Short Term Rentals (STRs), sometimes called Vacation Rentals, generally refer to furnished accommodations rented for less than 30 days. With the rise of the sharing economy and emergence of online rental platforms, STRs have become a popular investment choice for real estate investors in the last decade or so. However, like much of the economy, COVID-19 has upended the STR rental market. This post will discuss the pros and cons of owning/operating a STR in today’s post-COVID world.
By way of brief background, we have a studio apartment in our back yard which we have operated as a STR, primarily using Airbnb, since 2014. (Thus far no horror stories, knock on wood). I am NOT a tax professional or real estate attorney meaning the advice described in this article may be worth exactly what you’re paying for it – nothing. So, if you do decide you want to move forward on purchasing an STR you’ll want to discuss the move with a tax and real estate professional. Not solely rely on some guy on a blog.
Pros of a Short Term Rental investment:
1. Flexibility. As mentioned, our house is small with no room for overnight guests. Because the studio is a STR we can block off dates when friends and family visit so they can stay in the studio. If we rented it on a long-term basis, we couldn’t do that. In April and May, we blocked it off and I used it as a home office.
2. Offset the cost of vacation home. Let’s say you live in the OC. You love the beach but like the mountains too. You’re thinking of buying a second home in the mountains for long weekends – after all Big Bear is only 3 hours away and Mammoth Lakes is only 6 hours away. Buying a place and renting it as a STR an help you offset your costs of ownership. Additionally, mortgages on second homes normally offer better interest rates and lower down payments than investment real estate.
Note #1: Be aware that tax rules limit the number of days you can stay at the property to 14 days or 10% of the total nights it’s rented if you plan to fully deduct expenses. See IRS website for details.
Note #2: Towns and cities regulate their own STRs and have different rules so you’ll want to nail that down before starting your search. For example, Mammoth Lakes does not allow STRs at single family homes only at condos/apartments.
3. It’s a business. Because we manage all the bookings and do the cleaning and upkeep, our STR qualifies as a Schedule C business come tax time. This allowed us to open a solo 401k for my wife. This helps limit our tax liability on earnings while funding retirement. Additionally, once our kids are a little older, we plan to hire and pay them to clean the place – Yay! The benefit, in addition to not having to do the cleaning ourselves, is that my kids will be able to open a Roth IRA and we can contribute up to the amount they earn each year. This article explains all the benefits of opening a Roth IRA for your kids.
4. Extra income. Platforms like Airbnb and VRBO have made it easy to earn extra income renting out STRs.
Cons of a Short Term Rental investment
1. Volatility. STRs have always been subject to economic downturns as vacations are one of the first things people cut out during uncertain times. However, it’s no secret that COVID -19 crushed the travel industry including STRs. Travel patterns are changing with more people driving who in the past might have flown. This means destinations that are within driving distance of large population centers may continue to see demand. We had April and May booked, but all of those reservations got cancelled. We started getting reservations here in San Diego in June and have had steady interest since then. I have some friends with STRs in Mammoth Lakes and Lake Tahoe. They report strong demand with their places booked through August. Of course, if these towns decide to shut down again all those bookings will vanish.
2. Regulatory uncertainty. Many municipalities are still struggling with how to regulate STRs. Strong opinions exist on both sides of the issue. Proponents of STRs cite increased tax revenue for local government, income for home owners, and the unique experiences offered by STRs. Opponents argue that STRs increase local housing prices and change the character of residential neighborhoods. Some opponents want to ban them completely. Both sides have valid arguments. Politicians in many towns and cities have so far struggled to reach a compromise and, as a result, STRs face an uncertain future in many places.
3. Additional Homeowner’s insurance. Your standard homeowner’s policy almost certainly won’t cover you for an STRs. That means you’ll need a separate policy. A few companies, like Prosper and CBIZ, offer STR policies. Costs vary but it will likely exceed $1000 per year.
4. Maintenance. Maintenance is always a concern, but often shorter term tenants cause more wear and tear on your property. If you are not located near your STR, maintenance costs without a home warranty could be expensive.
Conclusion
In a Post COVID – 19 world, STRs still make sense as investment under certain circumstances. But it’s not a slam dunk. For those looking to invest in a vacation market, buy in a place you can see yourself visiting. Find a place that’s located within driving distance of a large population center. Finally, Make sure you can afford the carrying costs (mortgage payment, taxes, maintenance, HOA) if your unit doesn’t get booked.
If you’re looking for a primary residence that you can also use as an STR, you’ll want a separate entrance and a set up that doesn’t require you and your guest share space. Additionally, if you’re looking to buy in a location that hasn’t settled the regulatory issues, make certain you can transform the STR into a place that can be rented long-term.
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