Investing in Short Term Rentals

Underwrite for ROI 

Great investors are great underwriters. Underwriting is arguably the most valuable skill an investor can have, yet so many investors outsource this to brokers, banks, and investor gurus. They buy property based on a performance projection without learning what the numbers mean (if I had a dollar for every time someone said “I’ll buy if it hits the 1% rule”).

If you know how to underwrite you know how to assess risk and reward… you know how to invest.

Measuring your Return on Investment

• there are several metrics that measures the profitability of an investment
• different metrics are better suited for different strategies
• common metrics/KPIs for short term rentals are CoC, Cap Rate, RevPAR, RevPOR, ADR

Fees and Expenses 

• When creating your performance projection account for acquisition fees, rehab expenses, setup costs, and furnishing expenses
• When calculating your ongoing expenses remember to include hard costs and soft costs. Here are expenses we account for:
  • mortgage principle and interest
  • home insurance
  • flood insurance
  • property taxes
  • property management
  • repairs and maintenance
  • electricity
  • gas
  • water
  • trash and recycling
  • internet and security system
  • cleaning fees
  • lawn care
  • cleaning and laundry
  • consumables
  • vacancy

Gross Income

• Income is more than just booking fees. Include any income you collect from guests.
  • cleaning fees
  • extra service charges
  • pet fees
  • linen fees
  • extra guest fees

Underwrite for Legal and Tax Protection

Review local laws and apply for any permits or licenses

Keep in mind that most cities are currently writing the regulation for short term rentals. It’s likely requirements will change. Create a process to stay on top of permits and licenses to avoid hefty fines.

Taxes and bookkeeping and CPA

Meet with your bookkeeper and CPA to understand the tax implications for owning a short term rental. Ensure your books are set up properly to take advantage of as many tax benefits as possible.

Insurance

Give your insurance advisor a call. Many policies exempt short term rentals. This is easy to set up on the front end, but can be super expensive if you forget to make this call and cannot file a claim in the future.

Set Up the Property

Repairs

Create a checklist of items to check (bonus points if you check these items annually).

• Exterior Structure
• Landscaping and Lawn
• Garage or Sheds
• Plumbing Fixtures
• Light Bulbs and Outlets
• Finishings: Hardware, smoke detectors, fire extinguishers
• Doors and Cabinets
• Flooring
• Walls, Trim, Paint

Furnish/Decorate the Property 

Every property needs the essentials. We suggest building a spreadsheet that includes everything you will need for every single property. But what do you include once you have the essentials covered?

• Start with the end in mind when furnishing the property. You’ll get tons of feedback from guests. If you try to accommodate every type of guest, you’ll run yourself (and your bank account) dry trying to be everything to every body.
  – What is your target nightly price?
  – What amenities do other properties in this price point offer?
  – How nice are the finishings in other properties at this price point?
  
• Less is more! You don’t need nearly as many nick-nacks, trinkets, and pieces of art on the walls as you think! Before you add something to a space ask yourself these questions:
  – Does this add to the guest’s experience (comfort, entertainment, convenience?)
  – Do I want to pay to clean this?

Form + Function 

Algorithms run the world. Short term rental sites (Airbnb, VRBO, etc) want to show off properties that make them look good. When furnishing the property, see if you can find ways to combine form and function. Look at the list of amenities and see if you can purchase “boring” things like toasters and board games that have a unique aesthetic to them. Doing this will allow you to “check boxes for the algorithm” without doubling the budget.

Use “wasted space” thoughtfully. If you have a small nook can you turn it into a work space?
Can you turn a long hallway into an entryway by adding hooks and a small entry table?
Can you add some exposed shelving or artwork to an awkward space?

Trial Run

Stay in the house yourself for a long weekend before you list your property online.  Use the space the same way a guest would. Make a list of what you wish you’d had, what was inconvenient, and what broke.

Create Inventory and Cleaning Checklists

If you’ve done a good job setting up, guests will make themselves at home in your property. They’ll use the amenities and move things around. You need a process to keep make sure your cleaning, lawncare, and/or maintenance teams know how to set the house back up when guests check out.

Inventory

When the property is totally set up, inventory everything in the house. Ideally, you started with a spreadsheet and have tracked orders and deliveries throughout the setup process. But if you haven’t be sure to do so before you accept bookings. You’ll thank yourself later when you need to order a replacement.

Cleaning checklist  

Cleaning short term rentals if different from cleaning for a tenant move in or cleaning your personal home. Create a checklist for cleaning (and plan to modify it often as you learn!).  Here are some questions to ask yourself when you start making your checklists:

• What does my cleaning team need to bring with them when they clean a property? This could be it’s own checklist!
• Do they need to document property condition at the beginning or end of the cleaning?
• Do they need to take inventory?
• What needs washed every time (sheets, towels, bath mats, throw pillows)?
• How does the cleaning team know what to do if something is damaged beyond repair?
• What needs cleaned in each room (walls, baseboards, fixtures, floors, under furniture)?
• Does the cleaning team need to check the yard/exterior?
• What final touches should the cleaning team handle (fragrance, thermostat settings, turn on lamps, write a welcome note)?

Create + Market the Listing

When you venture into short term rentals, you are venturing into the hospitality industry. Hospitality is intuiting what your guest will want before they want it, it’s following through on promises, and it’s setting everything up for the guest to have a great stay without you!

When building your listing, build it for the guest who will book with you and for the algorithm ranking your property. Most websites will ask your guests to review you/your property for cleanliness, accuracy, check in process, communication/responsiveness, location, and value.

Photos

It should go without saying, but professional photos are a requirement. Make sure the photos do a great job of showing the layout and highlighting amenities. You can also ask your photographer to take photos you will need when completing your “check in process.”

Be Honest

There is a property type for every guest, and most guests know they “get what they pay for.” If you’re looking to provide a luxury experience, that’s great. Be prepared to provide convenience and excellence every step of the way. If you want to provide a budget-friendly space for travelers, that’s great too. Just be honest about what the pros and cons so your guest doesn’t feel over-sold.

Calendar + Pricing

• Keep your calendar up to date
• If you’re unsure about your availability, it’s better to block dates off than to have to cancel on the guest later
• Pricing is static. You cannot expect to “set it and forget it.” We use PriceLabs for our dynamic pricing and monitor it weekly.

Guest Manual + House Rules

A great guest manual sets guest expectations and proactively answers questions (plus it will save you a ton of time).

• Wifi, thermostat, television, and smart-home information
• Check-in and check-out instructions
• Where to find things in the house
• How to get ahold of you
• Parking information
• Trash and recycling information

Guidebooks

Put together a guide for your guests. Most travelers want to know “what the locals do” and “where the locals go.” Great dining and great experiences will put a rosy glow on the time spent in your space.