Investing in Short Term Rentals

Posted on February 29th, 2024

Short Term Rentals (STR’s) appear to be in the news quite a lot lately. If you live near a beachside community or some other venue where folks gather for any festive occasion, or at holiday times; you will find an influx of out-of-towners moving in just to be there for the holiday. This extends to winter resorts, summer times and any other resort town where people congregate seasonally.

STR’s appear to be a great way to diversify and to generate some strong returns to boost your income, as there appears to be quite a strong demand for such places. However before one takes the plunge into the STR market there are several things that need to be given careful consideration first. The location of the property, the local regulations, and not by any means of least concern is the financing of the property and all that goes together with it to make the venture a successful one..

Financing of a STR Rental Property.

Since this is to be a non owner occupied property there are several lenders who will be out of your circle of possible lenders. STR rentals do have some problems with operating in some states, towns and neighborhoods. While it might be similar to financing your primary residence it is viewed as carrying more risk. Since this is not going to be your primary residence you could expect greater scrutiny, higher rates and a longer qualifying process. You could expect higher interest rates and a larger down payment.

A traditional mortgage just might be difficult to obtain for a STR, thereby leaving you to turn to speciality mortgage lenders. There are mortgage companies that specialize in DSCR loans (Debt Service Coverage Ratio), which is a formulation designed exclusively for investment properties. What it does is provide the lender with a set answer which tells them if the property will provide enough income to cover its expenditure. With these companies the loan is not dependent on the borrower as much as it depends on the property income.

The Market for STR’s

As the mantra for Real Estate goes - Location, Location, Location. Short Term Rentals also share the same maxim. The locations that have the best views, those that sit on the best beaches or overlook the brightest festivals are the ones that are in most demand. To obtain properties in these locations one must be prepared to pay a premium. To say that there is market competition for these properties would be stating it mildly. A property placed in close proximity to all the amenities that the modern world expects yet allows for relaxing interludes of time; such a property would always be in demand. Still they can be as varied as a house on the Beach to a log cabin up in the mountains near a stream where the fishing is good. Just as human desires are varied so the places of their fulfillment varies.

A property so located would offer the owner the potential for higher returns than one would expect from any regular long term rental. To obtain such a property as that would require some research, vision and a lot of times quite a bit of persistence. Sometimes a property in top condition becomes available, sometimes you might have to obtain a parcel of empty land and build to suit. However what happens a lot of the time is to see a property that is in need of some repair set out and purchase it, then go in and bring it up to the required level that business demands.

Things Worth Considering.

STR’s have been coming under quite a lot of regulation from different authorities, both at state level and from county levels. You will need to check and see just how your property would be impacted by any such regulation. Are there any hidden tax requirements? How do you plan on having the property maintained? There will need to be checks between rentals. A manual of house rules would need to be created for use of the property, furnishings, marketing and securing of the property will have to be addressed.

A not so obvious problem that several STR owners face comes from the inhabitants of nearby homes. Some of these rentals attract many of the younger sect who indulge in loud music which tend to go on into the night, and this is coupled with alcohol  which brings with it police involvement. Another occurring situation is where a home that is usually rented to a single family has a situation where a younger member of the family takes over and brings a group of their younger friends. If you multiply that by two or three STR then the peace of the community gets shattered.

Now assuming that you were the first STR there and had no problems with the locals,  when it begins to increase you can see just how the problems with these types of residences will increase. This is just a glimpse of some of what can occur within your industry. It requires careful analysis before making any decision to tie up a lot of expenditure in such an investment. Is it a great opportunity for investment? Certainly. Does it come with some risk? Certainly. In all that might be said and done you will have to do your due diligence.

In summary; there is quite a growing market for Short Term Rentals, however to make a success of it requires some research, patience and all of the differing factors discussed above. This is not an exhaustive list but rather see it as a start.  Once you have arrived at the point where you have made a decision to purchase a property it is time to give me a call. Let us have that discussion so that we can find a lender who is versed in lending to income producing properties of that kind; he will get you your loan and send you on your way with this your next chapter on the adventures of your life.

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