How to Start a Vacation Rental Business: The Complete Guide

Management
Posted on
December 18, 2022

The concept of vacation rentals is not new, but the booking experience for both guests and hosts has changed dramatically in the last decade. Renting a private property offers an attractive alternative option to traditional hotel accommodations, and often comes with more amenities, more privacy, and more flexibility.

What is a vacation rental business?

Until the past decade or so, travelers relied on rental companies and travel agents to find the perfect getaway. Reserving a private home was once a process cloaked in secrecy, which made the accommodations more expensive for guests and added a barrier to entry for property owners.

Now, the internet, coupled with online booking platforms, has changed the way people vacation while adding some convenient ways for property owners to enter the property rental and management business. 

Today, more than 600,000 Americans rent out their homes or private properties to short-term guests. But what does it mean to be a property manager in this day and age?

Short-term rental management, also known as the vacation rental business, is the business of renting property to guests for a short period of time. While many real estate investors started with long-term rentals, leasing their open homes and apartments to tenants for a year or more, well-managed short-term stays have been shown to offer a higher return on investment.

The definition of “property” is loose in this business! While it does include traditional homes, like houses, apartments, and condos, it has also expanded to include unique spaces like treehouses, RVs, yurts, and repurposed shipping containers.

Regardless of what type of stay a guest opts for, short-term rentals come fully furnished and can be booked for a few days or weeks. They offer guests privacy that can’t be found in standard hotel stays. Additionally, they often offer amenities that make guests feel more at home, like lounge areas, offices, kitchens, and separate sleeping spaces.

What goes into starting a vacation rental business?

As these amenities increase, so does the role of the host. Hosts, or property managers, are charged with maintaining the house, finding tenants, and maintaining adherence to legal requirements while offering hospitality comparable to what renters would find in a hotel, if not better.

Interested business owners need to begin by finding the right property, creating advertising and marketing copy to attract people’s interest, and actually getting those folks in the door. From there, it’s important to track the numbers and maintain the property, in order to turn a profit. Read on for a deep dive into how to get started in the short-term rental business.

Identifying the target market for your short-term rental

With the demand for short-term rentals continuing to grow, and companies like Airbnb, VRBO, and others on the rise, there is still plenty of room for more property owners to claim a piece of the pie. However, that does not mean that any short-term rental will automatically be successful. 

Before investing in a property, consider the demand for rentals in the area. Are you looking for a property that is popular in a city, or in an area that attracts business travelers? That’s a good start, but you’ll also want to consider the potential occupancy rate, or how often the property will be rented. Is the visitor traffic seasonal or year-round? Seasonal markets are great for investors looking to take some time off from management throughout the year, but at the end of the day, vacant properties don’t bring in any income.

Next, you’ll want to dive into the short-term rental market on a deeper level. An easy (and entertaining way to approach this task is to spend time browsing booking platforms’ listings in the neighborhood you are considering. Look at the pricing (fees included) compared to the size and quality of the properties available. You can also get a sense of demand by looking at the number of recent reviews, or by clicking through vacation rental platforms like Airbnb and VRBO. (Apply a grain of salt here, because property managers can take their properties “off the market” for windows of time, which would impact the look of their availability). 

If you are looking for more intelligent insights or additional data, there are several short-term rental data providers that specialize in tracking property demand and pricing in order to help property owners stay competitive. AirDNA is a spectacular example of software built to give high-level and detailed rental insights alike–in fact, they’re our tried and true draft pick for this purpose.

Understanding local regulations and ordinances

Before investing in a short-term rental property or preparing to list a property you already own, you must ensure you understand the local laws surrounding rentals. There may be several levels of compliance you need to navigate, from homeowner association ordinances to state laws. 

Most short-term rental regulations happen at the city level and can often be found on local government websites. Look for information for business owners, as well as local zoning, building, and tax codes. Be sure to pay attention to the following:

Business licenses and permits

Many cities require business owners to apply for a license or a permit before they begin operating. The requirements may depend on anticipated income or occupancy.

Zoning requirements

Zoning ordinances are a common way for cities and towns to regulate short-term rentals. These regulations can limit where a property is located, what type of properties are allowed, how many guests can stay in the property, and even how many cars can be parked nearby. And that’s just getting started! A Google search of “zoning” and your city’s name will likely take you to the appropriate zoning ordinances, but as with anything, be sure to double-check that the source you’ve selected is trustworthy.

