Over the years, the IRS has been cracking down on taxpayers taking advantage of the qualified business income (QBI) deduction. Because of that, some house flippers are wondering whether flipping houses can still qualify as a business.
So, let’s dive in and see what you need to know.
QBI Deduction: What Is It and Who Can Claim It?
QBI deduction is a tax break that allows business owners, freelancers, and independent contractors to write off up to 20% of their total taxable income. This effectively decreases the income tax they owe to the IRS. However, not everybody is eligible for it.
For instance, only business owners with pass-through income may take advantage of the QBI deduction. This includes the following:
Sole Proprietors: An individual, such as a freelancer or independent contractor, who runs an unincorporated business
Partnership Members: Two or more people who made a formal agreement to oversee a business together, sharing in its profits and liabilities
S-Corporation Shareholders: People who own shares in an S-Corporation and include its income and/or losses on their personal tax returns
In short, you’ll have to double-check if you qualify for the tax deduction to take advantage of it, as there are some income limits and business types that may affect your eligibility.
What Does Not Count as QBI?
Now, not all income types qualify for QBI. In fact, there are nearly 20 different income types that the IRS does not consider as QBI. Here are a few of them:
Income from out-of-country businesses
Investment items (e.g., capital gains and dividends)
Interest income not related to a business or trade
Annuities received from something unrelated to a business or trade
Of course, as a house flipper, your only concern is if income from flipping is included on the IRS list. Well, it’s not specifically mentioned by the IRS. So, are you eligible for the 20% tax write-off?
Does House Flipping Qualify as QBI Deduction?
The law says that the QBI deduction will only apply to taxpayers who are sole proprietors of a business or trade, a member of a partnership, or a shareholder in an S-Corporation. So those in the fix-and-flip business will be eligible if your operations are conducted within one of these entity structures.
However, there are still rules dictating how much you can deduct from your total taxable income:
If you’re single or unmarried and your total taxable income is less than $164,900, then you can deduct 20% of your qualified business income.
If you are married and filing jointly with your spouse and your total taxable income is less than $329,800—then you can deduct 20% of your qualified business income.
Because of W-2 wage limitations, things become more complicated when your total taxable income exceeds these thresholds. If this is your situation, then it would be better to call an accountant for advice.
Confused? Don’t sweat it—here’s a quick example to help you understand QBI deductions better:
Let’s pretend that you’re a single-house flipper whose net operating income is $100,000 and W-2 wages are $50,000. Since you fall below the $164,900 threshold, you can deduct 20% from your net operating income, amounting to $20,000.
Assuming that you belong to the 24% tax bracket, this QBI deduction will save $4,800 on your tax bill.
Yes, House Flipping Qualifies as QBI Deduction
The QBI deduction has undoubtedly benefited a lot of industries, particularly real estate, where house flippers are now seeing more profits earned from every sale they close. But if you are still confused about the calculations, then we recommend working with a certified public accountant (CPA).
Calculating your QBI deductions is a huge headache and as a busy house flipper, you simply do not have the time for that. That is why you should consider joining the Real Estate Investors Association of Oakland County—our members have access to tons of resources that help them take their house-flipping business to new levels of success.
From landing sales on your fix-and-flip projects to help you determine your tax write-off, REIA has everything you need. Interested? Check out our website to see what your next steps should b
Calculating your QBI deductions is a huge headache—which you may not have the time for. Consider reaching out to REIA and our team of experts to help you with everything. Subscribe to our newsletter as well and join as a REIA member to attend our upcoming meeting!
Landlording can be a lucrative business, but it also comes with its own challenges. That’s why it’s essential to minimize the learning curve as much as possible and get tips from those who have been in the business for a while. You don’t have to take the trial-and-error approach if you already know the “secrets” and tricks to landlording successfully!
Read on to know the four expert tips for successful real estate investing.
Make It Difficult for Rental Advertising Scammers
Unfortunately, there are a lot of rental property scammers out there—especially on Craigslist. One of the common scams is where other people will steal your real estate listing, use the property information and photos, and replace the contact details with their own numbers and email addresses.
Attract interested tenants
Say that they’re “currently out of the country” and can’t turn over the keys to them
Have the tenants hire a locksmith to change the locks themselves
Collect rent money and security deposit
Then disappear into thin air. You’ll be left with clueless tenants you didn’t get to screen, and a rental property you can’t rent out without telling the scammed tenants to go.
How can you avoid these scams?
Be proactive and mark your photos with your phone number and contact information. Scammers won’t take the extra time and effort to remove your watermarks; they’ll skip over your listing and look for other opportunities elsewhere.
Another tip is never to publish the actual address of your home. Instead, use the nearest cross streets to give tenants a good indication of where your property is without revealing the address to scammers.
Be Attentive and Creative in Screening Tenants
The ultimate goal of screening tenants is to ensure they are responsible people who’ll pay rent on time, maintain your property well, and abide by all the clauses in your lease agreement. In other words, the best way to avoid bad tenants is by having a good screening process.
Here are our pro tips on how to screen them:
Assess their cleanliness: Walk them to their car. Take a peek at how clean or dirty their car is inside. Chances are, if their vehicle is filled with garbage (like this poor vehicle), they’ll treat your rental home the same way, too. Their car is a reflection of what’s to come for your home. Or even do a surprise visit to their current residence – how it looks is how your property will look after they move in.
