Short-term rentals (STRs), often associated with vacation properties and platforms like Airbnb and Vrbo, have transformed the real estate investing landscape. They offer high-income potential, flexibility, and diversification for savvy investors. In this blog, we’ll explore the short-term rental strategy, including where to invest, what to look for in a property, how to price nightly rates, and the role of property management. We’ll use real-world examples to bring the numbers to life.

Why Invest in Short-Term Rentals?

Short-term rentals appeal to travelers, business professionals, and tourists seeking flexible accommodations. This demand creates an opportunity for property owners to charge premium nightly rates and achieve higher returns than traditional long-term rentals.

Example:

Imagine purchasing a 2-bedroom condo in a tourist-heavy area for $300,000. You finance it with a 20% down payment ($60,000) and secure a loan for $240,000 at a 6% interest rate. Your monthly mortgage payment is $1,440 (including taxes and insurance).

If the property achieves an average nightly rate of $200 and a 65% occupancy rate, monthly revenue would be:

• $200 x 19.5 nights = $3,900

After accounting for property management fees (20% or $780), maintenance ($150), utilities ($200), and cleaning costs ($300), your net monthly cash flow would be $1,030. This equates to an annual cash flow of $12,360 and a cash-on-cash return (CoC) of 20.6% ($12,360 / $60,000).

Finding the Right Area to Invest

Location is critical for STR success. The best areas often combine high tourism traffic, favorable regulations, and robust year-round demand. Additionally, understanding the neighborhood classification—A, B, or C—helps refine your decision.

Tourist Hotspots:

• Example: A cabin in Gatlinburg, TN, attracts consistent vacationers year-round. Properties in this market often achieve occupancy rates of 70% or higher.

Urban Markets:

• Example: A condo in downtown Austin, TX, near event venues and tech headquarters, can command premium rates during festivals and conferences.

A, B, and C Neighborhoods Within Cities:

1. A-Class Neighborhoods:
   • These are affluent areas with high property values and strong demand from high-income travelers. They’re typically close to major attractions or business hubs.
   • Example: A luxury apartment in Manhattan’s Upper East Side may generate high nightly rates but comes with significant upfront costs and stringent regulations.
2. B-Class Neighborhoods:
   • Moderate-income areas offering a balance of affordability and demand. They attract a mix of business travelers and budget-conscious tourists.
   • Example: A property in Denver’s Highlands neighborhood provides proximity to downtown with lower purchase prices than A-class areas, achieving solid occupancy rates.
3. C-Class Neighborhoods:
   • Lower-income areas with affordable entry points but potential challenges like crime or low demand. These are riskier for STRs unless near a unique demand driver, like a university or niche attraction.
   • Example: A home near an industrial area may see sporadic bookings and require extra effort to maintain.

Key Considerations:

1. Regulations: Research local laws and HOA rules. Many cities cap STR permits or impose restrictions.
2. Demand Drivers: Proximity to attractions, beaches, or business hubs boosts bookings.
3. Seasonality: Evaluate whether the area has year-round demand or significant slow seasons.

How PropIQ Helps: PropIQ’s market analysis tools highlight STR-friendly areas, demand trends, and competitive insights, helping you choose the right market and neighborhood.

What to Look for When Buying a Property

1. Property Condition:

• STR guests expect move-in-ready properties with modern amenities. A newly renovated property might cost $20,000 more upfront but can save on long-term maintenance.

2. Amenities and Features:

• Features like a pool, hot tub, or proximity to attractions can command a 20-30% premium on nightly rates.
• Example: A condo with a city view balcony rents for $220/night, while a similar unit without it rents for $180/night.

3. Rental Demand and Affordability:

• High-demand areas often justify higher purchase prices.
• For instance, a $400,000 home in a high-demand tourist area may generate $5,000/month, outperforming a $300,000 property in a less popular location.

4. PropIQ Advantage:

PropIQ simplifies property analysis, showing expected revenue, and competitor insights to help investors identify top-performing properties.

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How to Price Nightly Rates

1. Research Market Rates:

• Platforms like AirDNA and Mashvisor provide detailed STR data. Compare properties with similar locations, sizes, and amenities.

2. Use Smart Pricing Tools:

• Many STR platforms offer dynamic pricing features to adjust rates based on demand and competition.

3. PropIQ’s Competitive Edge:

• PropIQ’s smart underwriting tool refines this process by pulling real-time data on similar properties, factoring in seasonality, events, and amenities for accurate return on investment analysis.

Example:

For our $300,000 condo:

• Base Rate: $200/night
• Seasonal Adjustments: $250/night during peak months, $150/night in the off-season
• Occupancy Optimization: Lowering rates mid-week increases bookings and overall revenue.

The Role of Property Management

STRs require hands-on management, from guest communication to cleaning coordination. Investors have two options:

1. Self-Management:
   • Suitable for local investors or those with flexible schedules.
   • Platforms like Guesty simplify self-management by automating bookings, messaging, and pricing.
2. Professional Management:
   • Managers typically charge 15-25% of revenue. For a property earning $3,900/month, expect to pay $780-$975.
   • They handle everything, including marketing, guest support, and maintenance, ensuring a hands-off experience.

Final Thoughts

Short-term rentals offer high-income potential but require careful planning and management. By choosing the right location, property, and pricing strategy, investors can maximize their returns while enjoying the flexibility STRs provide. Whether you’re aiming for a mountain cabin, a beachside condo, or an urban retreat, the short-term rental strategy can be a profitable addition to your real estate portfolio.

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