Taxes

Occupancy taxes, also known as lodging, hotel, or tourist taxes, are assessed by local governments to ensure visitors to the area help share the costs of public infrastructure. The taxes are common at the state level, but can also be levied by the regional, county, or city governments. Although the government intends for the tax to be paid by the guest, it is the responsibility of the host to collect these fees and submit them to the government. Although many booking platforms handle occupancy taxes, hosts should always check with their local government to ensure that all taxes are being assessed correctly. 

Housing or rental agreements

When your property belongs to a homeowners association, you may be subject to additional regulations at the community level. To know if this is the case with your property, review any legal documents that you were provided upon possession, which could include a declaration of the covenants or restrictions for your area. If you’d like to go the extra mile here, consider reaching out to your homeowners’ association president, or the community landlord, to let them know your intentions, and ask if any action is needed on your end.

Building codes

Your short-term rental should be a safe and clean environment for your guest–and that’s not just a suggestion! Many local governments have published guidelines on the habitability, health, and safety of residential properties. Some may require an inspection before you can host your first guest. Search for building codes on your city’s website or call the building department to verify local requirements.

Why follow the rules?

We get it, the rules can be confusing and overwhelming at first, but they are absolutely important. The consequences for ignoring or violating local ordinances can range from small fees to a loss of your property–a gamble that we don’t advise.

If you’re unclear about whether short-term rentals are allowed, or what kind of steps you need to take to remain in compliance, pick up the phone and talk to someone at city hall. If the regulations in your jurisdiction seem complex, or you feel the rules are particularly burdensome, consider collaborating with a local real estate attorney familiar with short-term rental law.

How to determine if your vacation rental business will make you money

Short-term rentals can bring in significant revenue, but managers must spend money to make money. Before you consider listing and setting your prices, create a thorough budget that outlines all of the expenses you anticipate and creates a bit of a buffer for those unexpected expenses that always seem to pop up.

The cost of the property itself–whether you already own it, or plan to purchase something new, is just the beginning. A few other costs to be aware of include:

Platform service fees

Host fees can range from three percent on Airbnb to a full fifteen percent on Booking.com! You can avoid service fees by opening your own direct booking website and cutting out the middleman.

Property management

Property management fees can cut into your revenue but may be a worthwhile investment if you are looking for a more passive management approach.

Furnishing

More short-term rental guests are seeking a unique aesthetic when they browse properties, so be thoughtful as you make interior design decisions. Get unique, and be sure to buy quality furniture pieces that won’t force you to waste money replacing them. 

Investors often go over budget on furniture as they remember to count costs like beds and couches, so don’t forget details like shower curtains, lamps, and other accessories! Be sure to be detailed as you approach this section of your budget.

Guest supplies and toiletries

Short-term rental guests expect to find conveniences like linens, pillows, towels, toilet paper, and other essentials when they arrive. In fact, one of the fastest ways for a host to earn a negative review is for them to fail to provide these items. Additionally, if you expect to book one set of quests after another, you’ll want to purchase a few sets of each of these items, to ensure they can be quickly swapped out as new guests are expected. 

Ask yourself what level of hospitality you want to provide your guests and work items into your budget that will win them over. Popular perks that guests mention in reviews include coffee pods, bath robes, extra toiletries, local foods, and recreational equipment like bikes or kayaks. Welcome notes, with a small gift like a bottle of wine, show your guests that you are willing to go the extra mile for them.

Utilities

You may be great at conserving energy, but that does not mean that your guests will be. Be generous when budgeting for utilities.

Insurance

Spend some time in short-term rental groups online and you’ll likely be ready to purchase the most comprehensive insurance plan on the market. Although some platforms do require some amount of coverage, you’ll likely want to stay ahead of potential disasters by purchasing short-term rental insurance from companies like Proper Insurance, which can fill the gaps between homeowners insurance and the coverage provided by online booking platforms. 

Adding a short-term rental rider or purchasing an additional policy can run property owners anywhere from a few hundred dollars a year to several thousand dollars, depending on the type of property, location, and coverage limits. Rates can increase quickly for various factors, like a pool on the property, or amenities like golf carts–but resist the temptation to leave these items out. Failing to disclose them can prove a costly mistake. 

