The average revenue from short-term rental properties (STRs) listed full time grew to $56,000 at the end of last year, marking the highest level ever. According to AirDNA, a rental analytics company that tracks the data of 10 million Airbnb and vacation rentals by owner, the number of listings is expected to grow by 15% this year as more investors enter the STR business.
Investors thinking about entering the space may find this year to be the ideal time to start a vacation rental business. In this article, we’ll look at the benefits of renting on vacation rental sites, then explain how to start a vacation rental business in 10 steps.
Key takeaways
- Benefits of starting a vacation rental business include increased gross revenues, increased control over a property rented to short-term guests, and numerous tax benefits that come with owning a vacation rental.
- To form a vacation rental business, investors should create a business plan, research the best vacation rental markets, and analyze potential returns.
- Before starting a vacation rental business, learn the local laws, understand the market, and create a guest profile to determine the right pricing and amenities.
Benefits of a vacation rental business
There are a variety of benefits to having a vacation rental business compared to a traditional long-term rental:
- Greater potential for gross revenue: According to AirDNA, the average rate for an STR is about $250 per night.
- Opportunity to generate income from additional services such as local tours, event hosting, transportation, cleaning, and laundry.
- Increased control over the property: Because guests turn over much more frequently, a host can adjust rent rates as needed and perform maintenance more often.
- Ability for a vacation rental host to build a guest network and develop a repeat visitor list.
- Tax advantages: Write-offs and deductions from rental income include management and leasing fees, maintenance and repairs, utilities and supplies, property taxes and insurance, and mortgage interest.
Of course, there are potential drawbacks. There’s a lot of competition due to growing demand for STRs, operating expenses can be higher due to utility and guest expenses, and hosts must comply with vacation rental listing site regulations and local and state housing laws.
How to start a vacation rental business in 10 steps
There are many reasons to start a vacation rental business. Some investors are tired of working 9 to 5, others want more control over their earning potential and lifestyle, and some are simply looking to ease into early retirement.
No matter the motivation, the process for starting a successful STR business follows the same general steps:
1. Create a business plan
Hosts should consider their motivations, values, goals, and operations. Then, put together a comprehensive business plan and budget. Consider factors such as:
- Personal income projections to ensure that extra cash is available to keep a vacation rental business afloat during slow periods
- Start-up costs, such as the down payment if the property is financed, business licensing fees, and furnishing and decorating
- Cash reserves for quickly taking care of unexpected repair issues
- Operating expenses, such as host booking fees paid to listing sites, the monthly mortgage on an STR property, taxes and insurance, utilities, supplies for guests, and property management fees
2. Find the best STR markets
Good vacation rental businesses can be found in markets with tourist activities and attractions, business hubs, or a combination. Although larger cities are often the first choice for long-term rentals, the best places for vacation rentals can be completely different.
As a recent report from Realtor.com revealed, many of the best places to buy a vacation rental are within a day’s drive or less of major metropolitan areas:
- Joshua Tree, CA
- Lincoln City, OR
- Sedona, AZ
- St. George, UT
- Fredericksburg, TX
3. Research the local laws
Review the zoning laws in your desired market.
Some municipalities and homeowner associations (HOAs) may limit the number of guests that can be hosted, require a minimum number of nights, or prohibit STRs altogether. That’s because the soaring demand for long-term rental property, combined with booming demand for STRs, has prompted some cities to restrict the spread of STRs in an effort to provide sufficient housing for residents.
As a rule of thumb, tourist towns like Incline Village, CA, and Blue Ridge, GA, and, generally welcome investors with vacation rental businesses.
4. Look for STR properties for sale
Websites like Zillow and Realtor.com, local real estate agents with access to the MLS, and local real estate investment clubs can be good ways to look for an STR property for sale. However, turning a home into an STR requires spending a lot of money on furniture and decoration, and you won’t have an existing customer list.
That’s why the Roofstock STR Marketplace can be the ideal place to look for an STR property for sale. Single-family vacation homes and condos are listed for sale in popular vacation rental markets.
5. Analyze potential returns from a vacation rental
Income from a vacation rental business should be measured using gross annual revenue, average daily rate (ADR), and revenue per available room (RevPAR):
- Gross annual revenue is the total income generated during a specific time period, such as monthly or annually.
- ADR is calculated by dividing gross annual revenue by the number of days a vacation rental was booked.
- RevPAR is determined by dividing gross annual revenue by the number of days a vacation rental was available.
Vacation rentals have the same operating expenses that long-term rentals do, but they also have extra costs to consider:
- Booking fees paid to listing sites, typically a flat service fee of 3% of the booking subtotal
- Supplies such as towels, linens, toiletries, kitchen basics, and guest welcome gifts
- Utilities including electric, water, gas, cable, and internet
- Increased cleaning and maintenance costs due to guests frequently coming and going
6. Purchase a STR property
With STRs listed for sale on Roofstock, the entire purchase transaction can be done completely online—from making an offer to negotiating a deal to performing due diligence to closing escrow.
The Roofstock team guides buyers and sellers through the entire transaction and can even provide referrals for financing and local property managers who specialize in STR properties.
7. Form a business entity
While it’s possible to own a vacation rental business under a personal name as a sole proprietor, many real estate investors choose to form a legal business entity, such as a limited liability company (LLC).
Holding a vacation rental under an LLC is a good way to separate personal assets from business assets and may also provide an extra layer of liability protection. Investors with multiple vacation rental businesses may wish to consider forming an LLC for each individual STR, then combine them under one umbrella LLC.
8. Obtain licenses, permits, bank account, and insurance
The city, county, and state in which a vacation rental business is located may require a business license to operate and another license to collect and remit occupancy tax from guests. Many investors also open up business banking and credit card accounts to avoid commingling personal and business expenses.
While listing sites like Airbnb and Vrbo provide hosts with liability insurance of up to $1 million, investors may wish to speak with an insurance agent or broker about acquiring additional coverage for an STR property. In many cases, a special homesharing insurance endorsement can be added to an existing insurance policy to provide an additional layer of protection.
9. Create a listing on sites like Airbnb, Vrbo, and Vacasa
A great listing can mean the difference between a profitable vacation rental that’s consistently booked and one that barely breaks even. This Resource Center offers tips for setting up a successful listing:
- Write a catchy title.
- Create an honest and detailed listing description.
- Take great listing photos.
- Make sure the calendar and reservation booking settings are correct.
- Set a pricing strategy to help you increase earnings.
- Consider using Instant Book to streamline the booking process.
- Write helpful house rules and choose the right cancellation policy.
- Think like a potential guest by adding extra amenities and creating a guidebook with local tips.
- Read other listings for inspiration.
10. Keep track of income and expenses
While listing sites often report guest revenues from bookings, it doesn’t provide an accounting solution for vacation rental businesses. That’s why many investors choose free STR software from Stessa, a Roofstock company, to automatically track income and expenses for a vacation rental business.
Property performance can be monitored in real time using the online owner’s dashboard, financial reports can be generated at the push of a button, and real estate documents can be stored online. When tax season rolls around, vacation rental owners can use Stessa to export tax-ready statements.
