Short Term Rentals: Do you know the hidden risks?
My introduction to real estate was simple and it happened after a friend of mine (we’ll call him John in this story) got married and bought a house with his new bride. John owned a condo in Downtown Austin and would rent it out to visitors and tourists for a few nights at a time. I had heard of doing this through websites like HomeAway, AirBnB, and VRBO (to name a few), but that’s as far as it went. It wasn’t until I was getting set to book my own travel that I realized the ballpark rates for renting small apartments in Austin. That’s when the lightbulb went off…Short Term Rentals! I couldn’t believe that it wasn’t until that moment that I saw this benefit to owning property in a social city like Austin.
So I have an idea, now what?
Like most people with a new idea, I researched…and researched everything about short term rentals. I ran the numbers on what I could reasonable make in rents and compared them to condo and house prices to get a better idea of feasibility. In the end, I didn’t do it. The Austin City Council changed the rules surrounding Short Term Rentals soon afterwards and declared their intent to phase them out of the city all together, all in the name of affordable housing. Austin has yet to phase them out and I still wonder from time to time, “Did I make the right move?”
Can the Austin market support a Short Term Rental in the long run?
Let’s consider a few things before making that call. From a strictly “how much money can I make from this?” standpoint, Austin is a great market to be in. It is famous for being the “Live Music Capital of the World” and rightfully so. South By Southwest (SXSW for all the locals) and the Austin City Limits music festival (ACL…once again, the locals) are two of the largest gatherings of music lovers on Earth. Texas Longhorn alumni from all over descend on Austin for several weekends in the fall to attend football games as well. Long story short, it has a lot going on to attract visitors and owning a Short Term Rental here is starting to sound very lucrative.
A tempting investment
With the waves of tourists that crash into Austin every spring and autumn come the skyrocketing hotel prices (read: gouging). Often, families or groups of friends will pool their resources and find a space to accommodate the group, which makes renting someone’s house or condo that much more appealing. Naturally, with supply dwindling, prices of the remaining inventory rise. Keep in mind, this is not specific to hotel rooms. At this point, homeowners with Short Term Rentals take note and charge higher than usual room rates. On paper, it looks like a win-win scenario. The tourists get a less expensive option (per capita), and the property owner has part of his/her mortgage paid off.
Make sure to get a License
Prior to the Austin City Council voting to eventually phase out Short Term Rentals, they initiated a licensing program. Those wishing to take part in this endeavor would have to register with the City and pay an application fee (around $450 last I heard), and collect and pay hotel taxes. In addition, proof of insurance and a certificate of occupancy is also required. Though you may be tempted to take the gamble, don’t. It only takes one angry neighbor, or one bad tenant for the Code Department to shut down your operation.
Then come the bookings…
I remember John occasionally talking about having to run by the condo to drop off more soap, or wash the sheets. Cleaning the condo was a big to-do and even his wife would sacrifice a day or two a week to ensure this got done. A lot more work than I had first imagined went into keeping the place booked. After all, a clean house or condo is more likely to get booked (and positive reviews) than one that resembles a frat house. Yes, you can hire a maid service to take care of this for you, but now you’re starting to eat into your profits.
What about when the renters are there? True, at this point you shouldn’t have to do much cleaning behind them. However, there are other necessities that may arise while your place is occupied. Often renters will place a Short Term Rental in the same category as a hotel or resort when it comes to what is expected during their stay. The description of your rental will work to calm some of these presumptions, but not everyone reads through large amounts of text. Inevitably, renters will arrive and expect the towels to be changed out every night, or the toilet paper be replenished on a regular basis. When these run out, guess who they’re calling?
The calm after the storm?
Congratulations! The renters have stayed through their booking and have gone back to their homes. The next batch of tourists are checked in and starting their stay. Then the phone rings. There’s something wrong with the wi-fi. It may not sound like a big deal. You talk them through some steps on resetting the router, or checking to see that the proper cables are connected. The first time this happens, you learn a lesson on being a landlord. Renters will mess with things that are beyond their skill to understand. Items that were working perfectly before, end up malfunctioning or disconnected. While trying to charge a phone, they’ve managed to unplug the TV/router/lamp and you’re the one who has to fix it.
What do you think?
By no means am I saying that owning a Short Term Rental is a bad thing. On paper, it is a very good investment. Per night it pays much more than the usual type of rental property most people own. But just like any investment, Short Term Rentals take maintenance, money, and time to continue to operate. Consider the pros and cons of being a landlord before jumping head first into the game. It can be hard work, but with high reward as well. In the end, it comes down to how much you value your time.