See if they have pets: Don’t ask if they have animals, because they can easily say no to that. Instead, ask how many animals they have—indicating that you already know they have pets and you only want to know how many of them there are. Make it a bit harder for them to lie.
Moreover, don’t believe anybody who says that their animals will “live somewhere else”. All too often, those animals will only live elsewhere for a while before moving into the home.
In other words, make it slightly more difficult for them to hide secrets from you. By checking their car and assuming that they have pets, you’ll get more honest answers out of the applicants, making it easier to decide if you want to accept them as your tenants or not.
Be Cautious in Accepting Upfront Payments Covering Multiple Months
Receiving upfront rent payments may seem great for you. You get to secure the money earlier without having to chase tenants for payments every month. However, take note of the following:
Is it legal? State and landlord laws might have a maximum upfront rent payment allowable, while some will require you to pay interest on it. Ensure that you’re familiar with the laws before accepting any upfront rent.
Why can the tenant afford it? Did they come upon some money and want to ensure that it goes somewhere necessary before they spend it irresponsibly? If that’s the case, they might not have a stable income or employment to afford the home in the first place.
Of course, there are exceptions to these situations. If you’re renting out to students, for example, the parents might pay upfront rent so their family won’t have to worry about paying monthly rent anymore.
Have a Thorough Lease Agreement
You may be tempted to use online lease agreement templates so you won’t have to create one from scratch. However, barebones templates won’t do much in protecting you or your investment property.
Plus, there are specific state and local landlording laws that you’ll have to consider in your lease, and other rental-specific rules that you’ll want to have (e.g., regarding smoking, pets, or painting the home’s interior). These are things that generic templates won’t guarantee or cover.
Instead, everything you want the tenants to know should be included in the lease agreement, so use online templates only as a guide to creating your own document.
Once your attorney approves the draft, sit down with your tenant and go through the entire thing. Don’t assume that they’ll read the agreement on their own—most of them will skim through it and call it a day. You’ll end up with tenants that will likely forget your rules, creating many problems down the line that could’ve been avoided in the first place.
Ensure that they know and understand your rules by having them put their initials at the start of every paragraph or sign every page of the agreement as confirmation. If anything unfortunate happens in the future, the tenants won’t have any excuse to say that they didn’t know the rental lease guidelines.
Pro Tips for a Successful Real Estate Investment Business
There are many other pro tips that you can learn from experts. Knowing these secrets is the best way to ease yourself into the rental business, become a great landlord for your tenants, maintain your real estate property, and protect your monthly cash flow for investment success.
Become a successful landlord today! Get in touch with me or my team at Logical Property Management.
We’ve been managing properties for more than two decades now, and have more tips and tricks to share for a thriving rental property business.
During the pandemic, STRs took a hit to their profits. Let’s take a look at some of the upcoming trends and the positive outlook facing STRs in 2022.
Before the COVID-19 pandemic, the short-term rental (STR) market was going strong. In fact, Airbnb reported a 33% increase in booking during February 2020—a month before the pandemic hit. In contrast, during the pandemic, STR bookings took a massive hit. By January 2021, Airbnb reported record low bookings, down 31% from their average.
It’s now 2 been years and we have to ask: Will the STR market recover?
While we have seen that people are becoming more willing to travel with COVID-19 restrictions slowly easing up, there are more than a handful of factors that affect the future of STRs. You’ll need to know these if you want to navigate the uncharted waters ahead.
Let’s take a look at some projections for the STR market in 2022 and beyond.
STR Trends for 2022 and Beyond
If you’re running an STR business, you’ll have to reevaluate your strategies to adjust to the changes. With how COVID-19 changed how we look at STRs, the market has adjusted to fit the new norm. Here are 3 of the biggest changes we can expect to see for STRs.
#1 – The Fall of Seasonality
Before COVID-19 made vacations impossible, it was fairly easy to predict when booking would increase.
For example, for a property located in the mountains, you’re likely to see an increase in tenants during the winter. For rentals located near theme parks or beaches, such as Orlando and California, you would see an increase in booking during spring and summer vacations.
However, thanks to the rise and familiarity of remote work (both for employers and employees), people are more willing to go on a vacation during off-peak seasons. In a May 2021 report, Airbnb recorded that 64% of respondents are willing to travel during off-peak seasons—making bookings highly unpredictable.
With people more willing to travel during off-peak seasons, bookings for vacation rentals might see sporadic bookings throughout the year. The number of total bookings might be roughly the same, but it won’t be concentrated on seasons.
To adjust to this, you should provide deals and discounts more frequently instead of focusing on seasons. Having regular weekend discounts can target the customers looking for bookings during off-seasons.
#2 – Recovery of the Urban Market
During the height of the pandemic, many people fled from cities to avoid the crowd. For instance, over 320,000 people fled New York City during the height of the pandemic, primarily to get away from crowded areas and retreat to more rural environments.
However, with the increased distribution of COVID-19 vaccines, people are returning to normalcy in terms of their comfort with meeting people. They aren’t as afraid of the crowds inherent to cities anymore as they were during the height of COVID-19.
In fact, New York City had an influx of new residents starting in May last year. Plus, malls are reopening, more restaurants offer indoor dining, public transportation is returning to normal operations, and people are starting to repopulate the cities.
With people flooding back into the city, the need for accommodations will rise. Therefore, the urban market is looking to make a fast recovery—giving you the perfect opportunity to grow with it.
