Evaluating the Financial Viability of Short-Term Rental Investments
Short-term rental investing can be an excellent way for investors to generate income from their real estate investments. Still, they come with challenges that must be considered before starting in this journey.
The demand for short-term rental properties is on the rise, and in some areas, renting out properties is even becoming the new norm. Although the financial viability of short-term rental investments is often debated, we want to take a closer look at whether or not this type of investment is worth it.
To determine whether or not investing in short-term rentals is financially viable, we first need to understand what it means for an investment to be economically viable and how that relates to short-term rentals.
What Is Financial Viability?
Financial viability is an objective assessment of the financial health of an investment, such as short-term rental investment. It measures how much cash you can expect to generate monthly from your proeprty, factoring in expenses and other costs.
Financial viability is a critical component of any business model or short-term rentals investing strategy. It’s one of the most important things to consider when evaluating whether or not a business will be profitable. And since many investors choose to invest in rental properties as part of their passive income real estate strategy, they need to understand how well their properties will perform financially.
The following are some of the factors that need to be considered to evaluate the financial viability of having a rental property investment:
1. How much money is required to purchase a rental investment property?
Several factors will determine the necessary amount of money when deciding to buy a rental property.
Down Payment: To get the most favorable terms on a mortgage, you’ll need to make a down payment of at least 20% of the purchase price. If you need more money to complete the 20% down payment, consider other financing options such as hard money loans or private loans from family or friends.
New or Existing Property: If you’re looking for something completely new and modern, expect your budget to be significantly higher than if you are looking for an older property with less desirable amenities and finishes.
Location: Neighborhoods with high crime rates or underperforming schools tend to not attract many buyers and therefore are sold at lower prices than those in more desirable areas.
2. What is the expected return on investment?
The return on investment is one of the most important questions you need to ask yourself before investing in vacation rental property. You also want to know how much money you can make per month by renting out your property and how much time it will take to get your money back.
Suppose you’re considering investing in vacation rental property. In that case, you need to determine if it will be profitable enough after covering all of your expenses. This includes mortgage payments, insurance, taxes, and other fees associated with owning a home or apartment building that you plan on renting out.
To calculate ROI of your short-term rental investment, subtract the annual operating costs from yearly rental income and divide the total with mortgage value.
3. How much money will be required to maintain the property?
Maintaining a rental property investment is expensive, and many factors determine how much money is required to maintain the property. Here are some examples:
Repairs: A roof leak, plumbing problem, or appliance breakdown can cost hundreds to thousands of dollars.
Maintenance: Regular maintenance is necessary for all properties, including painting, cleaning, and landscaping.
Utilities: Water, electricity, and gas account for most of your utility bills each month, and they tend to increase over time as appliances age and energy prices rise.
Taxes & Insurance: Property taxes vary from state to state, but they typically range between 1% – 3% of your property value each year, depending on where you live. Real estate property investor’s insurance also varies depending on your property’s location, but it usually costs less than $200 per year, unless there are special risks associated with your site.
4. How to determine if your rental property is profitable to the market?
A vacation rental can be a very lucrative business. You can generate passive income with it only if you do it right. To do that, you need to ensure that your property is in a good location, and there’s a demand for it.
Here are some other questions you should ask yourself:
- Is there a large number of tourists in the area?
- What are the average rates for similar properties in this area?
- How many short-term rentals are available in the area? How much do they cost?
- How many bedrooms does my property have? Is it large enough to accommodate multiple guests comfortably?
- What amenities should my property have that will make it attractive to guests (e.g., swimming pools, game rooms)?
If you are considering buying a property to rent out, you must have the answer to all the above questions to see if your investment will be profitable. Once you’ve answered these questions, you’ll be able to determine whether your short-term rental investments will be in demand. If it doesn’t seem like there’s enough demand for vacation home rentals in your target area, then maybe you should think about looking for a property in a different location.
5. How much should you spend for marketing your rental property?
Renting your property is different from selling it. When you sell, you have a buyer in mind and know how much they are willing to pay. With renting, you have yet to determine who will be interested or how much they’re willing to pay. Therefore, you need to do marketing to get the best possible tenants.
Marketing is done like any other investment in your rental property. The more money you put into it, the better results you’ll get.
The trick is finding the right balance between spending too much and too little. If you spend too little on marketing, your property will never stand out from the crowd, and you’ll have to rely on luck to get new tenants. If you spend too much, you might find out that your funds are being used up even before you reach your potential renters.
To market the property in the local area, it’s better to spend more money on advertising and marketing. However, if you are looking for a tenant from outside the local area, it is better to save money and spend it on online advertising and marketing.
The bottom line is that there are no hard and fast rules in determining whether or not an investment property is a good deal for you.
People mainly invest in short-term rental properties to get a steady income. The problem here is like with any kind of investment, there are risks involved. You need to evaluate the financial viability of your short-term rental investments to avoid losing money.
Knowing the financial viability of short-term rental investments is essential because it allows you to make the most of your investment while minimizing the risk. This means that if you want to invest in short-term rentals, you must be sure that the property you will buy has the potential to be profitable. Considering these factors before deciding will increase your likelihood of success with this type of investment.