Embarking on the journey to invest in a short term rental (STR) property involves more research than the process of investing in a long term rental. After all, you are buying more than just a property, you are buying a business. Thus, you should approach buying a STR investment in the same way as you would a business. You should understand the regulations affecting the business, you should have a grasp on the market, you should analyze the numbers, and you should study the competition. A good real estate agent that specializes in vacation rentals, such as someone who works for ATX|STRS, will be able to advise you on these items. However, retaining an expert doesn’t exonerate you from doing the work too.
Understand Local Regulations
One of the most critical aspects of purchasing a short term rental is understanding the local regulations and laws governing STR properties. Many Austin area municipalities have strict rules regarding vacation rentals, including permit requirements, zoning laws, and limitations on the number of days a property can be rented. These regulations can drastically impact your potential earnings or even make it illegal to operate an STR in certain areas.
Before making a purchase, it's essential to research the specific rules in your desired location. You may need to apply for a special permit, register the property with local authorities, or adhere to specific tax rules. Failing to comply with these regulations can result in heavy fines or the forced shutdown of your business, so due diligence is key. Understanding current regulations isn’t enough in my opinion, it’s also important to have an idea of any upcoming discussions about regulatory changes. In the City of Austin for example, you can listen to past City Council meetings and grasp the idea that regulatory changes are on the horizon.
Analyze the Market
The success of your STR investment hinges largely on the local market. You’ll need to evaluate factors such as supply and demand, average daily rates (ADR), and occupancy rates to ensure there’s a strong customer base for your rental. Areas with a high influx of tourists or business travelers tend to offer more opportunities for profitable STRs. However, a saturated market may mean increased competition, making it harder to stand out.
Look at local STR platforms like Airbnb and VRBO to see what similar properties are charging, how often they're booked, and the types of amenities guests expect. Use resources like rabbu.com or airdna to get a sense of seasonality and year over year trends. A clear understanding of the market will allow you to hone in on the right type of property for you, and the best location to match your goals.
Crunch the Numbers
Buying a short term rental is a financial investment, so you’ll need to carefully analyze the numbers before diving in. Whether you’re buying an existing airbnb or a property you plan to turn into a short term rental you will want to analyze expected rental income, operating expenses, maintenance costs, and property management fees if you plan on hiring a manager. Calculate your net operating income (NOI) to understand your potential profitability, and make sure your property’s cash flow aligns with your financial goals.
It's also important to consider the seasonality of short term rentals. Many markets experience fluctuating demand based on the time of year, and this seasonality can significantly affect your cash flow. Make sure to account for both peak and off-peak periods in your financial projections.
Study the Competition
To thrive in the STR business, you must also have a clear understanding of your competition. Look at the top-performing properties in your area and take note of what makes them successful. Pay attention to their pricing strategies, guest reviews, and the types of amenities they offer. This will help you identify areas where you can offer added value to guests and differentiate your property from others in the market.
If you want to succeed it’s essential to invest in high-quality photography, a well-written listing description, and thoughtful decor that reflects the unique character of your property. In a competitive market, presentation matters, and first impressions can make or break a guest’s decision to book your rental.
Final Thoughts
Investing in a short term rental property can be an exciting and profitable venture, but it requires more than just buying a home—it involves running a business. By understanding local regulations, analyzing the market, crunching the numbers, and studying your competition, you'll be well-equipped to make an informed decision and maximize the potential of your STR investment.
Ultimately, success in this field comes down to research, preparation, and a willingness to adapt. With the right approach, your short term rental can provide both personal satisfaction and financial rewards for years to come.