#3 – Longer Bookings Are Becoming the Norm
With the rise of remote work and online schooling (at least, for the meantime), people have changed the reasons for their vacations and, in turn, the duration of their rentals. The increase of flexibility with our responsibilities affected the length of everybody’s willingness to travel.
In a recent report, Airbnb showed that the number of people willing to book stays over 28 days has almost doubled. This is a great opportunity for your STR to adjust your pricing, provide duration-focused promotions, and meet the increased demand.
For example, offering a 10% discount for every additional week that they book can entice customers to choose your STR for a month-long trip. Even providing one free day for every successful referral can encourage people to give in to a longer vacation—and give you another guest to look forward to!
By providing customers with attractive deals for long-term bookings, you can:
Increase the number of visitors choosing your STR
Increase your occupancy rate
Increase and strengthen your rental income
Take Advantage of STR Opportunities in 2022
With travel restrictions lifting, the future for STR investments is looking brighter than ever. Our world is returning to pre-pandemic norms and the STR business is rebounding—if you use the opportunities wisely.
Take these trends into account and change your STR’s business strategy. Adhering to the market and behavior shifts will certainly strengthen and grow your profits as an STR owner, thriving in a market that people are looking for in 2022 and beyond.
Did you notice any other shifts in the STR market? Comment below and let’s get a discussion going.
Being a landlord isn’t all sunshine and rainbows. If you try to go in blind, inexperienced, and without proper knowledge—you’ll likely make dire mistakes that will ruin your bottom line.
Plus, doing some research online can only get you so far. You’ll get some bits of good information, but none will necessarily guarantee your success. No, you need to know how the pros do it so you can put yourself in the right direction towards becoming a successful landlord.
Not to worry, we’ve already compiled their “secrets” for you. No need to look elsewhere, here are the 5 things you should perfect to be as successful as the giants out there.
Screening is an important process for every landlord, so it’s of utmost importance that you have a firm grasp of how to properly screen potential tenants. Add to that, you need to abide by tenant screening laws to avoid potential lawsuits.
Generally, you need to keep these factors in mind when screening applicants:
Follow the Fair Housing Act, where it’s illegal for you to reject applicants due to race, sex, disabilities, and other discriminatory factors.
Perform rigorous background checks on their credit history and criminal records.
Once you make sure to abide by these laws, you should make a checklist for your ideal tenants. If your screening process is rigorous, you’ll end up with much better tenants. They’ll pay rent on time, take care of your property, and abide by everything in the lease agreement.
2. Successful Landlords Have a Well-Written Lease Agreement
You need to be specific when writing the lease agreement, otherwise, you might run into confusion later on. List down all the things the tenant can do, all the things they can’t, from having pets to subletting. That way, there aren’t any misunderstandings down the road.
A good contract will make sure to include terms like:
Names of all the tenants
The maximum occupancy
The terms of the lease
The monthly rent
Deposits and fees
Other terms you might include in a lease agreement are:
Pest control schedule
With a thorough lease agreement, you can protect yourself, maintain your assets well, and be confident that your tenants will support you in your rental business.
3. Successful Landlords Manage Their Property Professionally
How else do you keep good tenants? Well, you do so by being professional at all times. Trust us, this goes a long way in keeping your tenants happy and satisfied enough to stay longer.
Here are a few pointers to keep in mind when managing your tenants:
Make it easy for your tenants to reach you. Ensure that they have your contact details and are fully aware of what situations call for immediate action.
Keep on top of tenant emergencies like repair requests, so the property remains habitable and you solve issues before it turns into an expensive repair.
Don’t be afraid to evict those who defy the lease agreement, such as:
Not paying rent on time or in full
Does major property renovations without your permission
Conducts an illegal business in your rental property
Causes excessive property damage (e.g., broken structures, flooded bathrooms, pest infestations due to hoarding or garbage)
Instead, your goal is to establish and nurture a healthy landlord-tenant relationship where both parties are respectful. That way, tenants will stay longer and effectively stabilize your monthly cash flow and overall investment.
4. Successful Landlords Prioritize Keeping Good Tenants
Landlords don’t just find good tenants—they keep them. In fact, successful landlords are experts at keeping quality tenants around for a long time. For example, they’ll offer to upgrade selected amenities in exchange for renewing the lease.
Those incentives can include things like:
An internet connection upgrade
New flooring or furnishings
Improved HVAC system
New kitchen appliances
New in-suite laundry
While these do cost a pretty penny, doing so will reduce vacancies, turnovers, and maintenance. In other words, they look at the big picture and treat their tenants as they would want to be treated. By doing that, they’re less likely to look elsewhere leaving your rental vacant and not profitable.
Learn How to be a Successful Landlord from the Start
Successful landlords don’t waste their time and money on situations that they can avoid. Instead, they are proactive in figuring out ways to find quality tenants, keep them around for a long time, and list all obligations and expectations down from the get-go.
To give you a running start to becoming a great landlord, follow our tips! By running your rental property like a pro, you won’t have to spend unnecessary time, money, and effort to earn back your investment returns—and more.
Do you have any landlord tips for those starting out? Feel free to share them in the comments below!
Investing in a short-term rental (STR) is a great way to make some additional income. In fact, according to 2021 figures, the average Airbnb host in North America can make $41,026 annually from a single rental.
But you need to be smart and focus on a lot of factors to earn that impressive amount.
For example, just picking a neighborhood can make or break your investment. While the right neighborhood with all the right conditions will give you high occupancy and rental rates, the wrong neighborhood will only give you high turnover rates—or worse, complete vacancy.
