Are Vacation Rentals a Good Investment?
Are you thinking of signing up as an Airbnb host?
You certainly wouldn’t be alone.
While long-term rentals have long been the de facto income property investment of choice for small-scale landlords, the rise of Airbnb and other short-term rental property websites has many landlords rethinking their investment strategy -and wondering if they should switch to short-term rentals.
You’ve probably heard the success stories -some homeowners, especially those who live in vacation destinations have swapped their long-term rental for short-term hosting, and are now earning more than they were when operating with longer tenancies.
Then there are the stories of homeowners with extra rooms, raking in a hefty amount of cash by welcoming vacationers into their home. One San Francisco resident, Evan Kimbrell, even purportedly earns an average of $9,500 a month renting out his 2-bed home.
But is it always this cut and dry? We all know that owning an Airbnb property can be a profitable investment, but is it a good idea?
As with most things, the answer is maybe! It depends on a number of factors including your investment strategy, the property in question, and whether the city that you’re investing in is Airbnb-friendly.
If you’re thinking about renting out a room in your home, or maybe you are an investor that’s looking to buy property as a short-term rental, let’s take a look at a few things that you’ll want to consider before you take the plunge.
Short-Term Rentals Colorado Springs: Tax and Local Legislation
Today, there are more than 3 million properties around the world listed on Airbnb.
A quick search for Airbnb properties in Colorado Springs yielding more than 300 homes, but the city estimates that there may be up to 3,000 short-term rental properties in the area.
“Because this is all still fairly new,
the rules aren’t set in stone and you also potentially stand to lose money.”
They’re popular, sure; but are things always as they seem? Are short-term rentals a guaranteed way to turn a quick profit?
As Samantha DeBianchi, founder of DeBianchi Real Estate in South Florida and star on Bravo’s show, Million Dollar Listing Miami says, while there is money to be made with Airbnb, it’s important for investors to understand exactly what they’re getting into.
“Because this is all still fairly new, the rules aren’t set in stone and you also potentially stand to lose money,” DeBianchi says, highlighting the impact that local legislation can have on a short-term rental’s returns.
For would-be investors, and homeowners who are thinking of renting out their spare rooms, it’s important to consider the full implications of running short-term rentals. In addition to legislation -which varies from city to city, it’s also worth noting that income from short-term rentals may be subject to tax at the state and city level as well.
In Colorado, many cities are rushing to regulate short-term rental activity. Colorado Springs is one such city that’s recently enacted changes to existing ordinances. Despite these changes, though, the city is still largely considered to be Airbnb-friendly. For the most part, the regulations are designed to limit activity that may cause issues with neighbors, while at the same time, ensuring that the rights of property owners are upheld.
The new laws, which went into effect January 1, 2019, outline a few requirements and restrictions for short-term hosts.
The ordinance states that anyone renting out a residential unit, or portion of it, must apply for a short-term rental permit, which costs $119 per year. Hosts must also follow all applicable noise, housing, and public health ordinances of the city, along with all city fire and safety ordinances.
Colorado Springs hosts must also apply for a city tax license and collect lodging and sales taxes from guests which are then remitted to the city. In addition to the city tax, hosts must also collect and remit state and county sales taxes as well.
While Airbnb itself does collect city, state, and county sales and lodging taxes on behalf of its hosts in Colorado Springs, many short-term rental platforms do not. In all cases, short-term rental operators themselves are responsible for registering with the city and tax authorities.
The Colorado Springs ordinance also states that short-term operators must:
- Have proof of property-liability insurance of at least $500,000
- Include their short-term rental permit number in any marketing materials
- Display the short-term rental permit, local contact information, and emergency safety information, in the rental property itself
- Be available, or designate a local contact to be available 24 hours per day, 7 days per week to respond to complaints, which must be addressed within an hour.
They also limit the number of rentals for each property, stipulating that no more than one unit within each lawful dwelling located on a property may be rented out. Properties that have multiple dwellings -are allowed a maximum of four short-term rental units per property, according to the new guidelines. Condominiums are also limited to two short-term rental units per property. ( View ordinance here).
Additionally, hosts are prohibited from:
- Serving meals to short-term renters
- Holding large commercial or social events such as weddings on short-term rental properties
It’s also worth noting that the city has plans to revisit this regulation in June 2019, so there’s a chance that short-term rental regulations could see yet more changes in the near future.
Those who are outside of Colorado Springs, and thinking about making the foray into short-term rentals will want to check to see whether local legislation regulates Airbnb activity. If legislation is in place, you’ll want to find out if there are stipulations on the following:
- How long can you rent your property for? Are there any limitations on the number of days per year?
- How much of your SFR will be taxed?
- What licenses will you need to obtain?
- What zoning code requirements are there? (Including smoke detectors, carbon monoxide detectors, and fire extinguishers)
Legislation varies considerably from city to city, and in many areas, new ordinances may still be forthcoming as Airbnb is still relatively new -which means the full impact of these laws aren’t yet known. Cities including New York City, Los Angeles, San Francisco, and Santa Monica are currently among the most heavily regulated cities for short-term rentals -but laws are always changing.
