RISK OF SHORT TERM RENTAL INVESTMENT.

ASSOCIATED RISKS WITH SHORT TERM RENTAL INVESTMENT.

The income potential for short term rental property is quite apparent to investors. Even with the rise in popularity of short term real estate investing over the years, there are still short term investment opportunities available. It is possible to make more money with short renting compared to listing the property for long-term renting. However, earning revenue from this strategy may not be as simple as it seems. There are several risks of short rental real estate investing to consider before you get started.

So, how do you start short let business with these risks and still generate a high return on investment? Don’t worry! Here are 5 risks of short rent investing and how to avoid them.

1. Fierce Competition

With the increasing popularity of the short rent business, one of the major risks of this real estate investing is fierce competition. Today, there are thousands of investors that operates this business in all major cities in the country. Any beginner investor will have to compete will several other investors in the market. This risk can leave your short rent investment non-operational.

To beat the competition, your investment should be different from others within your location. You can do this by ensuring your prices are slightly lower than those of competitors. You can also spend a little more cash on better amenities and offer more and better services. Purchase good quality furniture, bedding, bath accessories, etc.

Welcome your guests in style with gift baskets and brochures that include a local map and recommendations. This will give your guests a better experience. When short rent guests are happy and satisfied with the services, they tend to leave good reviews. You should also invest in alluring professional photos in your profile to attract more guests.

2. Vacancy Risk

The possibility of having a high vacancy rate is also one of the risks of short rent real estate investing. Even though it is possible to make more money with short rental relative to a long-term rental, there are no guarantees. Bookings tend to be seasonal and hard to predict. There are times when you will have many bookings and be followed with a dry period. Unlike with long-term rentals where you get monthly/annual income, therefore short rental income can be erratic.

Definitely, you wouldn’t want your short rental property to just sit empty. A low occupancy rate can reduce your income, leading to negative cash flow. The uncertainty of short rental income also makes cash flow planning quite difficult, especially if you have a tight budget. This can be frustrating if you are relying on the short rental income to pay off your monthly expenses like insurance, mortgage, property taxes, etc.

To overcome the vacancy risk, you need to select a location with high demand. Such locations tend to be near tourist attractions, good transportation networks, and other amenities. Once you find a good location, study short rent occupancy rate, together with other financial metrics like cap rate and cash on cash return. Furthermore, compare other short rental properties around the location and see which one has a good return on investment. After hosting for some time, you can check your income statement to see if your investment is still viable.

3. Legal Implications:

Short rent hosting is not legal in some cities or countries, this is also one of the critical short rent investment risks to be aware of. For example, there are many areas across the United States that have enforced regulations to restrict short rent apartment and some local governments establish regulations for short-term rentals in an effort to encourage more long-term rentals. Some cities have banned short rent apartment while others are looking into banning it. Short rent hosts may also be required to acquire special permits or licenses. If you are not compliant with state and city regulations, you risk paying penalties or even getting severe jail time.

So, how do you avoid this risk? Before listing your property, carefully review the local regulations pertaining to short-term rentals. You can reach out to your local city council to get detail information about the regulations in the area. You also need to remain vigilant and stay up-to-date on the short rental regulations in your location.

4. Potential Damage to Rental Property

Probably one of the biggest risks of short rental real estate investing is damage to rental property. Most stays go without incidents of guests damaging your property. However, there are some stories of careless guests damaging expensive furniture or appliances in the house. Some hosts have reported that their guests either got drunk or into fights and ended up shattering house windows or breaking other sections of the rental property. Sometimes damage to the rental property may be accidental. Whichever way, damage to the rental property can cause considerable inconvenience and repair costs, so you should fathom this into your billing(something like refundable deposit in case of damages).

Although some short rental guarantee program provides some assurance, it may not cover everything. It may also be a hassle you might not want to deal with. short rental landlords can choose to charge guests for damages to avoid incurring the cost. Upon receiving guests, make sure you warn them in advance that they will be responsible for any damages to the property. For instance, you could write a manual outlining all the precautions and penalties that guests ought to consider.

5. Bad Guests:

When hosting your property on short term, there’s also the risk of having bad guests. This is one of the risks that most potential investors dread. Although most guests are usually responsible and polite, you will sometimes encounter guests with anti-social behavior. There are times when guests can refuse to leave in time and stay for a longer period than they have paid for. You may also encounter some guests who are excessively loud and annoying. Others can even fail to pay their rent in time or refuse to pay at all. The worst guests are those who are malicious and so, leave bad guest reviews no matter how hard you try. You may do your best to offer the best experience to your guests but there are some who will still be unhappy. Some guests may just not be a good fit for your rental property.

It is usually a matter of chance who your guests turn out to be. Although there is no certain way to prevent having bad guests, you can still take some measures to mitigate the risk. First, you need to actively screen your potential guests. Ask your guests questions about their trip, their intentions, how long they intend to stay, purpose of visit, employment status etc. This can give you some insight into the kind of people they are.

The Bottom Line

The biggest advantage of short rental real estate investing is the potential cash flow. Short-term rentals can typically generate far more rental income than when renting out long-term. However, there will always be some risks of real estate investing and short rental is no exception. Having guests in your rental property on a regular basis does open you up to some risk. These risks can significantly sabotage your success.

By assessing these potential risks of short rental real estate investing, you will be in a better position to come up with ways to overcome them. Also, to protect yourself from the inevitable risks, be sure to purchase investment property insurance tailored to short-term rentals.

Are you planning on short term rental investment? Be sure to use to carry out your findings very well about the gains and pains. To learn more about how we will help you make faster and smarter real estate investment decisions, click here to view and like our online pages

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