So, what are the right conditions that make a neighborhood perfect for STR investments?
Let’s discuss the conditions you need to consider when picking a neighborhood for your Airbnb.
What Makes a Good Neighborhood?
No one factor makes a good neighborhood. You have to consider several characteristics when choosing the area for your Airbnb. When you choose a neighborhood to invest in, look for:
Airbnb occupancy rate
Airbnb rental income
Airbnb rent averages
Each factor is as important as the next and they all have to come together seamlessly. For example, if you only take into account the Airbnb occupancy, you could see an 80% rate. But each tenant might be paying you a low amount—and that might not be worth the effort.
So, let’s define each factor and go through their details:
Airbnb Occupancy Rate
The occupancy rate measures the dates a property was booked versus the total number of days it is listed for rent. Factors like location, market saturation, and seasonality can affect a neighborhood’s occupancy rate.
Now, the average occupancy rate in North America is about 44%, but you’ll want to find areas that give an even higher number. Instead, focus on locations that have the highest occupancy rates such as:
Seaside, CA: 71.3%
Little Rock, AR: 75.0%
Phoenix, AZ: 64.1%
Los Angeles, CA: 55.6%
Columbus, OH: 60.6%
A quick search on Google will give you these numbers. If you find another neighborhood with a good Airbnb occupancy rate, you can consider investing in property there.
Airbnb Rental Income
The Airbnb rental income will determine how much income your property will generate over time. For you to determine the potential rental income you can earn in a neighborhood, you need to conduct a market analysis. Using market analysis, you can learn:
The real estate appreciation rates of the neighborhood
The current and upcoming trends of the real estate market in an area
If the neighborhood you’re scouting is suitable for an STR
If long-term rentals are more popular in a particular area instead of an STR
The overall demand for rentals in the area
Take, for example, Mashvisor’s heatmap. With this tool, you can see the average occupancy rate in Detroit. You can also get a glimpse into the estimated rental income of an Airbnb. After you perform a market analysis, you should have a good idea of what your Airbnb rental income should look like in that particular neighborhood.
Airbnb Rent Averages
This is the simplest metric you need to find out. You basically need to look at the average rent STRs are going for in a neighborhood. If you skip this, you might invest in an expensive property that’ll take too long to generate a good return on investment.
You can use Mashvisor to get a good idea of how much people are charging for rent on their Airbnbs. In general, you want to look-out for properties with similar specifications to the property you’re looking to invest in. Watch for things like:
The number of rooms
The number of beds and baths
The kinds of amenities available
The location (e.g., if it’s near tourist attractions)
Once you have a general picture of how much people are charging for stays in their Airbnbs, you get an idea of how much you can charge.
This will also help you estimate the maximum amount you should spend acquiring the property, as you’ll want to charge at least 1% of your total property price to recoup costs fast enough. For example, if a property costs $212,000, you’ll want to charge at least $2,120 for the monthly rent.
Finding out the cash-on-cash returns for similar Airbnbs in a particular neighborhood will give you an idea of whether investing in a neighborhood is worth it. Again, Mashvisor gives you the cash-on-cash returns of Airbnbs in a neighborhood.
To calculate your cash-on-cash return, you just need to follow a simple formula:
Let’s look at the potential CoCR of the listing we mentioned earlier, with an annual rental income of $25,440 ($2120 x 12) as an example. With a total cash investment of $200,000 and a safe estimate of operating expenses being 1/3rd of the annual rental income, it’ll look like this:
CoCR = (25,440 – 8395.2)/200000
CoCR = (17044.8)/200000
CoCR = 0.0852
For this particular example, the cash-on-cash return is 8.52% per year. This is within the benchmark for good CoCR, which is between 8-12%. If you find an area with a CoCR that measures within that range, it’s a good opportunity for your STR.
Pick the Right Neighborhood For Your Investment
Airbnbs can be a great investment opportunity. However, much like any investment, you need to invest wisely. Choosing the wrong neighborhood will put you at too much financial risk, and you might not see numbers anywhere close to the $41,026 average.
Do your due diligence, analyze your opportunities well, and maybe even consult with experts in the industry, and you can be confident in earning that $41,026—maybe even higher.
Do you think there are other factors to consider when choosing a location for an Airbnb? Let us know your insight in the comments below!
Nobody wants to live in a dilapidated home. We all want a place where we can come home to an environment of relaxation and comfortable living—certainly not a messy, broken-down house that’s far from being stress-free.
This means that, as a landlord or homeowner, you need to treat your property with care to ensure it lasts for decades to comes. Tenants won’t want to occupy your rental property if it’s falling apart and neither will you. You need to perform frequent maintenance on your rental property, and do everything you can to protect your hard-earned assets in the long term.
In this article, we will discuss some tips and tricks to keep your property in tip-top shape.
5 Tips for Maintaining Your Rental Property
First thing’s first, maintaining your property is mandated by law. If you are located in Michigan, you are liable under the warranty of habitability law to keep your rental property liveable.
The law states that a landlord must abide by 3 factors:
The property and all common areas must be fit for use.
The property must be kept in reasonable repair while under a lease.
The property must comply with health and safety regulations.
If you don’t follow the warranty of habitability law, tenants can either withhold rent until you make the repairs (no income for you!) or resort to repair and deduct—where they’ll make the repairs themselves and deduct the costs from rent payments. It may deceivingly sound convenient, but experienced landlords know that leaving repairs to tenants likely means cheap fixes and short-term solutions.
