Short term rentals can be a great way to earn extra income and diversify your investment portfolio. However, they also come with some challenges, such as legal regulations, taxes, management, and competition. In this article, we will cover the most important things you need to know about short term rental properties, including how to buy your first property and how to make the income it generates non-passive.
What is a Short Term Rental?
A short term rental is a property that is rented out for a short period of time – 12 months or less – usually through online platforms such as Airbnb, VRBO, or Booking.com. Short term rentals can be any type of property, such as apartments, houses, condos, cabins, cottages, or even boats or RVs. Some short term rental properties are fully dedicated to the purpose of being rented out, while others are the owners’ primary or secondary residences that they rent out when they are not using them.
Short term rentals are popular among travelers who want to enjoy the comfort and convenience of a home away from home. They can offer more space, privacy, and flexibility than hotels and provide a unique and authentic experience of living like a local in different destinations.
Short term rentals are attractive for property owners who want to earn extra income from their unused or underutilized spaces. They can charge higher rates per night than long term rentals and benefit from the high demand and occupancy rates in popular tourist areas. They can also use their properties for their own personal or business purposes when they are not rented out.
How to Buy Your First Short Term Rental Property
Buying your first short term rental property can be an exciting and rewarding venture; however, it requires careful planning and research. Here are some steps you should take before you make your purchase:
- Define your goals and budget: You should have a clear idea of why you want to buy a short term rental property and how much you can afford to spend on it. Are you looking for a passive income stream, a vacation home, or both? How much return on investment do you expect from your property? How much time and money are you willing to invest in managing and maintaining it? These questions will help you narrow down your options and set realistic expectations.
- Choose your location: Location is one of the most important factors that affect the profitability and popularity of your short term rental property. You should choose a location that has high demand and low supply of short term rental properties, as well as attractive features for travelers, such as natural beauty, cultural attractions, entertainment options, or business opportunities. You should also consider the seasonality of your location and how it affects the occupancy rates and prices throughout the year.
- Check the legal regulations: Short term rental properties are subject to different laws and regulations depending on the location, the type of property, and the platform you use. You should check the local zoning ordinances, building codes, licensing requirements, tax rules, and homeowner association rules before you buy a property. You should also be aware of any potential changes or restrictions that may affect your short term rental business in the future.
- Find the right property: Once you have chosen your location and checked the legal regulations, you can start looking for the right property that meets your criteria and budget. You can use online platforms such as Zillow, Trulia, or Realtor.com to browse through listings of properties for sale in your desired area. You can also work with a real estate agent who specializes in short term rental properties and can help you find the best deals and negotiate the best terms. You should look for properties that have the features and amenities that appeal to your target market, such as size, layout, design, location, views, parking, Wi-Fi, kitchen, laundry, etc. You should also inspect the property for any repairs or renovations that may be needed and factor them into your budget.
- Finance your purchase: Unless you have enough cash to buy your property outright, you will need to finance your purchase with a mortgage or a loan. You should shop around for the best rates and terms from different lenders and compare them with your expected income and expenses from your short term rental property. You should also consider the tax implications of your financing option and how they affect your bottom line.
- Furnish and decorate your property: After you have bought your property, you will need to furnish and decorate it to make it ready for guests. You should aim to create a comfortable, functional, and stylish space that reflects your personality and brand. You should also provide the essential items and amenities that guests expect from a short term rental, such as linens, towels, toiletries, coffee, tea, etc.
How to Make Short Term Rentals Non-Passive
Income generated through a short term rental is generally considered passive income by the IRS, which means that you cannot deduct any losses from them against your other income sources. However, there are some ways to make short term rental properties non-passive and enjoy more tax benefits. Here are some of them:
- Become a real estate professional: If you spend more than 750 hours per year and more than 50% of your working time on real estate activities, such as buying, selling, managing, or developing properties, you can qualify as a real estate professional for tax purposes. This allows you to deduct all your losses from your short term rental properties against your other income sources without any limits. However, you will also have to pay self-employment taxes on your net income from your short term rental properties.
- Provide substantial services: If you provide substantial services to your guests that are not usually provided by landlords, such as cleaning, laundry, meals, entertainment, and tours, you can treat your short term rentals as a business rather than a rental activity. This allows you to deduct all your expenses against your income from your rentals without any limits. However, you will also have to pay self-employment taxes on your net income from your properties.
- Group your activities: If you have multiple short term rental properties that are located in the same geographic area and are similar in nature, you can group them together as a single activity for tax purposes. This allows you to combine the hours and income from all your properties and meet the criteria for non-passive income more easily.
If you are interested in buying or selling a short term rental property or need help with managing or optimizing it, we are here to help. If you want to learn more about our services or schedule an initial consultation, do not hesitate to contact us today. You can call us at (786) 310-5582 or email us at [email protected].
