It is standard practice to want to see the annual revenue and expenses when you are purchasing a rental property. Going over earnings over the past few years gives you a sense of what you too could cash flow and is a way to value a business. But should we be applying this to short term rentals in this market or is it a recipe for disaster? The following are my observations being full time in real estate in Florida and also owning two short term rentals in St Augustine.
If you want a free consultation on your own short term rental or a pre purchase consultation on what you need to know, reach out to me and let’s talk!
- 2021 and 2022 were peak years for short term rental income due to pent up traveler demand, employees working remote and relocation needs. These were not normal years. Reviewing these income statements and basing decisions on them could lead you astray.
- When you review 2023 income statements for the most part you will see a decline in revenue compared to previous years. This is normal for the following reasons:
- Homeowners decided to become hoteliers in 2021 and 2022 thinking it would be an easy way to make some money during the traveler boom. Many homes that were never intended to be short term rentals due to location, quality of home or amenities, succeeded in those years.
- There were many homeowners that are not business people or natural hosts, and some that are amazing hosts. It was hard not to be successful with so many people coming to Northeast Florida.
- The excess number of short term rentals means that as traveler demand slows most people in this business will suffer, with lower occupancy rates due to supply being higher than demand. We are seeing a price war now on booking sites. This will continue until we see more properties exit the market.
- Short term rentals dropping out of the market and are either for sale, or are converting to long term rentals, has created an excess supply in the long term rental market, and forcing rents lower in some cases.
Thinking about buying a short-term rental in 2024?
It is safe to say is we are not going back to 2021 and 2022 revenue. Keep that in mind when reviewing statements and making projections on 2024. If you want to succeed in the short-term rental market here is my advice.
- Do not rely solely on past rental income to evaluate property and do your own research. Review all the neighboring rental comps on Airbnb and VRBO to see what they are charging and offering. You can also review data on AirDNA to see the consolidated data such as rates and occupancy. Connect with other hosts nearby and get their take on the market and how they are doing.
- Every owner makes different decisions that can help or hinder their financial success. Sometimes the goal is not cash flow. When reviewing past financials keep in mind that many owners are not marketers and have simply relied on platforms like Airbnb without having a marketing strategy. One booking platform is not marketing and not enough to build a rental business on.
- Consider how many years the owner has owned the property. It generally takes 3 years to build up a short term rental business and repeat guests.
- The location is paramount. Your property really must be in a place where visitors naturally want to stay. e: walking distance to beaches, a downtown area, restaurants and sightseeing opportunities.
- Existing amenities have value: Travelers now expect amenities such as a fire pit, outdoor space, hot tub, pool etc. If you want to keep your occupancy rate as high as possible consider the value of amenities when considering real estate, or consider what you might want to add to the backyard.
- Direct Bookings: Your marketing plan should include how you plan to get direct bookings. Do not thing that Airbnb is going to run your business.
- Buying out of town or in remote locations: It is possible to build a “destination” where you will build enough of an experience and reputation that travelers seek you out, but my advice is to create a business plan and ensure you have enough money and time to build this business. Really study other successful short term rental businesses before you embark on this.
Cash flow and Short-Term Rentals
Many people ask me how quickly the property will cash flow or when it will. If you go into this process and are just focused on cash flow you will lose.
There are many reasons investors buy real estate which should be factored in and also the time you plan to hold the asset. If you plan to hold it for less than 3 years maybe a short-term rental is not for you.
Depreciation, mortgage interest deductions, equity are some of the other reasons why investors buy. The biggest thing you must have is you have to love the hospitality business, have the time it takes to manage this and ideally be hands on. This is not passive income by any means. If you are self managing then you will hear from guests pre, during and post their stay, handle emergencies and maintenance. It is not for everyone, but if you are like me and enjoy running a business where you have the potential to net more, are ok with the risk and enjoy creating a visitor experience, then this is for you!
The cash flow may be there and we can review numbers and projections, however it may not be immediate. You may invest more in the beginning and lose or break even in the first year, then slowly build up as you make updates, and build a reputation amongst guests.
Short Term Rental Definition: A short term rental is a rental property that allows stays for less than 6 months.