Short term rental properties have surged in popularity in the last few years as a way to turn a quicker profit on a real estate investment. However, they are not without potential drawbacks. Let’s take a closer look at some of the risks of short term rental properties to help you decide if this type of investment is right for you.
What is a Short Term Rental?
Short term rentals, also known as “vacation rentals,” are properties that are rented out on a temporary basis-usually 30 days or less. In addition to vacation units, like those posted on AirBNB and other platforms, short term rentals also include home hacks and resort condos.
Short term rental properties are usually leased daily or weekly. In some cases, however, a landlord will offer a thirty-day lease.
What is So Great About Short Term Rentals?
Short term rentals are appealing to travelers looking for the comforts and conveniences of home while away. Most vacation units, for example, are fully furnished and allow tenants to cook, do laundry, have patio access, or watch TV in a separate room. Short term rentals are often cheaper than hotels, which charge a premium for amenities and cleaning services.
Short term rentals are appealing to investors because you can charge a higher rate than you would on a long-term rental. You can adjust rates seasonally to reflect demand and availability.
Risks of Short Term Rentals
Short-term rental properties, such as those listed on platforms like Airbnb or VRBO, can present both opportunities and risks for property owners. Here are some of the potential risks associated with short-term rentals:
Vacancy and Income Fluctuations
Short-term rentals might experience higher vacancies than long-term rentals, especially during off-peak seasons or when there is a decline in tourism or travel. As a result, your rental income can be less reliable.
Regulatory and Legal Issues
Some cities and municipalities have specific regulations or restrictions on short-term rentals. For example, some areas may require that you live on the property full-time in order to rent it out on a daily or weekly basis. Violating these rules can lead to fines or legal troubles. You may find yourself having to sell the property or switch to a medium or long-term rental. This can be a serious financial setback, especially given the higher up front cost often associated with short-term rental properties.
In an attempt to bounce back from COVID losses, the hospitality industry has also been lobbying against short-term properties. If they are successful, short-term rental owners could find themselves slapped with higher taxes and more stringent licensing and permit requirements.
Frequent turnover of guests increases the risk of property damage compared to having long-term tenants. Accidental damage, negligence, or even intentional vandalism can occur, potentially resulting in expensive repairs or prolonged vacancies while the unit is being cleaned.
Traditional homeowners’ insurance may not fully cover short-term rentals. You may need specialized insurance that accounts for the unique risks associated with short-term occupancy. Furthermore, If a guest gets injured on your property, you could be held liable for medical expenses and other damages. Liability claims can be financially damaging if you’re not adequately covered.
Higher turnover among tenants means the probability for negative reviews of your property significantly increases. Negative reviews from guests can harm your property’s reputation, leading to decreased bookings and income.
Competition and Market Saturation
Although certain cities are cracking down on short-term rentals, other municipalities continue to encourage them. These areas can quickly become oversaturated with available rentals, forcing owners to slash rental rates in order to compete.
Management and Maintenance
Managing a short-term rental property requires more frequent interactions with guests, handling bookings, and ensuring the property stays well-maintained. This can be time-consuming and may require additional expenses for professional management.
How to Buy a Short Term Rental?
None of this is to dissuade you from buying a vacation rental. Again, they can be wildly lucrative, if chosen carefully. If you’ve weighed the risks and have determined that you want to invest in a short-term rental property, you have several financing options. One of the best ways to finance a property purchase quickly and competitively is through a hard money loan. Next to a cash offer, this is often the next most attractive type of offer to a seller.
With Denver being one of the fastest growing cities in the nation, Colorado is a highly in-demand area for short-term rental properties. If you are looking for financing to secure a vacation rental in this gorgeous state, contact the professionals at Pinetree Financial. We understand the value of time in real estate, and we work quickly to help you secure funds as fast as possible. Call or go online today to get started.