For decades, buy and hold residential real estate investors have utilized a long-term rental strategy to generate cash flow. A long-term strategy is typically a one-year agreement for a tenant to lease a property for a fixed monthly rate. Once the year lease is up, the landlord and tenant can part ways or renegotiate the lease agreement for the subsequent year(s). This strategy is time-tested and proven to work very well at generating immense wealth. So why consider a different approach? In the following paragraphs, I will make that argument by introducing a different strategy that can 2x-5x your rental income, maintain your property in pristine conditions, and be 100% passive income.
Real estate investors invest for many different reasons with varying goals. Some invest to offset their living cost, some invest to generate wealth, and others prefer cashflow. I invest in wealth generation with an emphasis on cash flow. I focus on deals where I can create cashflow very early in the process and see appreciation as the icing on the cake. The amount that investors look to cash flow each month can also vary immensely as this is dependent upon individual goals. Multi-unit owners may look for $100-$200 per door per month, while single-family investors may not purchase anything that produces below $500 per month. As a cash flow investor, I'm looking to maximize cash flow, and this pursuit has brought to light a lesser-known strategy that is proving to be very lucrative and rewarding. I'm referring to short-term rentals, also referred to as vacation rentals, though many short-term rentals are not rented by vacation travelers but instead many other types of travelers. I can dive deep into these travelers in a sperate blog post.
I define short-term rentals(STRs) as 29 nights or less. An individual can rent my property for as little as one night but no more than twenty-nine nights(there is some flexibility here). Therefore I'm renting by the night instead of by the year as a long-term rental investor does. Charging by the night is where all the extra revenue is generated. People renting a space for a couple of days or weeks are willing to pay a much higher nightly rate than if they commit to 365 nights with a 1-year lease. My business coach, Mike Sjogren, likes to compare it to buying a 24-pack of water for $5.99 and then selling each bottle outside of Fenway Park for $5 each. A lot of money is generated by selling your property by the night, but I'm sure you are already thinking this sounds like a lot more work. Thankfully It doesn't have to be, and shortly, I will share with you how you can execute this strategy with just a few hours per week!
One last thing to consider as far as income goes when comparing a long-term strategy to a short-term is scalability. When you consider the extra income STRs generate, it's exciting to figure out how quickly you can scale and earn an income that can be very comfortable for many people. Let's say you decided real estate was your path to financial freedom and set a goal to clear 100K a year or $8,333 per month from your investment properties. Using $300/month, the national average of cashflow per property as a long-term rental, you would need to purchase and manage 28 properties to meet this goal. Considering an STR generating a very realistic $1000 per month, you're talking just 8-9 properties! That is a fast track to a bright financial future.
Now that we understand why STRs generate so much more income, we have to talk about the work and responsibilities that go into executing this strategy. One of the main reasons investors prefer a long-term rental is that they typically don't have to put too much thought or effort into the property for the entire year once it is rented. It's a relatively passive income stream and even more passive with adequate systems in place and or a reliable property manager. Well, the same applies to STRs, but the processes are just different. I'm going to share with you four processes in which you need to operate short term rentals and how you can automate these processes so you can manage your STRs with just a few hours per week.
The first process is pricing. To maximize your property's revenues and occupancy rates, you need to be priced accordingly based on your market demand and property type. The rates you charge nightly can fluctuate throughout the year and are based on many factors. Seasons, holidays, special events, and lack of supply are a few examples. Keeping up with this information to publish the highest rate to maximize income can take up much time if you decided to monitor your market regularly and adjust the prices manually. Instead, you can take advantage of Dynamic pricing tools that automate the entire process. Large hotel chains and airline companies have used these tools for nearly 20 years, and this is why you can check the price one day, and it's different the next.
