Investing in short term rentals: Is it really Low risk and high return investment?
Housing has been the best-performing asset class in history, according to research tracking various assets over 145 years. Better than stocks.
This was documented going back to 1870 in a 2017 paper from the Federal Reserve Bank of San Francisco titled The Rate of Return on Everything, 1870-2015.
The average real return on global housing from 1870 to 2015 was 7.05% compared to 6.89% for equities.
The housing return also came with a substantially lower standard deviation – meaning less risks.
However, property has some unique limitations, making it impossible for any individual investor to access safe and high returns.
Foremost, the paper assumed that you invested in 16 countries at the same time, and managed the properties efficiently without any gaps in long-term tenants.
Sounds easy, right?
But here’s a little secret: Individual investors can compensate for the lower rate of return by investing in short term rentals. Even just renting out as a short-term rental for 5 years can compensate for your average return.
Let’s analyse why short term rental investment has incredibly good return with low risk.
Airbnb Profitability Analysis in Manchester
It is important to note that the real estate return includes both the asset’s price increase and the net rental income. Each makes up about half of the total return according to the research.
For instance, consider Manchester, where the average home price in 2023 stood at £231,000. Factoring in additional costs such as closing fees and maintenance expenses. However, adept management of a short-term rental property can yield substantial profits, often surpassing those of traditional long-term leases.
Taking a conservative approach, assuming a modest annual property appreciation rate of 5.5%, investors can anticipate an average annual return of 9.28% after a decade.
Compare this to the S&P 500’s 9.67% average annual return during a similar period. However, the real game-changer lies in Airbnb rentals.
With an average 1-bedroom Airbnb fetching £32,632 annually, albeit with higher maintenance costs, investors can enjoy a monthly profit boost of £463, translating to an impressive 8.01% rate of return.
Moreover, strategic management or partnering with a management company like Stayful can push this figure even higher, reaching up to 13.63% for top-performing listings (Applied estimated revenue of top 25% Airbnb listings in Mancester) or potentially 14.23% for properties acquired below market value (20% BMV).
Risks associated with short-term rentals
While the potential for high returns in short-term rental investments is undeniable, it is essential to be mindful of the risks involved.
Unpredictable income
One of the primary concerns is the unpredictability of occupancy rates. Short-term rentals are heavily influenced by seasonal fluctuations, local events, and the ever-changing preferences of guests.
A property that experiences high occupancy during peak seasons may see a significant drop in bookings during off-peak periods, leading to inconsistent cash flow and potential financial strain.
Maintenance
Another risk factor is the ongoing maintenance and upkeep of the property. Short-term rentals typically experience higher wear and tear compared to long-term leases, as they cater to a constant stream of guests.
Frequent cleaning, repairs, and replacements of furnishings and appliances can quickly add up, eroding the profitability of the investment.
Additionally, unexpected events such as natural disasters, property damage, or guest-related incidents can result in significant financial and legal implications for the property owner.
Regulation
Regulatory challenges also pose a risk for short-term rental investments. Many municipalities have implemented strict zoning laws, licensing requirements, and tax regulations that can significantly impact the viability of short-term rentals.
Failure to comply with these regulations can result in hefty fines, legal disputes, or even the inability to operate the property as a short-term rental. Staying informed about the evolving legal landscape and adapting to changes in regulations is crucial for the long-term success of a short-term rental investment.
Factors to consider before investing in short-term rentals
Investing in short-term rentals can be a lucrative opportunity, but it requires careful consideration of several key factors.
Location is important
One of the most important factors to assess is the location of the property. The success of a short-term rental largely depends on the desirability of the destination, the availability of local attractions, and the ease of accessibility for potential guests.
Properties located in popular tourist destinations, near major events or conferences, or in close proximity to public transportation or airports tend to have higher occupancy rates and command higher nightly rates.
Find your target market
Another crucial factor to consider is the target market for your short-term rental. Are you aiming to attract families, business travelers, or solo adventurers? Understanding the needs and preferences of your target audience can help you tailor the amenities, decor, and marketing strategies to better cater to their needs.
Researching the competition in the area can provide valuable insights into pricing, occupancy rates, and guest reviews, allowing you to position your rental effectively.
Investment cost & return
The financial aspects of short-term rental investments cannot be overlooked. Carefully analysing the potential rental income, operating expenses, and ongoing maintenance costs can help you determine the feasibility and profitability of the investment.
It's essential to factor in costs such as cleaning fees, utilities, insurance, property management, and any necessary renovations or upgrades.
Understanding the tax implications and potential tax benefits associated with short-term rentals can have a significant impact on your overall returns.
Find out how much you can make on Airbnb with the Stayful Airbnb income calculator
As you explore the world of short-term rentals, one of the most pressing questions you may have is: "How much can I actually make on Airbnb?"
The answer to this question can significantly impact your investment decisions and financial planning. Fortunately, there are tools available, such as the Stayful Airbnb income calculator, that can provide valuable insights into the potential earnings of your short-term rental.
By using this calculator, you can gain a better understanding of the financial viability of your short-term rental investment.
It can help you assess the potential returns, identify areas for optimisation, and make informed decisions about pricing, marketing, and property management strategies.
The calculator can also provide valuable benchmarking data, allowing you to compare your projected earnings with similar properties in the area, further informing your investment strategy.
Remember, the Stayful Airbnb income calculator is a tool to provide estimates and should be used in conjunction with your own research, market analysis, and financial planning. It's important to consider the unique characteristics of your property, the local market conditions, and your personal investment goals to make the most informed decisions about your short-term rental venture.
Airbnb Management
To help with managing your investment and maximising your returns, it might be worth while partnering with an Airbnb management company.
Stayful provide Airbnb management nationwide and will provide all of these essential things that you need to make your listing stand out including:
Finding quality cleaners
Chasing for reviews
Listing optimisation
Key management
Pricing strategy.
Assisting with setup for your Airbnb.
Professional photos.
Making your Airbnb investment passive, if you are interested then let’s have a chat!