Articles, Buying Real Estate, Real Estate, Starting a Business

How To Make a Killing With a Short-term Rental Business

Written By: Rose Morrison
Reviewed by: Mike Reyes
Last Updated May 23, 2023
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a phone inside a short-term rentals business

Wondering how to start a short term rentals business? With the popularity of sites like Airbnb and VRBO, more and more people are looking to invest in real estate using short-term rentals. Travelers choose a vacation rental over hotels to save money, protect their health or have a one-of-a-kind experience hotels can’t offer. Rental owners who can capitalize on these desires will have it made.

However, success will depend on having the right mindset and direction. Those looking to invest need to approach this like a business — rushing in without a clear plan will cause mistakes that could carry heavy financial losses. Business owners can follow these straightforward steps to start their short-term rental business.

Choose How to Invest

Start-up costs are prohibitive to many investors getting started with short-term rentals. Potential properties come with a steep price tag because of their ideal locations in popular travel destinations — big cities, beaches and other getaway spots. Luckily, anyone looking to get into the vacation rental business has a few good options for entry.

Traditional Route

This method is heavily dependent on having a large initial budget. Investors would need a substantial amount of money at hand to purchase at least one property. The business owner buys the ideal spot, fixes it up, and lists it for rent — all the costs associated with the business fall on the investor’s shoulders.

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Alternative Traditional

The alternative traditional route is similar to the first option, where the entire financial burden falls on the owner. However, instead of purchasing a new property, they begin by renting a portion of their own home. Usually, these rentals are a finished basement apartment, an in-law suite with a separate entrance, rooms above a garage or a separate finished building on the same lot.

The start-up cost for this method is still high, especially if the owner needs to complete a lot of renovation work. Though, the price is substantially less than the traditional option.

Rental Arbitrage

Rental arbitrage is another good option that drastically reduces the cost of starting a short-term rental business. In this model, the business owner doesn’t purchase any properties themselves. Instead, they rent long-term apartments from someone else with the understanding that they can sub-lease it. Landlords often want increased assurances from this type of deal, such as several months’ rent in advance and certain forms of insurance to protect themselves against damage.

Property Management 

person standing near the stairs

The least expensive way for business owners to dip their toes into short-term rentals is to offer their services as property managers. An investor going the traditional route with one or more properties typically hires a property manager to do their marketing and handle the daily responsibilities. Instead of purchasing a property up front, a business owner can learn the ropes about vacation rentals from the bottom and save to move up the ladder. The property management strategy can help prospective businesspeople eventually find their own short-term rentals.

Find a Niche

Every type of location and form of short-term rental has nuances. There’s quite a difference between renting ski chalets to couples, urban apartments to traveling singles and beach houses to extended families. The number of rooms, decor and amenities would all vary.

Business owners will do better by mastering one corner of the market rather than spreading themselves too thin right away. They’ll need to hone in on one segment they feel they can target and market to successfully.

Determine the Best Locations for a Vacation Rental Property

two brown wooden chairs beside the wall

Once the owner determines a niche, starting a vacation rental business will be much easier. Short-term rental properties are in numerous locations nationwide. However, vacation rental owners must pinpoint where they want their properties. Knowing this element clarifies other factors like the peak season and what unique amenities to offer.

Those looking for a vacation rental property should use online tools to narrow their location options. For example, Airbnb has a tool business owners can use to research rental sites by zip code and determine their financial strategy.  This vacation rental software compiles data and shows trends in business travelers and vacationers.

Write a Business Plan

Many new business owners struggle with this next step, but writing a real estate business plan doesn’t have to be complicated. The short-term rental owner can create it themselves or get help from a business or financial expert.

A formal business plan forces the owner to think about how they want their business to run and analyze the competition. It keeps them on track in the early stages and into the future as they grow their business. Most lenders will require a plan to loan initial funds. These sections are the primary ones to know for short-term rental property owners.

Executive Summary

The executive summary is the most vital part of the plan for a vacation rental business. This section gives the first impression and provides an overview of the rest of the idea. The executive summary can contain a mission statement, inspiration for starting the short-term rental business and the company’s services.

