In this article, you will learn the five steps to buying a short-term rental property.
Are you looking to purchase a short-term rental property? Purchasing a short-term rental is an exciting and potentially profitable venture, but it can be daunting if you don’t know where to start.
This article will provide you with five essential steps for buying a short-term rental property.
From researching the local regulations to finding the perfect location, these steps will help make your purchase process easier and more effective.
Step 1: Research the short-term renting market
Research is crucial when choosing the best short-term rental property to purchase. You will have more information to make the best choice for your desired property as you do more research and ask more questions.
Consider travel, the expansion of tourism, regional attractions, gentrification, transformation, and improvements to the city's infrastructure before anything else. Check the local regulations to see the city or town’s rules and regs on short-term rental properties.
If each of these appears to be a solid indicator, it is likely that the investment is sound.
Of course, you know the real estate investing maxim: “Location. Location. Location.”
Price matters, too. Also consider the risk of vacancies. Each day you don’t have rented, you are still incurring all the costs.
Don't let people persuade you that a place or piece of land is suitable. Do your own research and have faith in your judgment when deciding what a great opportunity is.
Take a closer look, for instance, at the potential neighborhoods. Ask yourself crucial questions like:
- Does this area see a lot of tourists?
- What local amenities are there?
- How many other rental homes are there nearby?
- What is the area's median income?
To make the best selection possible, carefully examine every aspect of the potential short-term rental.
Step 2: Establish a Business Entity and Arrange Financing
Before diving into the short-term rental business, it is important to establish a business entity. Doing so will not only provide protection for you, the owner, but also create legitimacy in the eyes of the government and the public.
In order to set up a business entity, first determine which type of legal structure is best suited for your particular needs.
Options include:
- sole proprietorship
- Partnership
- Corporation
- Limited liability company (LLC)
Consider factors such as taxes and liability when making this decision.
Next, get an employer identification number (EIN) from the Internal Revenue Service (IRS) if you plan on hiring employees or filing taxes as a business entity.
Finally, register your business with your state’s secretary of state office or other department that requires registration for businesses operating within their jurisdiction.
A necessary but perhaps slightly uncomfortable thing you will have to do before you make an offer on a short-term rental property is arranging financing.
Most people don’t have hundreds of thousands of dollars laying around under their mattress or in the bank, so you will have to negotiate financing in order to acquire the property.
You can work with your local bank or credit union. You can even work with the SBA to get an SBA-guaranteed loan.
Your best bet is to consult with an experienced commercial loan advisor who can walk you through all of your options.
To get started, you can get a quick loan quote here for your short-term rental.
Once you’ve arranged financing, you can now prepare to make an offer.
Step 3: Secure the Property
Get an inspection scheduled before you purchase the property.
You'll spend a few hundred dollars on an inspection, but you could end up saving thousands. An inspection can help you identify any structural or underlying problems with the property, allowing you to make a more informed decision that you won't regret. Minor issues can also be used as bargaining chips to get the property owner to agree to a better deal.
Even before making the purchase, you can decide to have a certain amount of work done. An inspection will prevent a lot of future issues, problems, and costs.
Look over the pro forma. A pro forma is a cash flow forecast for the property that can be used to estimate monthly revenue, costs, and taxes. This will aid in your decision-making regarding the purchase price and provide you with some knowledge regarding the property's potential as an investment.
You might need to make a projected proforma yourself since not all sellers will have one.
Have the property appraised. The property may not actually be worth the $250K the owner is asking for. It might only be worth $230K after an appraisal.
You can potentially save tens of thousands of dollars by using your realtor's property valuation to help you negotiate the price of the property.
Once you are satisfied that the property is worth the seller’s asking price (or close) and that the property will have positive cash-flow, make an offer!
Making an offer on the rental property you want to buy is the last step. Once a deal has been reached, you must see to it that it is closed as soon as possible and before the set deadline.
Step 4: Prepare for Guests
You ought to be well-aware of the steps necessary to prepare the house for rental. It will soon be time to find the ideal tenants and begin reaping the benefits of your investment.
Preparing your short-term rental property for guests is key to success in the hospitality industry. Guests expect a certain level of comfort and cleanliness, so it's important to make sure all of the necessary preparations have been completed before they arrive.
Here are some tips on how to ensure that your short-term rental property is ready for guests:
- Take time to thoroughly clean and declutter the space.
- Make sure all surfaces including countertops, floors, and furniture are wiped down with a disinfectant solution and vacuumed or swept as needed.
- This will help create a sanitary environment for your guests which can help minimize any health risks associated with staying in a rental property.
- Additionally, dust light fixtures, blinds, walls and other hard-to-reach areas to make sure that no dirt or dust has accumulated over time.
- Of course, the property may need more than just a thorough deep-cleaning.
If the short-term rental property needs more than a cleaning once-over, you may need to paint it inside and out, repair floors and/or carpeting, or do some other cosmetic improvements.
If the property needs more work than this, re-read the section above about making an offer!
The last thing you want to do is get in over your head or pay too much for the property or the repairs it requires.
Step 5: Manage and Grow
You can organize everything with the aid of a property manager, who will collect rent and do all the administrative stuff you don’t want to do or aren’t equipped to do. They can also order repairs when something goes awry.
In short, if you’re in the short-term rental business for the long-term, and especially if you want to acquire more properties down the road, you will want to hire a quality property management company.
In conclusion, investing in a short-term rental business can be a great way to create passive income and build wealth. It requires research, financial planning, and the right property, but it can be done.
With the guidance of experts who specialize in this field, potential short-term rental investors can make informed decisions that could lead to success.