A few weeks ago, TJ Tijani joined Scott Lurie on an episode of The Hard Truths podcast to discuss short-term rentals. In their conversation, TJ outlined how his entire worldview on real estate changed when he realized that he could double the monthly revenue at half his occupancy simply by switching to a short-term rental model. With a number of advantages as compared to traditional rental properties, short-term rentals have proven to be a profitable investment strategy. So why aren't more people forgoing their long-term leases and moving towards this model? For starters, the amount of management that goes into these properties can be intimidating. Even with the countless platforms available such as Airbnb, VRBO, Booking.com, and more, there is still a lot of work that occurs off-platform that can be daunting.
Additionally, the number of listings available in a given market is growing by the day. Each of the sites listed above has millions of properties available at a given time and they each are competing for the attention of potential investors. The most subtle differences in management or marketing can have drastic effects on the profitability of the investment. If you are in the short-term rental game or are looking to make a transition, you need to pay attention to a few key management strategies that will differentiate your assets and set you on a path to success.
Know Your Markets
It should be obvious that similar units in different locations are going to have different demands, but not everyone is as in-tune with the differences as they should be. With the number of people entering the market, finding high-profit locations can be difficult. Sites such as AirDNA run the data on different markets to compare associated costs and revenues. Cities and locations most likely to be classified as 'high-demand' actually represent the slimmest margins due to the mortgage costs of property in those areas. Your best bet in looking for a profitable property is in smaller cities that can serve as a destination but don't have the competitiveness from full-time residents.
As always though, we believe that real estate is local. Your best bet is to find opportunities close to you. The reasons for this are plentiful. First, you inherently know the community which gives you insight into who may visit and why. By targeting clientele during specific periods of time, you can implement dynamic pricing (more on this later). Second, and most importantly, you have the ability to be hands-on in your management. If you are close to your cleaning crews, contractors, and ultimately your guests, you will be able to troubleshoot issues as they arise. Eventually, you should be as hands-off as possible, but there will be times when you wish your property was in your backyard.
Use a Dynamic Pricing Strategy
The biggest reason why short-term rentals are such profitable investments is because of the ability to change the price in response to the market. If you simply set your price and never adjust it, you will lose out on significant revenue in your unit. Choosing a consistently low price will obviously mean missing out on big events, or peak seasons in the area. But its also true that a failure to reduce prices in off-seasons can mean forgoing opportunity too. We know that the mountainside condo can draw high prices during ski season, but is there a price point that ensures you can keep it occupied in the middle of summer? Your goal should be to optimize the line between price and occupancy to maximize your revenue on an annual basis.
Airbnb and some of the other platforms offer tools to account for supply/demand issues, seasonality, and more, but there are also third-party pricing tools that can add an extra dimension to your pricing strategy.
Manage Your Overhead
Running a business is about more than maximizing your revenue. You also need to be cognizant of your expenses. One of the most effective ways to reduce your expenses is by effectively managing your tax burden. Short-term rentals owned under business entities, something that we highly recommend, have a number of tax benefits available to them. These are often underutilized as many of them are just taken for granted. For instance, you can claim travel deductions based on mileage or other expenses as you travel to and from your property. You can also claim deductions for property improvements, interest expenses, and depreciation. If you have a number of properties, consider consulting with a tax specialist to identify your best strategy.
You can also make significant cost reductions in other areas including cleaning services, contractors, and insurance premiums. There are apps available that can help you manage each of these on an ongoing basis which can reduce fees as well as ensure you are receiving the services you are paying for on a timely basis.
Retain Your Customers
Consider the fees that you are paying booking services each time your unit is rented. While they provide immense value for first-time renters, why should Airbnb continue to receive payments for repeat visitors? Booking sites are fiercely protective of their customer data, and they're not doing this out of the goodness of their heart. They need property owners to rely on their platform to bring in guests. You need to do everything in your power to circumvent these sites for repeat customers and that process starts with collecting their information.
Think of ways in which you can collect basic info such as name, email address, and phone number. Can you add a sign-on page to your WiFi? Maybe you can offer a digital guidebook accessible only by email? After their stay, you can reach out to solicit feedback or offer deals on future stays. Eliminating the booking platform from the equation allows you to pass on some of the savings to the customer, so use that as a selling point as well. Over time, stay in touch with these visitors through automated emails reminding them of your property and potentially showcasing other units that you might have. These messages shouldn't be overwhelming, but consistent enough to capture those likely to return to the area.
Simple CRMs or white-labeled booking platforms for your business website are widely available and will make it easy to transition visitors off of the primary listing sites. Short-term rentals rely on these platforms and they are well worth their fees, but if you want to become a five-figure monthly earner, they can't be your entire business.
Be a Proactive Marketer
We've already discussed aggregating emails from your customers, but there are other ways to separate yourself from competitive properties in your area. If you have better prices, locations, or amenities, make sure those are well known to potential visitors. Anything you can do to distinguish your offering will make a difference.
Additionally, be sure to leverage the benefits of your area. We already discussed using local events for dynamic pricing, but they also have value in attracting visitors. Even if your property doesn't have a distinct advantage relative to your neighboring competitors, your ability to market these events can set you apart.
You might be wondering how you can get this messaging across. Obviously, you should have fully formed profiles on all of the primary booking platforms, but you should also have monitored social media accounts, website, and active email campaigns for your business. Think of all the places someone might go to for info and make sure they can find your property when they're looking to book.
Be a Professional
This is the final and most important consideration in employing a short-term rental strategy. The accessibility of the market has made it so that anyone with a spare bedroom can get in the game. But if you want this to generate revenue like a business, you have to treat it like one. This means you have to be prompt with your communications, detail-oriented in your staging, and completely forthright with vendors, guests, and third-party providers. Doing so will quickly separate you from the competition and you will see the effect in your bank account.
Short-term rentals are popular for good reason, but the masses haven't yet figured out how to optimize their properties. Beginning with these steps, you will see a marked improvement in the performance of your assets and it will serve as a foundation as you continue to grow and professionalize your operations.