Business Description

The second part of a business plan is typically the business description. This section depicts the owner’s strategy in the vacation rental industry and the goals, products and services. The business description is an ideal time to show how the business will stay competitive alongside fellow property management companies.

Market Research

Market research is the section where business owners outline their target demographics. Property managers should specify where these targets live, their occupations and their incomes. The research can reveal factors like the social media platforms they use most often, what booking sites are the most popular and what unique selling points will get them in the door.

Market research should also describe where the industry is heading. Some factors — like changes in local zoning laws — are difficult to predict. However, tourist destinations may change with the times. The market could shift toward long-term tenants and away from a short-term rental business.

Marketing Strategy

After the market research has concluded, it’s time for the business owners to outline their marketing strategy. Here, they’ll discuss advertising, presence on online platforms, pricing for short and long-term rentals and more. This section is critical because it shows how the business plans to bring in potential guests and stand out among the competition.

Competitor Analysis

Getting into the vacation rental sector is difficult because there are likely already short-term rental businesses in the area. Here, STR business owners will show analyses of competitors and compare strategies.

What helps the competitors get positive reviews? How do they appeal to business travelers? What do they charge for an annual fee or booking fees? These tiny details depict what works for a vacation rental business.

Working with a real estate attorney is well worth its cost. These professionals are familiar with the short-term rentals business, and know local and state codes. An attorney can even help parse through complicated HOA contracts for any issues in the management strategy.

Investors must also stay on the right side of tax laws, ensuring they collect lodging and sales tax, and send it out each month. In addition, they need to obtain appropriate insurance based on their short-term rental business model. A seasoned attorney can locate certain tax benefits that apply to a vacation rental business in the area.

Another task for lawyers is to check local zoning laws. STR business owners may find an excellent location for vacation rental properties, but it won’t matter if the city’s zoning laws don’t allow the business to operate. The city may also require the business entity to obtain a short-term rental license.

Decide How to Manage Properties

Unfortunately, short-term rentals aren’t a set-it-and-forget-it situation. With such high turnover rates, there’s an increased chance of damage to the property and tenants violating house rules. The rental must also be reset after each checkout so it’s ready for the next guest.

All that work can be tiresome for one person, especially if they’re spread out across multiple properties. Many short-term rental owners still have full-time jobs and use their property management company for additional cash flow.

Investors need to decide how they’ll plan to manage their vacation rental business. Will they buckle down and do the work themselves or hire help like a cleaning person or property manager? What will they charge for cleaning costs?

Protect Your Investment

Business owners can take a couple of different actions to protect their investments. Both are essential to long-term success in property management.

Choose the Right Materials

Short-term rentals take quite a beating between the weather and the rapid switch of occupants with heavy luggage. Owners can protect their property by choosing suitable materials from the beginning. They need to know where to splurge and where they can economize. Flooring and furniture are items worth spending for an investment property.

Short-term rental owners should choose scratch-resistant and waterproof flooring materials that clean easily and have a long life span. Furniture is a similar situation. Investing in quality pieces with durable fabrics will help them withstand guests’ constant use, and require less fixing and replacing over the years.

Install Security

With this much time and money invested into a property, the least a short-term rental owner can do is protect it with basic security. Footage can help settle liability disputes and protect guests during their stay. It provides everyone involved with peace of mind and deters unwanted visitors and burglars.

Set Pricing and List

After everything else comes the fun part. The property owner or manager will use the competition analysis from their business plan to price their rental correctly. They should also consider adjusting costs depending on the season, day of the week, number of nights booked at a time and how many guests are coming. When it’s time to list, it’s wise to spread the property across several platforms and sync reservations to get access to the largest pool of customers possible.

Planning Is Essential for a Short-Term Rentals Business

Following these measures can help any short-term rental investor get started. Each layer is essential, like laying a complicated stack of dominoes — all the necessary pieces help it fall into place within the short-term rental industry. When done correctly, it’s a lucrative market for those who want to get into real estate. A property management company can find numerous additional properties if they play their cards right.

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