Leslie Anne Morris, Founder & CEO Invest in the Smoky Mountains.
If you’ve decided short-term rentals are intriguing, then let’s talk about the steps to take to buy your first one.
1. Identify a market.
First, you need to decide on the market. Will you buy in your own neighborhood, a close vacation market or perhaps look to invest in a hot market out of state? The choice is yours to analyze. No choice is wrong if the market you are looking at allows short-term rentals and has some sort of appeal for why travelers would want to come to stay there.
2. Find a real estate agent and lender.
The next step is to hire a real estate agent. I recommend interviewing and hiring an agent who is also an investor. If the agent has a proven track record in short-term rentals, they should have all the knowledge you’ll need to be successful.
Make sure the agent is also able to help you with the next big task, which is finding a lender. Finding a lender who understands the short-term rental asset class is very important due to the lack of formal lease agreements for these types of investments.
3. Take a look at your finances.
Figure out where your down payment is coming from and how much cash you will need. Lenders can help with this step. Depending on the loan program, a down payment of 10% to 30% of the purchase price is typical. Some investors use cash or even liquidate other investments if that makes sense based on their portfolio goals and how much income the other investments can make.
Once you start to shop and consider potential properties, you will need to calculate whether the properties you are considering will make you money or not. An easy metric for profitability is to determine the net operating income. You’ll likely need your agent’s help to plug in some of the numbers, but a simple formula is gross rent potential minus operating expenses.
4. Determine your management style.
Next, decide whether to self-manage or hire a professional property manager. If you have enough room in the cash-flow numbers, you may want to make this investment passive. The property manager’s job is to cater to all aspects of getting your property rented, communicate with guests and ensure the property is maintained on an ongoing basis. These jobs will all fall to you if you do not hire someone else.
Warning, this process can be time-consuming, and requests from guests can come at all hours of the day. Analyze your current lifestyle and workload to determine if you have the capacity for this.
5. Inspect the property.
Now that you’re well underway in the buying process, you will want to fully inspect the property by performing a thorough home inspection; determine the cost to repair any deficiencies uncovered during the inspection and calculate furniture and décor costs to make the property a turnkey short-term rental. Don’t forget silverware, small appliances and anything guests might require for an awesome vacation.
6. Consider your insurance needs.
Another important step before you buy your first short-term rental is to get an insurance quote. You will want to ensure the property is adequately covered.
A typical insurance policy for a short-term rental is going to combine traditional homeowner’s coverage with loss of rental income and commercial liability coverage. The policy will be more expensive than a basic homeowner’s policy, but you’ll be glad you are covered in the event an issue arises.
7. Take care of utilities and permits.
Once your property is appraised and you are officially getting close to being the owner, don’t forget to put the utilities in your name! You will also want to set up Wi-Fi and TV services.
If you’ve decided to self-manage, don’t forget to research permitting requirements for short-term rentals in your area. You will also need to collect and remit the appropriate lodging taxes to your local municipalities. Your property manager should handle these services on your behalf if you’ve decided to go this route.
8. Start preparing the property for guests.
To set up your property and ensure it is guest ready, a deep cleaning is highly recommended. Lay on the bed and sit on the couch! Imagine you are a guest spending several thousand dollars to stay in this short-term rental—would you be happy with the way it is decorated and how it functions?
9. Set up your online listing.
Next, set up your property listing on the OTAs (online travel agencies), such as Airbnb and VRBO. Make sure you use professional photography for your listing. I recommend asking your real estate agent for a referral to a real estate photographer, as they will be familiar with the angles to showcase stunning pictures.
Remember that your potential guest is making an online, emotional shopping decision, and the photos are key! (A professional property manager can arrange photography shoots and build your listing if you’ve hired one.)
10. Begin hosting—and keep learning.
Now you are ready to host your first guest. Hopefully, you get a five-star review. In my experience, you will get good reviews if you communicate quickly and efficiently and have provided an excellent vacation experience.
If the process goes smoothly, you may be wanting to scale your portfolio in no time. Analyze the process you went through, and determine if any efficiencies can be made to the steps you took. If you like the market and the team, you may want to consider buying another short-term rental in the same area. Before you know it, you’ll have a cash-flowing portfolio of short-term rentals that you can enjoy whenever they go unbooked. Enjoy the lifestyle, and grow your portfolio.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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