What to Know Before You Invest

Short-term rentals can be an attractive investment thanks to the potential for greater cash flow. But they also bring new challenges for investors more familiar with traditional long-term rental properties, from fast turnover between guests to extra regulations.

Experts say the short-term rental market has also grown more competitive, making it even more important to do your homework and develop a strategy before diving in. Here are six points to consider before making your first short-term rental investment.

1. Do your homework on local regulations

As popular as short-term rentals have become, they aren’t welcome in every city. Some, like Santa Monica, California, prohibit rentals of less than 30 days unless the resident stays in the property along with the guest. Others, like Chicago, allow unhosted short-term rentals but require property owners to register and pay a fee.

Rules can change, so if you’re considering investing in a new area, pay attention to proposed legislation and local officials’ general attitudes toward short-term rentals, says James Carlson, co-owner of Colorado-based real estate firm Erin and James Real Estate, which specializes in short-term rental properties.

Particularly in areas where policies seem unsettled, investors may want to have a “Plan B” strategy for the property if new restrictions are imposed.

Even if you end up investing only in long-term rentals, it’s smart to stay up to date on local regulations in case renters express interest in posting your unit on a short-term rental platform.

2. Estimating potential income

Unlike a long-term rental unit where you have a fixed, predictable amount of rent coming in each month, income from a short-term rental varies based on the nightly rate and number of bookings you secure.

Online tools like AirDNA and Rabbu provide data on short-term rental prices and occupancy rates in various markets. But don’t stop there, says Avery Carl, CEO and founder of real estate sales team The Short-Term Shop, which specializes in the vacation rental market in the Smoky Mountains and Gulf Coast.

Spend time scoping out competing properties’ listings on platforms like Airbnb and VRBO to get a better feel for the rate your property may earn, says Carl, who is also the author of “Short-Term Rental, Long-Term Wealth.” If there’s a luxury unit with swanky perks, you may not be able to match its nightly rate, but if a competing property looks run-down, you may be able to charge more for yours.

“Zoom in on the neighborhood you plan to buy in, look at the properties and use that to see what you can expect,” she says. “The data might tell you what price someone got, but it won’t tell you the price is low because they have bad photos.”

If you’re considering investing in an area where tourism is seasonal, like the Colorado mountain towns many of Carlson’s clients invest in, he recommends accounting for the fact that your rates and bookings will vary throughout the year.

3. Extra cash flow — but also extra work

Higher per-night rates mean short-term rental properties tend to generate more cash flow than long-term rentals, but the extra revenue comes with additional costs.

Unlike typical long-term rentals, short-term rental units must be furnished. Those furnishings and amenities don’t need to be over the top, but if you have the budget, hiring a designer can help improve the look of the unit, making it an attractive place to stay, Carlson says.

Short-term rentals also tend to require more hands-on management. Units must be cleaned and prepared for a new guest after each stay, and you’ll need to field bookings and questions from guests.

Property managers specializing in short-term rentals can take over those tasks, but they also tend to charge higher fees than long-term rental managers, Carl says. If owners want to self-manage, online tools such as OwnerRez, Hostable or Guesty can help automate tasks like managing listings across multiple platforms, fielding bookings from guests or scheduling cleanings.

There is one advantage to more frequent turnover: When a professional cleaner visits a property a couple of times a week between guests, it’s easier to catch maintenance issues or other problems before they turn into major headaches, Carl says.