business partner Jenni has had some success with Long Term Rentals, Short Term Rentals, and what are called Mid Term Rentals. A Mid Term Rental is sort of a middle ground. Available on some short-term rental sites, like Airbnb, it allows you to rent out a furnished home for anywhere from 30 to 90 days.
The bottom line is something that works for one person, may not necessarily be the ideal situation for another.
Here are five reasons we can think of that owning a Short-Term Rental might not be the right choice for you.
1. It might not be legal in your area.
The very first step to owning a short-term rental is to make sure it’s legal in your area. In some states, property managers and hosts are simply required to obtain a license. In other states, neighborhoods, or HOAs, running an Airbnb out of your home may be strictly prohibited. In this case, going ahead with your plans and getting caught may result in a fine and a shutdown of your Airbnb business.
The best way to find out if a Short Term Rental is legal in your area is to look up the city and county laws surrounding it. For instance, according to slc.gov, “The city does not currently have regulations or allowances for land use known as ‘short-term rental’. Short-term rentals are generally categorized as hotel, motel, or bed and breakfast uses. These are permitted in multiple zoning districts around the city. “
You can use slc.gov Zoning Look-Up Tool to determine the zoning district for your property. You will also want to obtain an Administrative Interpretation, and a Business License for the city of Salt Lake before you open your Airbnb business.
2. Your front-end investment can be sizable.
There are a number of ways you will likely have to prepare a home for long-term rental. This might include minor repairs, paint, window coverings, yard maintenance, and finding a trusted management company (or better educating yourself on managing the property on your own). You will want to know how to find and select tenants who are a good fit for the space and can be trusted to treat your property with respect. And you will want to understand the local and federal regulations around Fair Housing as well as your local Landlord Tenant Laws.
If you are considering becoming a Long-Term Rental Owner but don’t know where to start, sign up to be notified of our next Long Term Rental Management Class.
In contrast, the initial preparation of a Short Term Rental can be far more involved, and costly. Not only will the home itself need to be in good condition, but you will want to consider thoughtful interior design, enticing amenities, and additional comforts that may exceed even the typical hotel stay. A Short-Term Rental will need to be fully furnished and stocked with everything you could need from kitchen appliances to utensils, bathroom towels, bedroom linens, and possibly extra amenities such as coffee, tea, and a few snacks.
Additionally, the Short-Term Rental business is all about occupancy. You will want to book your space for as much of the year as possible and you will want to be able to charge enough to cover your expenses and make a profit. Guests will consider paying a little extra for something special, so adding amenities that might set your space apart such as a hot tub, sauna, pool, or fireplace means you can increase your nightly rate.
Most Short Term Rental owners can expect to invest anywhere from $20,000 to $40,000 or more into an existing property before the space will be ready to list. So be sure you have enough of a reserve to ready your property and make it enticing enough to potential guests in the face of competition.
3. Owning an Airbnb can be a full-time job.
While it may be tempting to think of Airbnb as ‘passive income’, in our experience, and the experience of our colleagues, owning an Airbnb can be a full-time job. With a Long-Term Rental, the in-between stages of moving out a previous tenant, prepping the space, and selecting and moving in the next tenant may take some initial work. However, as the average long-term lease lasts for at least 12 months, you can expect your initial work to pay off in the form of a lasting tenant who will settle in comfortably and need little else for some time to come.
With a Short or Mid-Term Rental, you are dealing with frequent communication around booking, arrival, getting settled, and checking out. You will want to be available to answer guest messages quickly (and at all hours). You will also need to coordinate and schedule regular cleaning of the space between guests.
If customer service and scheduling are not your strong suit, or you’d rather not have to figure out how to get a can opener to your tenant at 9 pm, then a Short Term Rental might not be the right choice for you.
If you’d like to know a little more about the first-hand experience of managing a Short Term Rental, check out one of our latest podcasts where agent Craig Oborn discusses his love of owning an Airbnb with the two of us, who have had more varying experiences from positive to negative.
4. There can be more risk involved with the Short Term Rental.
All forms of investing come with some amount of risk. The question is often, how much risk are you willing (or able) to manage?
While the potential for larger amounts of revenue with a Short Term Rental may be tempting, it’s important to understand that revenue can fluctuate. This can be particularly true in a place with a high amount of seasonality, meaning most visitors come during a certain time of year due to local attractions, weather, or accessibility. If you need the stability of the same amount of revenue every month, and can’t (or don’t want to) manage the possibility of far less revenue during certain times of the year, then short-term rentals might not be the right fit for you.
5. The place you are considering owning is far away from where you live.
When it comes to the hands-on nature of the Short Term Rental, distance can provide a major obstacle. So, it’s important to consider a space that is closer to your actual home. It is much easier to self-manage a short-term rental if you live nearby. Guests will often need last-minute items, such as an extra towel or a cot, you may need to check the unit to ensure it is in good shape before someone checks in, or there might be an issue with a lock, or inclement weather that makes the space difficult to access.
With a Long Term Rental, you typically only have to visit the property quarterly, and you can hire a management company to help with more frequent things such as potential maintenance issues or collecting rent.
6. The place you are considering owning is already saturated with similar Short Term Rental properties.
Before taking the leap of investing in a Short Term Rental, it’s helpful to shop your competition. If your potential Short Term Rental is competing against a number of other similar properties, then it may not be as lucrative as you had hoped.
It’s important to note that an over-saturation of Short Term Rentals in your area is not necessarily a deal breaker. Real Estate Agent and Short Term Rental Expert, Craig Oborn advises us to consider the property we own, or will own, and what might set it apart from our competition. You can use software like AirDNA to research a particular area and take a look at the layout of most competing AirBNBs. For instance, there may be a number of 1 or 2-bedroom homes on the market for your particular area but a shortage of 5-bedroom homes and a market for large families coming in for weddings or other family events.
7. The place you are considering owning is highly seasonal.
While owning a Short Term Rental near a popular ski area might seem like a no-brainer, it’s important to remember that heavy seasonality can mean going a number of months without great income. When mapping out your investment, you’ll want to be sure the high season will offset the low season.
Alternatively, additional draws such as easy access to local airports and major city centers or other summer attractions that are just as popular may help offset seasonality.
Understand Your Preferences
In summary, it's important to have an understanding of who you are, what your preferences are, and what your true limitations are when considering how you will invest in real estate.
For some, like Craig, owning a short-term rental property provides far more revenue than a long-term rental, and allows the level of flexibility and control of the space that a Long Term Rental could never afford.
While for others, like myself, choosing long-term tenants who come with strong references, and are a good fit for my space, ensures less investment of time, energy, and financial resources over time than a short-term rental and offers me a more predictable income while building equity.