By following the law, you can avoid consequences and protect your properties.
To help keep in line with the warranty of habitability law, here are best practices to maintain your rental property.
1. Establish Easy Communication with Your Tenants
The first step to keeping your rental property maintained is to communicate with your tenants if you aren’t living there. Your tenants will be the ones living in your rental, which means they are the first to find any need for repairs. Plus, you don’t want to leave a problem unattended for too long, or it becomes permanent damage.
Having regular communication with tenants is important for catching necessary repairs immediately.
Always provide a way for your tenants to get in touch with you easily. Your goal should be to make it easy for you to get ahead of important repairs before they cause major damage.
2. Perform Regular On-Site Inspections
Schedule a yearly inspection with your tenants or for yourself so you can have a frequent, in-person idea of the status of your rental. Getting an expert to help is also not a bad idea. You should look out for tell-tale signs of property damage, like the following:
Broken windows and screens
Discoloration on walls and ceiling
Burn marks around sockets
Malfunctioning smoke detectors and fire extinguishers
Your goal in performing regular on-site inspections is to catch any signs of water damage or gas leaks that can lead to costly repairs down the road.
3. Schedule Periodic Pest Control Visits
Pests are one of the most damaging factors to a property. For instance, do you know that the US spends over $5 billion yearly for termite repairs? That’s a lot of money spent on dealing with termites that can certainly be avoided.
So, take a preventive approach by scheduling pest control maintenance once every 3 to 6 months. Have an exterminator visit the property and extinguish any possibilities of pest infestations, so you don’t have to worry about little damaging critters occupying your rental property.
We understand that regular pest control visits can be costly to your business. But, it’s a cost worth taking, especially when you consider the more-expensive alternative of dealing with existing creatures.
4. Opt for a Professional Landscaper
Not only does great landscaping help entice new tenants if you’re renting it out, but it also keeps your existing renters happy and helps you avoid many problems down the line. You can always maintain the lawn yourself, but hiring professional landscapers will give you benefits such as:
Preventing pests from making a home in the lawn and trees
Avoiding debris accumulation that can harm your plumbing system
Protecting the structure of the home from nature-related issues (e.g., falling trees or overhanging branches that pose harm)
Plus, professionals will have the skill, experience, and equipment to keep all lawns, gardens, and other green areas of the rental property beautiful and functional. Many other benefits come with maintaining the landscape, but the biggest benefit is that you’ll beautify your home.
5. Hire Heating, Air-conditioning, and Ventilation (HVAC) Specialists
One of the main systems that keep a property habitable is the HVAC system. If the system fails, it becomes very difficult to live on the property. Just imagine going through winter without any heating or sweating in the summer with air-conditioning, and you’ll know what we mean!
Moreover, if an HVAC system fails, the entire cost of replacing everything can range from $5,000 to $10,000. In other words, shouldering the costs of regular maintenance is definitely better than having to replace an HVAC system eventually.
Consider hiring professionals to perform annual maintenance and constantly remind your tenants to clean and replace AC filters whenever necessary. Your goal is to avoid having an HVAC system breakage while keeping your tenants living comfortably.
Take Preventative Care of Your Property
Living in a rundown home is one of the worst things to experience. A home with no heating, full of pests, and faulty toilets is a nightmare no one wants to experience. Not only will your tenants leave right after the lease if you’re a landlord, but failing to maintain your property also means violating Michigan laws that will cause to recipe some financial penalties.
Instead, be more proactive. Keep your rental property well-maintained, stay on top of arising problems, and do everything you can to ensure that your property lasts a long time. The more you maintain your assets, the farther they’ll take you in terms of investment.
Do you have any other property maintenance tips that you’ve found useful? We’ll love to hear about it in the comments section below!
Short-term rentals (STRs) are currently one of the most thriving sub-industries in real estate. In fact, a 2019 survey found that 60% of American tourists prefer staying in an Airbnb over a hotel.
However, if you plan on investing in an STR, you need to do your due diligence to find the best market for your property. Diving straight into it without doing any research will likely your Airbnb is empty more often—resulting in less cash in your pocket if it’s just sitting there. Plus, you might end up in an area that’s either saturated with too many excellent STRs already, or an area with barely any guests to attract.
For instance, a property in Palm Springs, Florida, could potentially earn you upwards of $125,000 a year. This figure might sound like an enticing gain for a potential STR investor, but you have to account for all the costs and potential pitfalls that you’d have to expertly navigate in the particular market.
You have to ask yourself questions like:
How popular is the area?
How many STRs are already in the area?
How easy will it be to fill with guests?
What kind of guests are staying there?
How much are the utilities and general maintenance?
Can you make enough in busy seasons to cover slow seasons?
Let’s take a look at how you can choose the right market for your STR investment venture.
The Four Markets of STRs
There are 4 main types of STR markets:
Traditional vacation markets
Unique locations & experiences
Each of these markets comes with its share of risks and advantages that you need to navigate. For example, an STR located downtown might have stricter laws in place when compared to a traditional vacation rental.
Let’s compare them all to help you decide what’s best for you.
1. Traditional Vacation Markets:
The traditional vacation market exists both regionally and nationally, relying heavily on tourism. The main difference between the two is accessibility and affordability:
Accessibility: The regional vacation market is usually within close proximity to cities. Visitors can reach these destinations with a short drive out of town. An example of this type of market is Panama City Beach, Florida. This beach is within driving distance of major cities in both Alabama and Florida, where Montgomery and Birmingham are three hours away and Jacksonville is a four-hour drive from the coast.
