If you are trying to maximize returns on your rental homes, short-term rentals may be the way to go. They are not all roses and rainbows, however. We are starting to hear of owners losing money on these once profitable deals. As someone who’s been in the real estate game for a while, I have seen many trends and wanted to be sure to give you a heads up on the growing risks of buying short-term rentals. If you’re considering jumping on the Airbnb or VRBO bandwagon, it’s crucial to know about the potential pitfalls, especially if you’re new to the industry.
Short-Term Rental Risk: Local Regulations
One of the fastest growing risks is local regulations. Many cities and towns are cracking down on short-term rentals, imposing stricter rules and requirements that can seriously impact your profits. For instance, in my hometown of Lakewood, they’ve recently implemented a new rule that you must live in the property full-time to rent it out on a nightly basis. That means if the home is not your primary you need rental agreements of 30 days or longer. This is the same restriction implemented by Denver and one that more cities are considering. Now if you own an investment in a city with this restriction, you may be forced to sell it or switch to a medium or long-term rental, which could seriously eat into your bottom line.
Short-Term Rental Risk: Hospitality Industry
But it’s not just local regulations that can trip you up. The hospitality industry, including hotels, is also pushing back against the rise of short-term rentals. They’re lobbying for more regulations, higher taxes, and steeper permits and licensing fees, making it harder for small investors like us to compete. It’s like the big guys are trying to keep small investors like us out of the game!
Short-Term Rental Risk: Demand
And let’s not forget about the changing demand for short-term rentals. It’s not as good as it once was. The demand for one to three night stays, which used to be super popular, has been on the decline in recent years. Obviously, this is location specific but be aware that the demand for these has plummeted in many areas across the country. If you own in a low-demand area, you might struggle to keep your property booked and generate consistent income, which could mess up the eye-popping returns you expected.
Demand is only one piece of the equation, however. Supply has been increasing in areas with friendly governments so now there’s the risk of oversupplying the market. More and more people are jumping on the short-term rental bandwagon, which means there’s a growing number of individually owned properties vying for the same pool of renters. This increased competition could lead to lower occupancy rates and rental prices, which will have an impact on your profits.
Short-Term Rental Risk: Other Investments
And let’s not forget about the investment you make in furnishing your short-term rental. If you spend a ton of money decking out your property only to find out that you can’t rent it out as planned, you could be left with beautiful furniture you cannot use. Talk about a way to kill your returns!
Keep Your Eye On The Ever-Changing Short Term Rental Landscape
Buying short-term rentals may not be as easy and profitable as it once was. With increasing regulations, competition from hotels, changing demand, and the risk of oversupply, there are definitely risks that the small real estate investor needs to be aware of. It’s essential to do your homework, understand the local regulations, market conditions, and potential risks before diving in. And don’t forget to keep an eye on the changing landscape of the vacation rental industry, and have a plan B, because things can shift quickly in this game.