But isn't managing a short-term rental (STR) unit a ton of work? How do you know people will even come? The economy is good now...what about when it declines? But aren't the expenses and fees really higher?
Sound familiar?! These are a few of the objections we had before entering the STR business. Ready to hear how we addressed these questions, as well as one additional bonus objection? Let's go!
Isn't it a lot of work?
Like most everything in life, the short answer is that it depends. While it takes a sizeable amount of effort to furnish the unit (unless you outsource it to a third party), the level of ongoing work is dependent upon whether you have full-service property management or not. If you manage the property yourself, it will absolutely be a lot of work, but of course, your profits will be higher. If you use a full-service property manager, your level of involvement can be minimal and not too different to using a property manager in long-term (LT) rentals. This is a business decision you must make.
How do you know people will come?
The short answer is you don't, but you do your best to answer this question by doing extensive due diligence, such as calling hosts with comparable properties in your area and researching third party websites (such as www.AirDNA.co) to get market data on occupancy and average daily rates for your zip code.
What happens when the economy contracts and tourism declines?
The number one rule of investing is to not lose money, and we seek to do this by ‘protecting the downside’. When you are underwriting an STR for purchase, we cannot stress enough that the numbers should work on a LT basis when you need to pivot because the market has contracted. In other words, STR should represent upside to the property's investment thesis.
Aren’t the expenses and fees really high?
Yes, relatively speaking, but you should have also have higher revenues that will offset the additional expenses!
Bonus objection...But aren't short-term rentals taxed at higher rates than long-term rentals?
Nope. As long as you don't provide 'substantial services' as defined by the IRS (examples include in-stay concierge services, cleaning of the sheets daily, or conducting guess tours), STR income is reported on Schedule E of your tax return, just like LT rental income and expense.
People will always question ideas and strategies they haven't implemented themselves (especially family, so watch out), so when faced with these objections, it's good to understand the facts. Have said people done STR before? If not, you may want to question them on their credibility to be giving such advice...
Were you ever faced with these questions when you started pursuing an STR strategy? Or maybe different questions? If yes, please comment below - we'd love to answer them. And of course, if you found this article helpful, we'd love to hear that, too.