Affordability: Real estate prices will usually be more affordable than the national vacation market. Additionally, the regional vacation market will have the most accommodating regulations out of the three, as these are hotspots for vacations.
Panama City Beach, for example, allows for STRs in all areas designated as commercial zones, limited multi-family zones, unlimited multi-family zones, and townhouse zones.
Another benefit of the vacation market is its resistance to the effects of a recession. Unlike its national cousin, the regional vacation market is more accessible and affordable to visitors making it more resilient against the effects of an economic recession.
Tourists wouldn’t need to make big vacation plans to visit a regional vacation rental, such as booking a plane ticket. These locations can be reached by car ride. Additionally, the more affordable lodgings will allow tourists to visit despite an economic recession.
While regional vacation markets rely on tourism, a major hit to the industry isn’t nearly as devastating to these markets. In fact, during the COVID pandemic, many city-slickers fled cities during the pandemic. Regional vacation markets can tap into these potential customers during occasions like the COVID outbreak.
2. Unique Locations & Experiences
Next up are STRs located in unique areas for experiences that you can’t find anywhere else. These might be activities out in nature or just places nearby popular attractions. Some different types of STRs that fall in this category are:
Properties near ski resorts
Properties beside amusements parks
Vacation homes on a lake
Beachside villas in tropical countries
These all offer a unique experience that you can get anywhere else. Typically, this kind of rental will have an off-season because tourists aren’t usually booking all year round. However, if you can make a ton of profits in the peak seasons, this could be worth it even if it’s unbooked during the slow times.
3. Business Markets
STRs in an urban location doesn’t rely solely on tourism to generate revenue. Of course, tourists will also visit your property, but the main source of income will be from business people.These are often professionals traveling due to a variety of reasons, such as a convention or business deal.
The metro market is potentially the most lucrative market for an STR due to the frequent turnover of tenants. A busy city will have many occasions that will see an influx of visitors, such as during sporting events, conventions, concerts, etc.
Despite being potentially the most profitable market, an urban rental also comes with the most risks:
Rules and Regulations: Different cities will have different regulations when dealing with STRs. In the case of Oakland, Michigan, the city prohibits STRs except in a few select locations, such as near the airport, along the freeway, or the waterfront.
Market Saturation: Another risk is market saturation. Because an urban rental is one of the most profitable markets, it is a hotbed for STRs. A lot of competition could potentially limit your revenue, especially if you can’t compete with the existing rentals in the market.
Overall, the metro market is a great avenue to establish an STR. But you should educate yourself on the risks involved with entering the urban rental market—especially in your specific city.
4. General Convenience
The traditional leisure vacation rental is the conventional STR we all think of when we hear the words “short-term rental.” But a lot of people use Airbnbs for general purposes where a hotel simply won’t satisfy all of their needs.
Here are some of the most common reasons people use Airbnbs that aren’t for vacation or business purposes:
Hospital Visits: Individuals staying in a city for hospital visits. Major cities will have the best medical facilities, which means that a patient’s family could need a place to stay while their relative is receiving treatment
Weddings: Hotels are expensive, so for a wedding, a lot of guests will choose to go with Airbnb to cuts costs. It also gives them a space that they can make feel like home if they’re coming from far away and turning the wedding into a vacation afterward.
Reunions & Graduations: Another common reason to use Airbnb is family or school reunions where, again, your guests are likely saving on costs associated with a hotel and they want a palace where they feel like they’re at home.
If your STR is located near a hospital, a popular wedding venue, or a large university you might see more guests staying for these purposes. And if you don’t know, try asking your guest why they are staying! That will give you a lot more insight and allow you to optimize your listing in the future.
Set Your Goals and Expectations When Deciding a Market
To decide which market is the best for you, you have to be clear with your goals. Each market comes with its share of benefits and negatives, so you need to align your expectations while keeping these in mind.
Here’s our list of recommendations:
Business Market: These are good for a steady stream of income year-round if you’re located near conference centers and in a downtown area that professionals are staying in.
Unique Experiences: These kinds of rentals may have more downtime, but you can often charge higher rates as they are quite specific in what they offer guests.
Vacation Market: These can be resilient if you’re attracting people interested in regional vacations However, for areas that have on seasons and off seasons, you need to be careful. Make sure you can stay profitable on the season alone.
General Purposes: These can be quite resilient depending on where you are and if you optimize your STR listing well. Make sure you ask your guests to understand why they’re booking your rental property.
Pick the Right Market to Reach Your Investment Goals
Deciding on where to put up your STR is one of the biggest challenges facing real estate investors. With how competitive and unpredictable the STR industry is, identifying the right market and location for your rental could make or break your investment.
But the solution is always to return to your investment goals. As long as you align your objectives to what type of income a market provides, you’ll be well on your way to gaining the highest and most consistent cash flow from your STR investment.
What STR market are you targeting? Feel free to leave us a comment below!
This could be because guests don’t want to shell out extra money or find the whole process of a security deposit to be an inconvenience. But, even though guests dislike having to pay a security deposit, it’s necessary to protect your property from damages, and more importantly, undesired expenses.
So, what can you do as a short-term rental (STR) owner that benefits both you and your guests? Keep on reading to find out how to find the right balance.
