So, you think you want to start a short term rental (STR), huh? Perhaps you have a residence or guest house that is unoccupied, or a separate apartment in your home. Maybe you only occupy your own home sporadically. Thinking about making some extra income off of these living spaces is really smart! But, there’s a lot to think about it. Jumping in without doing the proper research and putting in place some standard operating procedures could actually end up costing you money and causing major headaches. We’ll get into the operation procedures in our next article. But for now, let’s dive into what you need to consider before you take the leap.
Take some time to understand your own goals. Will this STR be a side-hustle that supplements your income and maybe funds a dream vacation or two? Or is this something that you’d like to develop into a full-time income-earning venture. Knowing your own goals will help you set your expectations and goals, accordingly. Determine how much net profit you want/need your STR to bring in on a monthly and yearly basis. Write that number down, we’ll come back to it.
Having a sense of whether or not operating an STR fits into your life conveniently is also important. If managing the property, cleaning between guests, interacting with guests, and so on will not easily fit into your schedule, you’ll likely be looking for a property manager. This is a great plan as long as the income your unit brings in can easily support those extra costs.
It’s also important to understand your own tolerance for the anxiety that naturally comes with operating a short-term rental. Think about the following – you’ll want to rate yourself on a scale from 0 – 5 regarding how well you think you’d handle these circumstances, and whether you can sleep at night knowing these things may come up:
- Dealing with difficult, demanding, or disrespectful people
- Navigating the online rental platforms (like AirBnB or VRBO)
- Concerns about theft or damage to your property
Now, let’s get some boring stuff out of the way. You don’t want to break any rules, or even worse, laws, by starting a STR.
Call your local jurisdiction’s planning & zoning department to determine the answers to these questions.
- Does your town or city outright prohibit STRs? Are they allowed?
- Are there limitations on the number of days rented?
- Are there requirements that limit short-term rentals to rooms in houses that are owner occupied?
If you rent an apartment, confirm that your lease allows you to sublet the premises. Similarly, if you live in a condominium confirm that association rules do not prohibit STR’s.
If you still have a green light after the first round of research and reflection, it’s time to do the fun stuff. Hop on the most common STR platforms (AirBnB and Vrbo) and see if there are any existing STRs close to the home you want to rent out. Understanding the existing market is going to give you valuable information regarding:
- Number of competing units (some competition is great, a lot may indicate a saturated market or a really high demand)
- Price points per bed
- Niche markets (kid- or pet-friendly, party-ready, eco-aware, etc)
- What’s missing that your STR might add?
Now, remember that number you wrote down earlier? Get that back out and let’s get a rough idea of whether this is a good choice for you.
Let’s say your goal is to bring home $1500 of supplemental income monthly from your STR. Hypothetically speaking, let’s say that the average STR nightly rate in your neighborhood is $160/night. Without getting into any of the nitty gritty details that will follow in the next article, do some simple math. 100% occupancy rate would yield a gross income of $4,800 (of course, more math will be required to determine your net income after taxes, platform fees, operating and marketing costs, etc). But, perhaps the average occupancy rate in your area is 65%. In that case, the gross income potential is still above your goal of $1500/month, and high enough so that it can *probably* withstand the expenses.
We put together this simple worksheet for you to see if you can make it out of the “No Zone.” If so, let’s dive deeper into the financials to see what your true earning potential can be!