The second process is communication. Before, during, and after every booking, there should be a steady flow of communication. Not only does this ensure rules and procedures are followed, but it also shows the guest you care about their experience, and this will make for a much happier guest. Proper communication is a crucial aspect of operating an STR. If you had to manually respond to every message, with just a couple of properties, you would quickly be inundated. Thankfully there are many communication tools available that allow you to automate many of the guests' questions. The technology we are currently using also utilizes artificial intelligence to improve how it answers guest inquiries. You can pre-write many of the information one time, and then as the software detects specific questions, it will respond with your answers.
The third process is access & security. You could easily have anywhere from 3-7 different groups of travelers checking into your property in a single month. Having to change the locks each time is out of the question, and providing the same key to a different guest could pose security and safety issues. Therefore you will want an automated way of granting this access. You can do this by utilizing smart locks. There are many companies now producing smart locks that generates a temporary key code whenever you like. Even better, some of these smart locks can sync with your booking calendar and autogenerate the code to only work during the guest booking time and email it without you pressing a key. It's a beautiful thing and easy to set up! The second part is security. It's crucial that you have a security process in place that will allow you to thoroughly screen your guest before booking and keep an eye and ears on your property throughout their stay. This will ensure you're granting access to the right type of guest and increase the odds of a smooth stay. A good starting point is utilizing Airbnb's system, which does an excellent job of verifying the guest using their system as a potential guest of your rental. You can make it mandatory that Airbnb's guests are verified, meaning they have provided Airbnb essential info, including their government ID. Airbnb will then perform a background check to ensure criminals or sex offenders are not allowed to book. For more info, visit: https://www.airbnb.com/help/article/1308/does-airbnb-perform-background-checks-on-members.
It's also good to have a series of screening questions that state your rules and have guests agree to them. For instance, we make sure all of our guests know that parties are strictly forbidden, and our quiet hours are from 11 pm until 8 am. If these rules are broken, it will result in immediate eviction. Lastly, with security, you want to ensure that noise levels are in check and that guests are not getting out of hand. With a noise monitoring device, you can monitor decibel levels(not conversations) and be notified if a certain threshold is surpassed. Some states have even made this device mandatory to obtain an STR license.
Lastly and probably the most important is the turnover process. This is the process for preparing your property for the next guest. The turnover process starts once a guest checks out from your property at the end of their stay. Now you must quickly and thoroughly get the property back to a pristine condition before the next guest arrives. Any missteps here can be critical to the overall experience of your incoming guest. This is a process that you want to emphasize in the beginning and have quality control checks. Your turnover team will consist of cleaning crews, maintenance personal, and runners. Properly communicating with your turnover team when a property is due for a turnover and ensuring it is completed can take up a lot of your time. But with the use of some useful software, you can also automate much of this process. Software like Turnoverbnb connects you with cleaning crews in your area and automatically notifies them in advance when a checkout will occur. The turnover process does require a bit more upfront work to get dialed in, but once you have assembled the right personnel and have confidence they are following your processes, this step can become very hands-off.
With these systems in place, you are on your way to building a genuinely passive real estate business, which generates you a very healthy income without trading your time to earn it. Though I am bullish on STRs and feel there is a strong future ahead for them, I also respect the value of long-term rentals. There are tons of markets where Strs will perform well, but there are also places that its not the best option, or flat-out banned by rules and regulation. Therefore I believe it's smart to have a mix of both strategies throughout your portfolio. The allocation will vary by the investor, but I think this combination gives you great flexibility. One example of flexibility would be with the recent and unexpected developments of COVID-19. Many STRS have performed exceptionally well during this time, while long-term rental investors are handcuffed from evicting nonpaying tenants by government mandates. STRs are an excellent hedge in this scenario as you could easily offset the lost income on your long term rentals. If you already own several rental units, you could quickly start into this strategy by investing in furnishings for one property or unit and seeing how it performs. You may be pleasantly surprised by how much extra income you can earn and become fixated on maximizing cash flow as I have!
Tom is Founder and CEO of Rent Sherpa, a short-term rental company partnering with real estate investors across the nation to maximize cash flow with a lucrative and technology-driven rental strategy.