Today, more than 3 million properties are listed on Airbnb, with the average host earning raking in $924 a month. But while there is money to be made with short-term rentals, it’s important for would-be hosts to ensure that they don’t dive in blindly, without first considering the full implications of renting out their home, or a portion of it, as a short-term rental.
Short-Term Rentals: What You Should Know
The term short-term rentals (STRs) refers to residential properties that are available to rent for a short period, anywhere from 30 days to six months.
These types of rentals have been growing in popularity in recent years, especially since the arrival of Airbnb, the app that’s become synonymous with STRs. Part of short-term rentals’ appeal, is in their charm — in a world of ubiquitous hotel chains, real homes offer authenticity, allowing travelers to “live like a local.” Then there’s fact that they offer flexibility and amenities that hotels just don’t have. For example, someone looking for more specific accommodations, say, something with a kitchen can simply log onto a website to find a property that fits their criteria.
Of course, STRs are also attractive for homeowners who’d like to earn a bit of extra cash, helping to lower the cost of living just a bit. And increasingly, it’s not just homeowners who are benefiting from short-term rentals; even institutional investors are getting on board with STR investments.
While there is indeed money to be made with short-term rentals, and often these rentals go for more than their longer-term counterparts, STRs come with their own set of issues and risks. With this in mind, here are some things potential hosts should take into consideration:
Local Legislation
Are short-term rentals legal in your city? Every place is different, and you’ll want to take a look at your local legislation to see if STR activity is regulated or restricted and if so, to see what rules apply. How long can you rent your property out for? For how many days per year? How much will your STR income be taxed? You’ll also want to check to see what license you’ll need to obtain, as well as zoning code requirements including smoke detectors, carbon monoxide detectors and fire extinguishers.
Legislation may still be forthcoming in many areas, and the full implications of these laws aren’t yet fully known. New York City, Los Angeles, San Francisco and Santa Monica are currently among the most heavily regulated STR cities, but things are always changing. My city of Colorado Springs, for example, just passed a law that requires short-term rental operators to apply for a short-term rental permit, which costs $119 per year. Hosts must also apply for a city tax license and collect lodging and sales taxes from guests to remit to the city, in addition to state and county sales taxes.
Consider HOA Rules
If you belong to a homeowner’s association, you’ll want to find out what its rules are concerning STRs before you sublet your home. Many HOA leases are vague when it comes to short-term rentals. While the agreement may prohibit the issuing of a short-term lease, vacation rentals are usually so short that no lease is required in the first place. This means that some STR operators in HOAs feel that they may be within their rights to sublet their property. However, as short-term rentals become increasingly commonplace, many HOAs are taking additional steps to ensure that they draft up comprehensive leases prohibiting the activity. If you’re in an HOA, opting to move to a true long-term lease may be a better option for the long run.
Additional Considerations
Do you own your own home, or is it a rental? If you’re in rented accommodation, you’ll need your landlord’s permission before listing the home online. If you’re buying your own home but still have a mortgage on it, you’ll want to check with the bank to see if you can sublet the property.
If you’re planning to buy a home and would like to rent out a room as an STR, as a real estate agent I would advise you to get your agent’s advice first — both on potential HOA guidelines and on the local STR market. Other important considerations include insurance. You’ll need to tell your insurer what you’re up to and update your policy, or else risk it being made void should you need to make a claim. Finally, you’ll want to find out what impact this will have on your property taxes.
Additional Expenses
STRs might produce a higher gross yield than long-term rentals, but it’s important to realize that they generally incur higher expenses as well. Common costs include cleaning fees, maintenance, repairs and utilities and bills, including cable and internet. Also important to consider is your vacancy rate. You may not be able to keep your property or room, occupied every week out of the year; SFR demand is often seasonal. Also consider what happens if home values decline, driving down your asking price. Additionally, Airbnb takes a 3% service fee for each reservation, which will cut into your profit as well.
While listing a part of your home as an STR can indeed be a great option to generate some extra income or have an investment property, like all investments and money-producing ventures, your research will make or break your success. Take the time to run the numbers and do your research upfront, and then decide if it’s something that makes sense for you.
