Hidden Costs to Short Term Rental Investing

Investing in short term rentals (STR) is becoming more popular with investors.  The cash revenue is higher, you don’t deal with tenant laws, and now you have a place to stay on occasion for free.

I’ve been digging into more myself as a possible investment and wanted to share some key factors to consider when investing in STR.

1. Cities have their own taxes and permit fees you need to be aware of.  Every city is different.  For example, Malibu has a 15% tax on gross revenue. San Bernardino County requires an initial permit application of $667 and a biennial renewal of $489.  These are costs that need to be factored in.
2. Don’t assume 100% occupancy, in some cases not even 75%.  Check out sites such as AirDNA to determine vacancy rates as a guide and go from there.  I had a client who had a 98% occupancy rate.  But to do this, they were on every day looking at days not booked and would drop the price to get the spaces filled. Also keep in mind as this gains popularity, that means more competition, thus lower occupancy rates.
3. Laws can change, so have a back up plan.  In Los Angeles, it needs to be a primary residence for 6 months out of the year.  Don’t be surprised in other areas where laws, fees, and even community rules can change.  I was analyzing deals where it only worked for short term rental and would lose money as a traditional rental.  Be okay with that level of risk.
4. If you decide to go with a property manager, be prepared to pay between 25%-35% depending on the level of service.  It isn’t easy managing these investments.  You are basically a hotel that needs to be available around the clock.  It might make sense to hire a company to handle it.  However, between the property management and the city taxes, 50% of your gross profit is immediately gone.
5. Don’t forget utilities and entertainment.  In a traditional rental, you aren’t always responsible for the electricity, water, gas, etc.  You aren’t even responsible for furniture. Not the case here.  Don’t forget to factor all of that in and then some.  A Netflix account along with the internet is a bare minimum to consider.

So here is an example of potential profits on a property bringing in $400/night (60% occupancy) and you acquired the property for $500,000 with 25% down and there is no City tax.

If there is a city tax, then it can drop down your Cash-on-Cash return. There are more line items an investor might consider, like capital expenditures or providing more services for entertainment (such as a Peleton bike or other streaming services).

Every investment will have its pros and cons and you can determine how to go about it.  It could be shopping around for a better interest rate; it could be incorporating solar panels to see if it saves you money.  Maybe even buying a newer home to where there will be less repairs makes sense.  It is ultimately up to you and what your real estate goals are.