Short-Term Rental Investment: What to Consider, Pros and Cons

Individuals looking to diversify their income streams are increasingly looking at short-term rental investments. Airbnb and Vrbo simplify listing properties, giving investors more potential to earn high returns. However, anyone considering this investment path must weigh the pros and cons carefully. Consulting a financial advisor may be useful for investors who want a clear picture of the risks involved.

Benefits of Investing in Short-Term Rentals

Short-term rental properties offer several advantages for investors seeking income, flexibility and portfolio diversification. With the rise of booking platforms and demand for unique travel experiences, these properties can generate strong returns while offering owners a high degree of control.

Higher Income Potential

Short-term rentals can deliver significantly higher returns than traditional long-term leases, particularly in popular travel destinations or during peak tourism seasons. With the ability to set nightly rates, owners can adjust pricing based on demand and maximize revenue. This flexibility allows many investors to cover mortgage payments and operating expenses more quickly than with fixed monthly rents.

Flexibility and Control

Unlike long-term leases, short-term rentals give owners the freedom to choose when and how often to rent out their properties. This means the property can also serve personal purposes, such as vacations or hosting family. Owners can easily adjust availability or rates in response to changes in the market, giving them greater control over both usage and profitability.

Inflation Hedge and Long-Term Value

Real estate often holds its value over time and can appreciate in response to inflation. Short-term rentals offer exposure to this trend while also producing regular income. For investors seeking a balance between cash flow and long-term growth, this type of property can provide a useful counterweight to more volatile investments.

Risks of Investing in Short-Term Rentals

While the potential rewards are appealing, short-term rentals come with a range of financial and operational challenges. Investors should carefully assess the costs, time commitment and market conditions that could affect the profitability and sustainability of this investment strategy.

High Upfront Costs

Starting a short-term rental requires more than just buying property. Investors must also budget for renovations, furnishing and equipping the home to meet guest expectations. These costs often challenge newer investors, especially in competitive markets.

Inconsistent Income

Unlike long-term leases with predictable monthly rent, short-term rentals depend on a steady flow of guests. Bookings can fluctuate due to seasonality, economic conditions or local events. Low occupancy during off-peak periods can make it harder to cover fixed costs such as mortgage, utilities and taxes.

In addition to market-driven volatility, changes in local regulations can directly affect short-term rental income. City governments may impose restrictions on short-term rentals, including permit requirements, limits on rental days or outright bans in certain zones.

Time and Operational Demands

Managing a short-term rental involves more hands-on work than many investors anticipate. Regular cleanings, guest communication, maintenance and review management are all part of day-to-day operations. While property management services can offload some of this burden, their fees may reduce overall returns, making it important to weigh convenience against profitability.

How To Start Investing in Short-Term Rentals

A couple shakes hands with a real estate agent on the deck of a waterfront home.

Location is a critical factor in the success of a short-term rental investment. Properties in tourist hotspots, near business districts, or close to major attractions tend to command higher rates. However, it’s important to balance potential income with property costs and local regulations. Some cities have strict rules governing short-term rentals, which can impact how and when they operate.

Securing financing for a short-term rental property can be different from traditional real estate investments. Lenders may require higher down payments or mortgage rates due to the perceived risk associated with short-term rentals. It’s advisable to explore various financing options, including conventional loans, vacation rental loans or even partnerships with other investors.

Effective property management is key to the success of a short-term rental. This includes everything from maintaining the property’s condition to handling guests to marketing and communications. Many investors choose to hire professional property management to handle these tasks.

Tax Considerations for Short-Term Rental Owners

Owning a short-term rental property comes with unique tax implications that differ from traditional rental real estate. You must report income earned from platforms like Airbnb or Vrbo, even if the property is rented for only part of the year. However, expenses related to the property—such as mortgage interest, cleaning fees, repairs, utilities and depreciation — may be deductible if the rental qualifies as a business.

The IRS may treat your income as self-employment income if you offer hotel-like services. If you offer amenities similar to hotels, such as daily cleaning or concierge services, the income may be subject to self-employment tax.

Additionally, owners must track how many days the property is rented versus used personally, as this can affect deductibility of expenses under the IRS’s “14-day rule.” Keeping accurate records and consulting a tax advisor can help maximize deductions and avoid unexpected tax liabilities.

Bottom Line

A rear view of an unrecognizable couple arriving at their accommodations with their suitcases.

Investing in short-term rentals can be a lucrative venture, but it requires careful consideration of several factors to ensure success. First, understanding the local market is crucial. Researching demand, competition and local regulations can help you make informed decisions about where and how to invest. Additionally, the financial aspects, such as initial investment costs, potential rental income and ongoing maintenance expenses, should be thoroughly evaluated to ensure profitability.

Tips for Investing in Real Estate

While property appreciation is a long-term benefit, investors should focus on monthly cash flow to assess viability. Calculate net operating income (NOI) by subtracting all operating expenses from gross rent, and factor in financing costs to determine actual returns. A property with steady cash flow is more resilient in down markets.
A financial advisor can help evaluate and plan for major investments, like purchasing a short-term rental property. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.