Other Considerations for Short-Term Rentals
In addition to city legislation, would-be hosts should check to see what other rules they’ll be subject to.
This includes any HOA rules, and, if the property in question has a mortgage, whether the mortgage company will allow subletting. You’ll also want to see what impact this will have on your homeowner’s insurance and property taxes.
There’s a host of other factors that you’ll want to keep in mind when considering your options. Let’s take a look at some of them now.
Additional Expenses
While it’s true that short-term rentals often produce higher gross returns than their longer-term counterparts, there are also more expenses and often higher vacancy rates with short-terms as well, meaning that your actual in-pocket income could be less than what you were expecting.
You’ll also need to factor in costs like property management, cleaning services, utility bills, landscaping, pool services, plus additional maintenance and repairs.
Decreasing property values is another consideration. While this is less relevant if you’re just renting out a room in your home, if you’re thinking of purchasing a property for the purpose of a short-term rental, you’ll also want to consider what would happen if your home value declines, driving down the asking price on your rental.
Additional considerations include:
- Insurance:What type of insurance will you need? (Remember, Colorado Springs requires a minimum of $500,000 property liability coverage)
- Unlikely Expenses: what if a tenant is injured at the property? What if you’re the victim of theft?
Fees: Airbnb takes service fee from hosts for each reservation, which is currently 3%. This will also take a bite out of your profits.
HOA Rules
Prior to operating an STR, would-be hosts in HOAs will want to make sure their contract allows for short-term rental activity. HOA leases tend to be notoriously vague when it comes to the issue of short-term rentals. This is because while they generally prohibit the issuing of short-term leases, Airbnb and other short-term rentals are usually so short that no lease is even required. Because of this, some homeowners in HOAs feel that they can sublet their property. However, it’s important to note that as short-term rentals become more commonplace, many HOAs are taking steps to prohibit Airbnb activit y.
If you’re thinking of operating short-term rentals, you’ll want to think carefully about whether buying a home in an HOA is right for you. In many cases, hosts in HOAs may be better making the move to true long-term leases may be a better long-term option.
Tips for Short-Term Rental Success
In addition to having a different breakdown of expenses when compared to their longer-term counterparts, short-term rentals also require a different approach to rental management as well.
If you’re considering a short-term rental, here’s a look at a few things that can help to set you up for success.
Location is Everything
When it comes to investing in short-term rental real estate, location is everything. You’ll want to opt for a property that’s located in a prime getaway location. Being located near amenities and sights -or close to public transport links is always a plus with short-term rentals, helping to ensure that your would-be visitors are able to easily get to, and from your rental.
Find a Way to Stand Out
How will your rental stand out from the crowd? Since your success on Airbnb is based on reviews that your guests leave -you’ll need to go the extra mile to ensure their satisfaction. Offering excellent amenities, including good Wi-Fi, TV, laundry facilities are always a good idea. A/C in areas that tend to see high temperatures is essential. You’ll also want to consider providing things like a coffee maker, cookware, dishware, good towels, and of course clean bed linen. Take a look at this comprehensive list of things that you need to provide an excellent guest experience
Determine Who Will Manage Your Rental
Unlike long-term rentals, vacation rentals require a lot more upkeep and maintenance to ensure they are up to standard. Since your tenant turnover rate is going to be much higher, you will be faced with a constant stream of tasks, including cleaning, handling reservations, meeting and greeting, restocking inventory -and more. Before you decide that short-term, vacation rentals are for you, you should ask yourself who is going to be handling all these tasks. Do you have time to be there, around the clock, should something go wrong? Remember, city ordinances in Colorado Springs specify that someone needs to be on-call 24/7 to handle complaints. Are you planning to be available for calls like this yourself? Or are you going to hire a housekeeper? These are all important questions to ask yourself before you decide to move forward.
Start Small
If you are thinking about getting into short-term vacation rentals, then you might consider starting small. Instead of buying a brand new property in a different location in hopes of striking gold -consider renting a room out on Airbnb and seeing how it goes. See if you enjoy the tasks of being a host and if you gain positive feedback. Airbnb investing, while it might sound like a good part-time hobby, is actually something that takes a considerable amount of time and effort. While there is money to be made in Airbnb investing, like all investments -there are pitfalls and complications that arise as well. Starting small can give you a taste of what you are getting into -without all the hassle.
While Airbnb can be a great investment option, the success of the investment will vary considerably depending on a number of factors. Some homes that are located in areas with heavy short-term rental regulations, and high taxes -or in a place with strict HOA requirements may be better suited for long-term rentals. However, in other cases, short-term rentals are where it’s at. Just make sure you do your research, understand the implications, and know your requirements and responsibilities -before you start.
If you’re thinking of buying a short-term rental in Colorado Springs or the surrounding area? At Springs Homes, our agents are happy to help. Get in touch today to get expert advice on the local real estate market -and see investment opportunities that are available in your area.
Originally published at https://www.springshomes.com on April 24, 2019.