Why are Security Deposits Necessary?
Security deposits are necessary in the event that guests damage the property or steal things during their stay. The deposit serves as a backup fund in case there are necessary expenses after the guest leaves. In addition to having a financial safety net, enforcing a security deposit is a way to filter your guests so that you only attract respectful and high-quality applicants.
There are two things to consider when it comes to determining the costs of your secret deposits: your local laws and the rules on that platform.
When it comes to the laws and regulations for STRs, most states don’t yet differentiate between long-term and short-term rentals. So, for example, in Michigan, you need to abide by the standard laws surrounding security deposits.
As for platform rules, you need to read the fine print before to make sure you are allowed to collect a security deposit. In the case of Airbnb, the platform does allow owners to add a security deposit to their listings. However, they are optional and not always expected by the guests.
How Do I Justify Security Deposits?
As important as it is to look out for your finances and property, it’s important to look out for your guests, too. Since a lot of them would rather not pay a security deposit, you have to find a way to get them comfortable with it.
Losing a good potential guest just because of a security deposit is the last thing you want to do—especially in a competitive market like STRs! So, how can you justify security deposits in a way that shows your guests that they can trust you?
Here are some tips that can help do the trick.
1. Assure your guests that they will get it back.
It’s possible that some tenants and guests had bad experiences with security deposits in the past, so you’ll want to do everything you can to change their perspective. The most important thing you need to address is how to convince them that they’ll actually get it back. And the best way to do this?
Tell them WHY you have a deposit. Because at the end of the day, the deposit isn’t just to get more money from them, it’s there to protect your property from damage. Another way to improve that trust is to share your own tenant horror story, so they understand why you’re not willing to accept someone who refused a deposit.
To combat the negative association they have towards deposits, you should also always be prompt in returning security deposits. Short-term rental platforms, such as Vrbo, require that you return security deposits within 2 weeks maximum. If you’re prompt with returning security deposits, it also shows you care about your guest and are a trustworthy host. Then, they’ll leave glowing reviews that future guests can read so they know what to expect from you.
All of this will help your guests see why it’s necessary. And if they still can’t understand your perspective, you probably dodged a bullet anyway.
2. Show guests how you’ll keep a detailed record for fair deductions.
Before you let guests stay in your rental, take note of the property’s state and its items. Keeping detailed records and photos along with a check-in date can help you keep track of everything.
In the event that you need to use the security deposit, you can accurately pinpoint the reasons that led to the deduction. This way, you conduct yourself professionally and show the guests that using their deposit is warranted and completely fair.
Explain your process to prospective guests so they feel comfortable in putting down a security deposit.
3. Lay down house rules and damage policies.
Communicating these things beforehand can save you and your guests from an argument in case the full security deposit won’t be returned. By letting them know ahead of time what the house rules and damage policies are, your guests will know how to treat the property.
More so, in case they do break rules and damage things, you can say that you made things clear from the start. Similar to keeping a detailed record, in the event that you have to use the deposit, the guests will know that it’s being deducted in an honest and transparent way.
Get the Best Guests From the Start
Security deposits not only take care of possible damages committed by guests but also act as a filter to ensure you’re only attracting quality guests to your rental property. Because at the end of the day–you don’t want to rent to anyone you don’t trust.
Although security deposits can put off some guests, being professional and honest about it can make security deposits easier for them. With a security deposit in place, you can worry less about your property, while your guests can enjoy your place responsibly.
Is there anything else you want to know about security deposits for STRs? Feel free to leave a comment below!
Many real estate investors self-manage their properties and I did too learning from my experience as I went. However, professional property managers have a lot of experience to help both new and seasoned real estate investors make the best investment and property management decisions. I asked my property manager, Jill Powell, of 1st Choice Real Estate, PLLC to share some of her insights into what investors should be considering.
Property Management Considerations Before Purchasing
Interestingly, all of the suggestions from my property manager come before purchasing the property. Thus, education and preparation are key to success in real estate investing. However, from my own experience, there are things that you just cannot anticipate and only experience teaches you.
15 Things to Consider Before Making that Next Purchase (in no particular order)
New property investors should not buy older homes that have been turned into multi-units with all utilities included. These properties are often efficiencies or one bedroom units with transient tenants. You will have sky high turnover and sky high utility bills. Plus, you can’t hold anyone responsible for leaving the junk sofa on the curb that you now have to pay to have disposed.
If you buy in a college town, have the parents co-sign.
Always run prospective tenants’ credit and have a good way to score the rest of the application findings. Make sure the application is complete and all steps followed—no cutting corners or exceptions.
If you don’t have a lot of spare time or don’t enjoy tenant calls at 3 a.m., when their heat goes out in Michigan in the winter, think about hiring a property manager. After self managing at first, I now buy my properties with the intent of having a professional property manager help me run my rental business.
Use a cashflow or deal analysis spreadsheet prior to writing your offer. My property manager has seen many out of area investors pay for inspections only to walk on the deal once they find out what the local taxes will be after buying, local cost of the rental licensing and the true cost of rehabbing the property. It pays to have a professional on your side. I always have my property manager weigh in and be involved prior to making any offers. They are a valuable part of my team.
Use a local Realtor who specializes in rental properties. They can tell you not only what is happening with property values and market rents in the area but also things like is there a moratorium prohibiting rentals in that subdivision, a limit on the number of unrelated persons in a property or a limit on the number of pets a tenant/owner can have in a property in that area.
