We have been investing in residential real estate for seven years and our company currently oversees a portfolio of 24 residential rental units (doors). Out of those 24 doors, exactly one-third are short term rentals (STRs). But this is fluid…we are probably going to convert a few of them back to traditional rentals in the next few months. I recently made a list of pros and cons for investing in these short term rental properties. Read on for my list of top five benefits of STR investments. In another article I’ll share my list of negatives!
#5 – Better Upkeep and Maintenance
When you frequently have a new set of eyes at your property, you will find out quickly when something is not working. Typically, things will get fixed sooner and in theory, this can prevent deferred maintenance from backing up and wreaking havoc on your property. We haven’t exactly experienced this personally, as it seems we run into a fair share of major issues at both types of rentals. But I have heard this repeatedly from investors with first hand experience, and it does make sense. This is why good property management companies often include regular walkthroughs of the property in their leases: so they can catch minor issues before they balloon into costly major repairs. Of course, you might see slightly more wear and tear on a short term rental…so that’s something to keep in mind as well. It will depend on your occupancy levels and the type of traveler you target.
#4 – Staying There Yourself
If you’re investing in cities and neighborhoods that you would want to visit or experience living in, now you can do that. Obviously this doesn’t apply to everyone’s investment strategy and you must make sure that every investment makes sense financially, but there’s certainly a real value to having a place to stay when you’re visiting a particular city (eg, long distance investors visiting their properties) or just having the flexibility to move around (flippers who like to live in their properties to avoid the costs of a full-time home might occasionally find themselves in need of a temporary place to stay). For us it aligns well with our investment strategy which has always been focused primarily on up-and-coming neighborhoods that we felt people like us would want to live in.
We currently have properties in –
- Jacksonville: Riverside, San Marco, Brooklyn, Murray Hill, Southside
- Indianapolis: Fountain Square, Bates-Hendricks
- Chicago: Logan Square
#3 – Better Interest Rates
Again, this only matters if you are utilizing a mortgage, but interest rates are usually slightly lower on a second home than an investment property. This was partially the impetus for why we converted our condo in Chicago into an STR shortly after purchasing it. We received a better rate and felt like it was a cool place to visit.
#2 – Getting Started with Limited Capital
We didn’t go this route personally…in fact, we used our own money for each type of investment strategy we employed prior to leveraging outside funds. But I would be negligent if I didn’t mention this as a major benefit. For many, real estate investing is a hard industry to crack with significant upfront hurdles, and this is one of the few methods to get in with very limited capital. Rental arbitrage, as it is called, is super popular with many acclaimed online courses preaching the virtues of this type of business. Wework did this for commercial office space, and despite their spectacular fall from grace, they are still a significant disruptor in a business that is here to stay.
As a rental arbitrage business, you would enter into a master lease agreement with property owners that allows you to operate an STR in their properties. A flat rate agreement would require you to pay a set fee for this right, while you keep any profit or loss. A revenue share agreement would require you to share the profits while lessening your risk. Of course you could also negotiate a hybrid-type of agreement to hedge your risks and benefits.
The total cost to you would be the security deposit, first and/or last month’s rent, and the cost to furnish the property. However, even these items can be negotiated and there are many stories of STR operators getting these things covered by the property owner.
#1 – Better Returns on Investment (sometimes)
So obviously none of the items on this list are a 100% guaranteed benefit. But it is especially so for #1, otherwise every rental property would have been converted to short term already! Clearly I’m talking about potential returns, and if a property is right for STR, the primary factor will almost always be the better numbers.
We have seen pretty stable net revenues about 30-50% higher than longterm rent, after factoring in all the additional costs of operating an STR. Also in this category I would include the fact that we can hire housekeeping/cleaners and extra help with management and operations. We pay on average $400-$500 per month per property for cleaning, $150-$200 for the management help, and another $350-$450 goes to city hotel taxes. This allows us to support our longtime contractors and contribute to the local economy in a small way. And to be clear, these additional costs are calculated into the 30-50% higher net revenues I mentioned.
Some actual examples from our portfolio
So those are my top five. I’d love to hear your thoughts, especially if you think I missed something!
