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Recently, there has been a lot of interest and allure around investing in short-term rental properties and posting them on platforms such as Airbnb. If you currently don’t own any short-term rentals and haven’t done any prior research into this investment strategy, you might be wondering: What exactly are short-term rentals? Is it possible to use an Equity Trust self-directed IRA to purchase and maintain a short-term rental, using an Airbnb or another platform? Is this investment strategy right for me?
What’s the difference between a short-term and long-term rental?
If the property is rented at an average of seven days or less, this is generally considered a short-term rental. If the property owner/manager is offering additional services (ex. access to a local spa, swimming facilities, etc.) and the average stay is 30 days or less, they could still fall under the classification of “short-term rental”.
A conventional rental property, which is also known as a long-term rental, is where a tenant signs a lease and pays rent monthly. Investing in long-term rental properties is a very common real estate investment strategy due to the consistent cash flow as well as the long-term stability it typically offers.
Short-term rentals, if defined as such, must be insured differently than long-term rentals. There can be “hotel tax” assessed with a short-term rental. This can depend on the county, so investors must research the market they are investing in to determine the applicable tax treatment.
Why have investors been investing in short-term rentals?
There are many reasons why investors have been looking into this real estate investment strategy. Depending on the area that you live in, short-term rentals could potentially be more profitable than long-term rental properties.
“A well-booked Airbnb rental will be much more advantageous than renting the same unit to a single tenant for a long-term rental,” said Deepasha Kakkar, the founder and CEO of Crackitt, in an article published by FortuneBuliders. “Rather than relying on a single long-term tenant with a fixed monthly payment, you can charge higher nightly rates based on your location and the reputation of your renting space as proven by numerous rental reviews left by your previous tenants.”
In addition, consider this example from Rocket Mortgage: “Let’s say you want to rent out a one-bedroom apartment in Los Angeles. As of March 2022, the average monthly cost of that apartment is $2,563, meaning you could make roughly $30,000 if your tenant signs a 12-month lease. According to AirDNA, the average daily rate for an Airbnb in Los Angeles is just over $190, with units typically occupied 67 percent of the year. This means you could make over $46,000 off your Airbnb – a significant $16,000 more than you would through traditional renting.”
Another reason why investors have been looking into this real estate investment strategy is the diversity of tenants. With long-term rental investments, you are locked in with a tenant for a certain amount of time. If that tenant is financially responsible and follows through with the lease, there is no issue. If the tenant is not consistent with rent payments or breaks the lease, your flow of income will inevitably be impacted negatively.
However, with short-term rental investments, you are allowed to be more selective with tenants and can charge tenants on a per-night basis.