Over the last few years, many investors have shelled out large sums of money purchasing short-term rental properties.
These properties can range from vacation rentals to luxury homes and come with the potential to earn massive returns. The concept is to achieve a greater ROI than annual rentals by charging a premium for flexible lease terms and fully-furnished units. Think…hotel meets house.
But everything that glitters isn’t always gold. Some experienced investors are weary of the short-term business model. Here are three reasons to avoid investing in Airbnb.
By design, short-term rentals have high turnover, which means a constant stream of new renters coming in and out of the property. With high turnover comes increased management costs, as more time and effort are required to clean and maintain the unit between rentals. It can also lead to more wear and tear on the unit, risk of vacancy and more. All of these things can negatively impact the bottom line.
Occupancy rates of short-term rentals are far more susceptible to shifts in the economy. Many short-term renters travel for work or vacation. When the economy is strong, and people are feeling confident about their finances, there is typically more demand for short-term rentals. However, when the economy contracts, people cut back on leisure and business travel, resulting in higher vacancy rates.
At scale, financing short-term rentals can be more difficult than traditional rentals. Banks tend to be very conservative and not think outside the box. They understand the concept of short-term rentals but may not be comfortable with the higher turnover and increased management compared to traditional rentals with a one or two-year lease.
A Final Note
Another important thing to know—many investors overpay for properties hoping the daily rental rate will make the numbers work. Do not overpay!
When calculating the return on a potential short-term rental, make sure that the property cash flows assuming a one-year lease at market rents. This way, if demand for short-term rentals goes down, you can always rent the property to a traditional tenant and still make money.