Get the details from your lender before making the offer so you have the exact downpayment number as this will affect your rate of return.
Start slow and learn from each property.
Investing in real estate is not a way to earn “passive income.” It is a very time consuming business unless you use a property manager.
Be cautious purchasing rental properties with tenants in place. Ask for a tenant ledger. Ask for current photos or, better yet, inspect all units personally. Look up rental/tenant violations for the property historically. Drive by the property at multiple times of the day to see how the tenants maintain the property.
Research rental rates for the area. Just because the listing says they can get a certain rent doesn’t mean they actually are—verify it against market rents.
Know the local laws regarding “discrimination based on income source” for things like section 8 vouchers.
Decide if student housing is right for you. You will have high turnover, higher costs to get the property ready to re-rent and potential issues locally if the tenants like to party.
Have a good CPA. They can help save you a lot of money and understand the tax implications of the investment.
Make sure you understand the local rental laws where you purchase property.
A professional property manager is a valuable part of any real estate investor’s team. Even if you self-manage your properties, you can learn from their experience to make the best investment and property management decisions before you buy your next property.
If you have a short-term rental, COVID-19’s travel restrictions likely had a negative impact on your short-term rental investment.
The pandemic challenged everyone’s travel plans all across the globe last year. In turn, travel-related businesses, such as short-term rentals, initially took a major hit and saw business declined. Many markets rebounded relatively quickly, but COVID challenges haven’t fully disappeared yet..
Although we are finally regaining our freedom to travel, the World Health Organization (WHO) still advises that individuals and business owners engage in their COVID-19 safety measures. This includes avoiding crowds, spreading high traffic areas out, and cleaning surfaces which many people touch.
With all this in mind, there are new challenges for short-term rental investments in the post-pandemic world. But, there may just be some new opportunities as well.
Challenges for Short-Term Rentals
COVID-19 has brought an increased focus on hygiene, cleanliness, and even crowd density. These days, people are still advised to avoid public places, where cleanliness and social distancing can be compromised.
This means that if your short-term rental property does not meet the current standards for cleanliness and safety, you may find it challenging to rent out your property. You’ll need to make your rental property a desirable option for people and that it keeps their health and safety in mind.
We suggest you prioritize the following aspects:
Cleanliness: Now more than ever, having a clean rental property is a key factor in getting booked in the post-pandemic world. Since the spread of COVID-19 can occur due to unsanitized surfaces, people want hosts who go the extra mile to make sure it’s well cleaned.
Make sure to highlight your cleaning policies in your posting, and in great detail. You want to show them you care about their needs and will go above and beyond to make their stay with you safe.
Pandemic Measures: Another consideration is how your property provides safety measures for the pandemic. Onlookers feel safer when they know that rental property owners promote practices to mitigate COVID-19. Leaving extra bottles of hand sanitizers in different rooms, Lysol wipes, bottles of surface disinfectants, and even complimentary masks, can help your property stand out in the sea of online options.
For the general safety of your guests and yourself, there must be a strict adherence to these standards of cleanliness and safety. More so, even if you do your part, your guest might not. So another set of challenges are the ones presented by guests themselves.
Unsafe Guests. To keep yourself and your rental unit safe from COVID-19, you have to examine your guests thoroughly and pick them wisely. For example, Airbnb’s COVID-19 guidelines align with the current advice provided by authorities. Guest bookings for a stay after exposure or after testing positive are not allowed.
Always keep yourself updated with the guidelines and advice regarding COVID-19 and apply these measures when booking guests.
Opportunities for Short-Term Rentals
While there are some new difficulties for STRs, there are also some opportunities for short-term rental property owners. Here are some things you can promote about your rental property to make it a hot pick for people’s vacation or business plans in a post-pandemic world:
Preferred Lodging. As you already know, the way people travel has changed immensely due to the pandemic. Locations that involve high-traffic areas where the virus can easily spread are still advised against by the WHO. As such, places like hotels, restaurants, and public markets are categorized as higher risk.
Luckily, when weighing the pros and cons of hotels versus STRs, an STR is considered safer and more preferable. Due to an STRs exclusive nature, it minimizes the risk of contracting COVID-19 from strangers staying at the same location.
In addition, guests don’t share facilities and spaces with other guests, so both airborne and surface contamination is far less of a concern. As long as you do your part and keep your rental unit clean and safe, your rental unit will be the preferred choice for bookings.
Local Attractions: Most short-term rental properties cater to people looking for lodging while they’re on vacation. And when rental properties are designed to cater to these people, the surrounding area usually provides options for all sorts of activities for guests to enjoy.
Some may look to retreat in nature, while others want to explore a new city. Whatever options and activities your short-term rental property provides, you can advertise.
Since short-term rental properties are a safer option to stay in for holiday, more people are shifting to this option. Pair that with the resurgence of traveling, and you can expect that your short-term rental property will be fully booked!
Want to keep doing business? Keep up with the changes!
COVID-19 has brought many unexpected changes in the way people travel—including what kind of short-term place they want to stay in during vacations and trips out-of-state. But these changes aren’t all bad, as the safety measures that go along with COVID-19 can actually heighten the attractiveness of your short-term rental properties if you can make them stand out from the crowd.
The pandemic may have negatively impacted your short-term rental investment, but that’s all about to change. If you deal with the challenges and seize the opportunities given the travel changes, your investments can make a comeback.
Did we miss anything? Let us know in the comments below!