House Hacking: Short-Term Rentals for High Returns

So far, we've been talking all about house hacking, for long term rentals (12 months or longer)

But there's another super profitable way to house hack: turning your properties into short-term rentals, like Airbnb.

Now, Short-term rentals often have much higher rental income potential, compared to long-term rentals.

But - they also require more attention and management, and carry a little more risk as well.

Today we'll explore the benefits and challenges of short-term rentals, and what this could look like if you decided to use your house hacks for short-term rentals

So some advantages:

Probably the biggest benefits, and often the reason people do short-term rentals or Airbnb's in the first place, is the potential for much higher rental income.

Unlike long-term rentals, with leases of 12 months or longer, short-term rentals can generate more rental income, because you are charging by the day, the week, or the month.

There is such a thing as mid-term rentals, which are typically somewhere between 2-6 month leases

And I'll probably make another video on what mid-term rentals are here in the near future

But anyways, with short term rentals, by renting your property out in shorter time-frames, the price per day is much more, than if you breakdown what you're getting per day on your long-term rentals.

For example, say your long term rental goes for $2,000 per month, which comes out to $24,000 per year

This comes out to about $65 per day over the course of a year.

Now, lets say after a little bit of research into your local market, your house hack compares to other properties that rent out for $100 per day.

At 100% occupancy, this comes out to a little over $3,000 per month, or $36,500 per year

As opposed to long term rentals, where you get paid each month, short term rentals also pay out after each reservation - so you're getting paid constantly as opposed to once per month.

So this all sounds pretty good!

But before ya start diving into short-term rentals, here are some things that differ from renting your house hack as a long-term rental, that you should strongly consider

First off, you gotta have a backup plan. 

An easy way to do this is to Evaluate whether the property would still cash flow as a long-term rental or not.

There's a good chance your short-term rental will cash flow, if it also cash flows as a long-term rental.

This also gives you something to fall back on if the short term route, ends up not generating what you were expecting, or if it is simply just too much time and work to manage these things.

Which brings me to the property management side of it

Short-term rentals are waaay different than long-term when it comes to managing the place. This is probably the biggest learning-curve short-term investors run into. 

They demand a serious amount of constant attention, which of course can be very time-consuming (If you choose to manage it yourself).

Be prepared for these added responsibilities. 

Specifically, be prepared for the constant turnover. You've gotta clean the place after each reservation, and get it ready for the next one.

With constant turnover, you're also going to have more and more different people coming in and out, in unpredictable intervals, which could drive up more costs in repairs/maintenance

So, if you don't want to deal with this stuff and have another full-time job, a property manager in this case would be well worth the $.

You already know what I'm going to say - yes, remember this is a business! If you can't handle it, that's okay, a property manager can help with this! And, if maybe the numbers don't work out with a property manager, if you ran the numbers correctly to see if it would still cash flow as a long-term rental, you always have that option to fall back on.

This next piece of advise, is not really advice but more of a strong encouragement.

Budgeting for vacancy.

You've already checked if it's in a strong area, high demand for short-term rentals, etc etc

But you REALLY need to consider the fact that your short-term rental will very very unlikely have 100% occupancy all the time. 

If you ask the biggest short-term rental investors out there, all of them will say they do not have 100% occupancy on all of their properties.

This is a major adjustment from long-term rentals because there could be weeks of no bookings or reservations. 

So when you're running your numbers on potential income on your short term house hacks, account for a much higher vacancy rate than you would with long term. And be extremely conservative with it.

If the average monthly or annual occupancy rate in your market is 70%, run the numbers assuming 60%. If the average rent per day is $100/day, run the numbers on $90 per day.

This is the safest and most conservative way to see if your house hack will work as a short term rental - if the numbers would still work even with below market averages.

And then, we have short term restrictions 

We'll start with HOA's here. 

Whether you're buying a condo, townhome single family or even multi-family, double triple quadruple check if your property is in a homeowners' association (HOA) first, and then whether or not short-term rentals are allowed

A lot of HOA's here in Central Iowa have restrictions on rentals in general, and of those HOA's that allow rentals at all, most have restrictions on rentals under 12 months. 

Compliance with your HOA rules is crucial.

But, there are a handful that do allow short-term rentals or at minimum, 30 days or longer

Our next house hack we are closing on here in a few weeks allows rentals of 30 days or longer, which is part of the reason we loved this place. Knowing how few HOA's allow under 12 month rentals we think is a great value-add for resale down the road, in being in one of the only known HOA's that allow it. 

Not saying we wouldn't have bought it anyways, as we kind of focus on the long-term rental side of house hacking, but I'd be lying if I said it didn't help the case in our decision. Gives us flexibility if we wanted to switch to short-term or mid-term rentals in the future.

But wrapping this up here,

Short term rentals have become a huge sector in the real estate rental market. There have been a lot of success stories from these and tons of creative ways to start a short term rental portfolio - specifically through house hacking. 

Just be sure to run the numbers properly, consider those property management aspects to it and constant attention needed, along with the backup plan or exit strategy - Your house hacks could be even more profitable as a short-term rental than long-term, and reach your financial goals much quicker.