Short Term Rentals: How to Classify them

Owning a Short-Term Rental (STR) is one of the best ways to start your real estate investing journey…. And you can get started with less capital than traditional investment properties.

Standard investment properties and multifamily investment properties require 25% down and commercial loans require 30% down.   However, you can purchase your first STR with 10% down (if you are purchasing as a second home).   In addition, you can own multiple second homes so this process can be repeated at additional locations.

Another great aspect of STR properties is they are located in desirable locations and you can use them…   If you have a mountain resort or a beach town that you enjoy visiting then you are already on your way to owning a STR.  You already have a location and you intuitively know the market.  The next step is to review the numbers and your purchase criteria. 

There are three ways to approach short term rentals.

  1.  Subsidize Your Vacation Home

This approach is for those that love to:    ski, snowboard, spend time on the lake, spend time at the beach, mountain living, desert living etc.  If you are nodding your head then you know exactly what I am talking about.  This property will not likely cash flow for you because you will be using it frequently and that is ok….   You are making this purchase to subsidize you vacation lifestyle and to stop paying to rent someone else’s STR.  I would still recommend purchasing a property that you enjoy but does not consume all your capital.  Treat this property like an investment.  Understand that you purchased the property as your second home but your mindset should be that it is an investment.  Be prepared that your property will experience wear and tear with short term rental use.  Maintain the mindset that the income, tax benefits and equity build up are worth the small prices that come along with renting.  

  •  Light use Vacation Home

This approach is similar to number 1 but you would visit this property less frequently.  Example: an out of State property that you would visit once a year. This property should be profitable because of your low days of use

  •  Pure Short-Term Rental

I would recommend this approach to someone who has already owned a STR property for at least 6 months.  The easiest way to reach this category is to convert one of your existing short-term rentals from approach 1 or 2 to a full time Short-term rental.  For example, you purchased a property 2 years ago in your market and subsidized the mortgage with short term rental income.  Overtime you saved this income and would like to move up to a newer better unit.  You can now qualify for a new second home loan at 10% and covert your current unit to a full-time short-term rental.   Note:  After your second purchase in a market you may be required to place 20% down but you will need to confirm with your broker.   

The benefits for all three of these approaches are similar.  They all share tax benefits and equity build up. However, the yearly income will improve as you move from Approach 1 (Subsidize your vacation home) to Approach 3 (Pure Short-Term Rental). 

Join the Carpe Diem STR course to learn more…

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