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Investing in a Short-Term Rental: How to Get Lucky

01st Jul, 2020 | Investor

In this article:
The short-stay market can be lucrative for some property owners but a flop for others. Discover the critical ingredients for success.

If you’re buying a property specifically for short-term rentals, your purchasing and financing choices can make all the difference to your profit. Not every property is suited to attracting guests for short stays all year round, so don’t buy a property because the price is right and hope the guests will come. Here are three tips for how to make smart decisions from the start.

Figure out your financials

When calculating how much you can borrow, some lenders will consider rental income, but not others.

Before you even begin looking at properties, know what you can afford. It’s not just the price of the property, but all the expenses associated with owning a rental. Council rates, land tax, maintenance, repairs, pest control, strata fees and stamp duty are some of the typical costs. Short term rentals tend to have higher running costs as you will need to account for increased maintenance and frequent cleaning. They may also have higher vacancy rates and seasonal price fluctuations, which will impact your cash flow.

Advice from a trusted and experienced Yellow Brick Road mortgage broker can help you make the best decision about how much to borrow and which loan to choose. There are many options to consider when financing investment properties: whether to use equity from an existing property, take out an interest-only loan or add in features like a line of credit.

When the time arrives to put in a loan application, advice from a broker can boost your chances of approval. We’ll prepare you for what lenders look for, such as savings history, credit score and ‘serviceability‘. When calculating how much you can borrow, some lenders will consider rental income, but not others.

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  • Know your market

What you’re looking for is an area where there is demand but not too much supply.

Location is an essential consideration for any investment property purchase. Buying a short-term rental has even more specific location requirements because there are areas which have a higher potential for profits. Numerous online tools are available that can help you distinguish different locations based on their short-term rental returns and occupancy rates. Some cities and apartment blocks have restrictions on short term renting so always check the laws and strata guidelines before you invest.
 
What you’re looking for is an area where there is demand but not too much supply. Start checking the calendars of properties in these locations to identify which properties are popular and why. Are apartments more popular than houses? What is the optimal number of bedrooms? How close are these places to public transport, shops and restaurants? 
 
Importantly, decide in advance whether you have the time and energy to manage the property yourself or whether to outsource. Your decision should factor in whether your home is within easy reach of the rental.
 
Be clear about your end goal

How would you handle switching between the models of landlord and hospitality provider.

Know what you want to achieve through your investment and over what time frame. A typical assumption is that you will use the property for short-term stays, with the fall-back option of long-term rentals. However, it’s essential to dig deeper into these financial assumptions to look for how you would handle switching between the models of landlord and hospitality provider. 
 
As an owner of a short-term rental, your ongoing success will depend on your ability to meet continuously rising guest expectations and make your property stand out from the crowd. It’s crucial to enter the purchase with your homework complete, including a clear understanding of the insurance and tax implications of running this type of rental.