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Forbes: Why Short-Term Rentals Are Real Estate Investing's Future

One of my favorite ways to invest in real estate is through short-term rentals (STR). Websites like Airbnb, HomeAway and VRBO are gaining market share each year as people become more familiar with the process. We’re still in the beginning stages of this type of investing. If you are an early adopter, there is a huge opportunity to maximize your ROI.

Before we can understand when and why STRs are a great way to invest, we need to first acknowledge that there are some downsides to consider. One big issue is that cities and counties around the U.S. are still trying to figure out how to regulate it. I’m in Las Vegas, Nevada, where short-term rentals are extremely regulated, and obtaining a license to lease them out is almost impossible at this point. The big reason here is the hotels run the city, and officials want people staying on the strip, spending money. Ordinances have passed that make it harder for people to host STRs.

Because of that, I don’t have any STRs here in Las Vegas. You don’t want to be in a constant battle with the city. It’s much better to go where there aren’t as many regulations to fight against. You want to find a market whose economy is dependent on STRs. For example, all of the STRs I own are in Big Bear, California where hotels are scarcer, so STRs are necessary to fit all the tourists coming in. I love that market, and there are many others just like it throughout the U.S.

Assuming you find a market that fits your criteria, this type of investing can offer huge benefits:

1. Higher Returns

In the right market, the returns on short-term rentals are much higher than long-term rentals. One of my properties grosses $4,000 a month on average. If it were available for long-term rental, it would earn $1,500 per month. With STRs there comes more management work and fees, but even taking that into consideration, the net is usually going to be higher than if you rented the unit long-term.

Again, every market is different. So it is possible that your market would have similar rental returns on both short- and long-term. But, you probably wouldn’t be investing in that market in this way. I suggest networking and talking to people in your market who have STRs to see how they’re doing to get a feel for the climate.

2. Personal Use

My favorite part about STRs is that you, the owner, can also use them whenever you want to have fun, check on your properties and look for new potential units. If they were being rented long-term, you wouldn’t have the ability to use them.

It’s a great way to have a second home that earns you income every month. The only “problem” is when they are booked so much that you have to schedule your own visit far in advance. It’s a great problem to have as an investor.

3. Diversified Risk

I believe STRs are less risky because your tenants are diversified. With a traditional long-term rental, if your tenant stops paying rent, you have a big problem on your hands. You won’t be getting any monthly income until you can evict them. If they cause any damage, you’re going to be out even more money.

With an STR, you don’t have to worry about evicting a tenant. You have many different tenants every month generating income, so you don’t run the risk of going months without receiving a check. Also, if a tenant does cause damage, some STR rental sites have insurance coverage for the damages the tenants cause. From my experience, instances of major damage from short-term renters are few and far between. It’s typically small things like a broken dish or lamp.

If you're ready to get started on your STR portfolio, these are the top three traits to look for when picking a market:

1. Location: Is it located somewhere you can easily manage? Would you like to vacation there yourself? Can you build a team there?

2. ROI: How much are properties in that market selling for? How much are they renting for on short- and long-term basis?

3. Legislation: Is the market STR friendly? Is there any upcoming legislation that could change the dynamic and put your investment at risk?

Clearly, I’m a big believer in STRs. I think they will continue to gain even more market share as time goes on. There will be more regulations as it becomes a bigger business, but the early adopters can cash in on some great opportunities.