The definition of a residential rental property is changing. Until recent years, a residential property investor planned on tenants to stay 6 months or more. But the online marketplace has added the possibility of renting single-family homes as if these properties were hotels, on a weekly or even daily basis. Present-day rental property owners may wonder how this new trend affects their investments. So, should short-term rentals be explored by investors planning to buy properties? There are many factors to consider before answering this question.
Short Term Rentals in a Property You Own
As short-term rentals have become common, their impacts on neighborhoods, public safety, and hospitality tax receipts have received increasing attention. As a result, states and cities in the US are placing legal limitations on short-term rentals. Massachusetts now has a statute that specifically addresses short-term rentals; Boston also recently enacted laws for such rentals. Similarly, some homeowners’ associations and many managers of condominium projects regulate short-term rentals.
In Massachusetts, owners whose short-term rentals exceed 14 days in a given year must pay a 5.7% room tax. All short-term rental properties must be state-registered, and all must have liability insurance. The Boston ordinance is even stricter: only owner-occupants may offer short-term rentals and for only one unit per residential property. Owners must provide contact information to both the city and tenants, and they must notify owners of adjoining properties when these homeowners register for short-term rental.
Short-term rental in Boston, then, is not an option for a residential investor unless the investor plans to occupy that residence. The Boston ordinance also specifies that only an owner can rent all or part of his property on a short-term basis: long-term tenants cannot offer a property for short-term rent.
Other municipalities have different ordinances. Vacation communities tend to be more permissive towards short-term rentals by absentee landlords. Because short-term rental laws are new and evolving, it is critical that an investor-owner examines all applicable laws, ordinances, and regulations before offering his property to the short-term rental market.
Buying a Property for Short Term Rental: Exploring the Benefits and Limitations of an Enterprise
Once an investor has confirmed that short-term rentals are allowed in their target location, other factors will influence the purchase decision. What is the market demand in that location? Which is to say, how many visitors typically arrive in that area every season? The availability of rental units for supply is also essential. If there aren’t local registries for short-term rental units, an investor might check online listings to estimate the depth of supply.
Short-term rental units require more marketing and management than needed for long-term rentals. Units are perpetually listed for rent, and each rental reservation generates management and maintenance duties. Short-term rental is similar to hotel operation: attendants are hired for cleaning, repair, and customer contact. While daily lease rates are typically higher for short-term rentals, expenses are relatively steeper. Long-term rentals’ more passive management may well justify their lower unit rental rates.
The first and most important consideration in using an investment property for short term rental are the legal limitations. States, municipalities, and homeowners’ associations have implemented new rules for short term rentals. Such rentals may even be prohibited. In others, the number and duration of permissible rentals are strictly enforced. Successful short-term rental depends on a property’s location, design, and layout. An investor must know what the competition is for a potential short-term rental property. The investor must also be prepared for additional marketing, management, and maintenance expenses. Lastly, a well-informed investor may decide that long term rental is a better option.