Short-Term Rentals: How to Pick a Market and Estimate Revenues, Expenses, and Your Income
Yes, you can make great money in short-term rentals (STRs) without being an expert real estate investor, without managing the properties or problems yourself, and without having to pay cash for the furniture up-front out of your savings — and it’s often more profitable than long-term rentals. How? Keep reading.
In this post, we’re going to brief you on picking your market (either your home area or out-of-state!), your up-front investment, revenue expectations, operating expenses, and take-home cash. Every market can be an opportunity, and it boils down to the price you pay up-front what your profit numbers will be.
Picking your market: Many of Patriot Family Homes’ homeowner- and investor-partners have converted primary residences, secondary residences, vacation homes, long-term rentals, college properties, military housing, rental portfolios, new construction, fix-and-flips, apartments, multi-families, and more into top-performing short-term rentals across many markets. If you have a property already, explore the opportunity there first. Questions you’ll want to answer are: How many total STR listings are there in my market? How many listings are comparable to my property (bedrooms, bathrooms, square footage, quality of interior, amenities, location)? Are there too many listings, too few, or a balanced supply? Are occupancies, nightly rates, and total revenues increasing or decreasing on average across the market? Will my property be competitive? What does revenue look like for these comparable properties? Where would my property stack-up within this core comparable set of properties? You’ll also need to think about operations and logistics for managing the property, which we’ll talk to below.
Up-Front Investment: There are three core buckets you’ll need to consider: Purchase price, capital repairs, and furnishings. The purchase price should include up-front transaction fees for due diligence, closing, and other one-time charges, such as financing fees. Capital repairs can include a new water heater, HVAC unit, roof repairs, window replacement, or any other important repairs to the property itself. Furnishings — or FF&E in real estate terms, which stands for Furniture, Fixtures, and Equipment — includes the furniture, electronics, security systems, locks, utensils, decorations, and other items needed to be purchased for setting up the home. All of these are up-front investments, and they should be considered the total cost-basis for the property. Financing your furniture through an established property manager, such as Patriot Family Homes, at a below-market price is another great option if cash-on-hand is not readily available for furnishing the entire home.
Revenue Forecasting: The best source of truth are comparable properties that are currently operating in the same market. First, you can partner with an STR manager, such as Patriot Family Homes, who will have proprietary data from their own homes in the market. Second, you can pay for access to secondary market data — which will be a little less accurate — from providers such as AirDNA, Rabbu, Key Data, or several others, who do their best to aggregate revenue performance of homes in the market by scraping data from AirBNB and VRBO. Third, you can pay for a company to underwrite properties for you, such as Revedy, and these companies base their projections on the best available data they have access to for each market, which may come from partnering with local STR managers or using scraped, secondary market data.
Comparable properties are how you determine a revenue range for your target property. Once you’ve found a core group of 3-10 comparable properties, you’ll then want to analyze them and determine which characteristics are most similar — just like when you’re buying a home. How many bedrooms does each home have? How many full bathrooms? How many guests can stay? Is it a budget, intermediate, or premium interior? How are the locations? Is there a pool, hot tub, game room, or other amenity that helps to drive demand? How are the reviews? Is one home unique architecturally or historically? Is one home waterfront? Are several walkable to a popular attraction or event? After analyzing your comparable properties, determine a revenue range you believe is applicable for your target property. Then, using your informed and best judgment, determine where you think your home will likely perform within that revenue range.
Operating Expenses: Each property is different, but there are many common expenses that will not change. If you are partnered with an STR property manager, such as Patriot Family Homes, then a standard industry management fee is 25-30% of net revenue for full operations management. If it’s solely digital management, which includes the marketing, revenue management, and guest communications and services, then a standard industry fee may be 10-20% of net revenue. Even with a manager, you’ll still need to account for your property taxes and insurance, repairs and maintenance invoices, permitting and licensing costs, utilities, HOA dues (if applicable), FF&E replacements (cups, plates, linens, towels, etc.), and any required capital repairs (e.g. water heater replacement, pool repairs, roof, etc.).
If you manage the home yourself, you’ll need to account for the above expenses, as well as routine cleaning fees, deep cleans (at least quarterly), lawn care, pest control, property service calls, labor management for cleaners, repairmen, contractors, and guest services, furniture transportation, installations, and replacements, as well as digital management for bookings, daily and weekly price-adjustments, and accounting and legal costs and compliance.
Whether to manage yourself or partner with a property manager depends on your goals: Will this be your own active and time-intensive business, or will this be a passive cash-flowing investment?
If you plan to invest out-of-state, a trusted and proven short-term rental manager is the best friend you haven’t met yet. You can passively invest while entrusting the operations and logistics entirely to your on-ground and in-market management partner. If you bring the money, they bring everything else required. (Plug: Contact us!)
Take-Home Cash: Once you’ve forecasted your revenues and operating expenses, subtract your expenses from revenue. What you’re left with is your Net Operating Income (NOI). However, you still need to account for your mortgage payment and any other financing payments for the property. Once those have been deducted from your Net Operating Income, you now have your take-home cashflow from the property.
Financial freedom, flexibility, and larger profits (as compared to long-term rentals) are what drive many owners and investors towards short-term rentals; operations, logistics, customer nightmares, labor shortages and problems, and harsh reviews are what drive most of them out. Patriot Family Homes is becoming the leader in short-term rental property management, and we partner with both owners and investors across many different markets.
If you’re not opposed to learning how this might work for you or someone you know, reach out now to firstname.lastname@example.org with the subject line: Learn More About STR Management, or fill out our form here. We know it’s a conversation that will change your family’s financial future forever, your investment philosophy, and you’re love for real estate.