Cleaning

Do you have the time, energy, and attention to detail required to make your rental shine in between bookings? For most folks, the answer is no. That’s why, to no surprise, an entire industry dedicated to cleaning short-term rentals has emerged! 

You’ll want a cleaning service that can go beyond basic sweeping and dusting. Make sure your team is able to restock essentials, ensure the house is staged well, and more. 

Looking to add a cleaning fee to offset this cost? Makes complete sense. To do so, solicit cleaning quotes before you create your listing, and then you’ll know exactly what to charge.

Maintenance

Unfortunately, plumbing emergencies and broken furniture come with the territory. Between emergency repairs and maintenance on appliances, plumbing, or something entirely different, the costs can sneak up on you! 

Maintenance is hard to accurately estimate, but it is essential to be prepared for unexpected costs. There are a few loose formulas that some short-term rental managers use to estimate their costs. Some calculate by square footage, estimating a dollar per square foot for yearly maintenance, while others estimate that annual maintenance costs will average one and a half times the monthly rate.

Although some online booking platforms offer damage protection, and additional insurance might cover the larger repairs, but it’s risky to rely on those payouts. It’s often difficult to prove that a particular guest is the one who scratched your furniture, as normal wear and tear could also be the culprit.

Taxes

Although occupancy taxes are meant to be paid by your guests, this doesn’t mean that you won’t get hit with property taxes and business taxes. You’re likely familiar with property taxes, but business taxes may be new to you. A simple rule of thumb is that if you rent out your property for more than fourteen days per year, you’ll need to report any income earned to the IRS, which will be taxed based on the tax bracket you are in.

Vacancies

Ambitious short-term rental hosts often create a budget based on a full booking calendar, but it is wise to account for vacancies. Even if your property is not being used, you’ll still be incurring some costs as the owner.

Determining how you are going to manage your vacation rental business

Although listing platforms like Airbnb, VRBO, and more make it easier to manage a short-term rental, property management is still time-consuming and labor intensive. Many property owners initially approach the short-term rental business as a side hustle and opt to maintain their full-time job while renting out their property for extra income. However, many soon realize that there is more work involved than they initially anticipated. 

Renting a property is more than posting a few pictures online and then watching the money deposit in your bank account: managers must market the property to potential guests, juggle reservations, respond to emergencies, and ensure that the property is cleaned between guests.

There are three common approaches that short-term rental owners take in managing their property.

Do everything themselves

When property owners rent their space for the first time, most begin with the self-managed approach. It allows new hosts to test the short-term rental business without investing in a professional property manager or paying service fees. 

Many experienced hosts will recommend all short-term rental owners start by self-managing their property, even if they plan to hand off the reins to a management company later on. Self-management allows new hosts to test their skills and learn on the fly while they are still operating with a small number of properties, and have a lower margin of loss if they make errors. 

Ideally, self-management is recommended for those that live near the property and have a flexible enough schedule to communicate with guests and respond to problems as they come up.

Hire a vacation rental property management company

You provide the property and they’ll do the rest: that’s the pitch that property management companies use to add rentals to their portfolio.

Property management companies offer a done-for-you approach to short-term rentals involving taking care of marketing, collecting payments, handling maintenance, and answering guests as they need help.

Working with a property management company will save hosts time and hassle, but it won’t save you any money. Property management companies typically charge a percentage (anywhere from 15 to 25 percent) of the total value of bookings for their services.

Before signing an agreement, try finding recommendations from other local hosts. Then, interview each company to ensure their business values are aligned with your own. 

Property management companies are ideal for those who are interested in a more white-glove approach and can be great for those who manage properties in different areas or whose schedules do not allow deep dives into the ins and outs of the industry.

Property management software

Online services have been created to fill a gap in the short-term rental market. Small and independent property managers may not want to completely give up management of their property but may need help keeping up with the demands of the work.

Services like Futurestay help property owners build, grow, and optimize their rental business through connectivity and automation. While some software focuses solely on helping list, or other one-off services, Futurestay offers an end-to-end rental management solution that seamlessly handles payments, booking, and guest communications. 

While a property management company could truly set you back more than half of your earnings, property management software charges small flat fees or low percentages of five to ten percent.

This system is best for short-term rental hosts who like managing their properties but want to be more time efficient. Additionally, these tools can help entrepreneurs looking to grow their businesses, and up their guest experience without committing all of their time to do so. 

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