2.2 The Short-Term Rental Model

When your clients initially approach you with their goals of purchasing a second home they often have ideas about the rental that are not entirely accurate. These come from the media, friends, and online sources – none of which can be guaranteed to be telling them the right story.

So, you will need to be clear in your own understanding of how vacation (short-term) rental differs from residential (long-term) rental.

There are areas where it all becomes a little fuzzy so even if you’ve been involved with both before, it’s worth getting some more clarity so you can offer the real deal to your clients.

What is a Short Term Rental?

The definition of short-term or vacation rental, can vary from place to place and is often determined by regulations and restrictions. How these are governed depends on zoning, by-laws, and community structures.

  • The legal definition of short rental in MOST US states is any rental period less than 6 months and 31 days. This helps regulate how taxes are paid.
  • These laws vary so it’s important to check with your local municipality to find out what they legally consider “short term” and how they keep track of them.
  • The most popular long-term rental lease term is 12 months and is locked in with a residential lease.

The big issues facing anyone interesting in operating a vacation rental business are the short-term rental restrictions being seen in many areas where no such restrictions would apply for long-term rental. Checking the legalities of rental in every area you serve is an important task for any real estate agent specializing in selling to this market.

  • Regulations may be driven by municipalities, cities or states. Senate Bill 1400 in Florida is an example of state-issued legislation
  • Registration and licensing may be required.
  • HOA restrictions can take precedence over municipal/state laws allowing short-term rentals

This needs clarification at two levels:

County-Level– The county where the property is located must first allow short-term rentals.

Neighborhood Level – Not every area will be impacted by community (neighborhood) intervention, but this is typically where rigid rental restrictions are put into place. This could be in condos, gated communities, and any areas that are governed by localized regulations.

It’s important, as the agent, to research all of the neighborhoods you will be showing to prospective clients and know exactly what their restrictions are.

A worst-case scenario occurs when your client spends months searching online for homes, spends a lot of time and money to fly in to work with you, falls in love with the home and their dreams, and then one week before closing (after it’s too late to get their deposit back) they find out the minimum rental stay in that neighborhood is one week or one month, when their primary intention was to rent it for shorter periods. Now the home has become less marketable for them and they are stuck.

They’re going to blame you and will be unlikely to trust working with you going forward.

If there is no HOA and the property is not located within a community governed by an HOA then as long as the county allows short-term renting, there are no further restrictions for the property.

Short Term Management

The models of management for short-term rental are very different from those operated by residential PM companies. These are some of the features of STR management:

  • Commissions and fees are negotiable based on owner involvement
  • The property manager handles emergency calls
  • The PM owns the right to the reservations they confirm
  • The PM may own the rights to the rental listing profiles, video & photos
  • PM’s own rights to photography and video they procure
  • Owners must carry liability insurance
  • Some PMs only take specific types of homes in the program
  • In some states, PMs must carry a real estate license
  • Full-service PMs control the cleaning crew and maintenance issues

There are additional differences between short-term and residential management

  • A long-term rental property requires one property manager to oversee the home and procure a tenant.
  • A short-term rental property requires a property manager to do the same job as a long-term rental manager but also needs them to be an expert in hospitality, marketing, and management.
  • A long-term rental property is a hands-off investment for the owner in most cases.
  • A short-term rental property can be hands-off but there is more startup and recurring involvement required by the owner over the course of the investment.

What is a Long Term Rental?

Long-term rentals are pretty much what most real estate agents are used to working with. They are much easier to research & acquire as their information is plentiful and most agents understand how the investment works. Typically, they are properties that are leased for 7 months or longer and the rental rate is fixed for the entire term of the lease.

Good school zones are typically sought after for good A+ residential investments. Lower-income areas are sought after for C-type investments. However, short-term rental investors don’t consider either as a means of income generation.

As such, they are a predictable investment for your client. They generate a reliable source of income month after month (assuming you have a good tenant and they pay their rent) and will provide a predictable ROI every year. The downside to a long-term rental is that your client cannot ever use the property for themselves.

This may be a good business model for some investors but others might be seeking more from their property in terms of personal use, or the prospect of greater income from short-term rentals.

Differences in start-up

  • Short-term rental require being furnished and outfitted with specific inventory before they can be placed on the market.
  • Long-term rentals typically required removing all items from the houses and being completely vacant before being rented.
  • Short-term rentals follow a complex set of tax rules that must be overseen by a tax specialist and/or the informed owner.
  • Long-term rentals follow a simple income tax system and are not subject to the additional bed and tangible taxes that a short-term rental is subject to.
  • Short-term rentals require an advanced marketing setup and do not procure guests the same way long-term rentals procure tenants.

The primary goal is to ensure your buyers are qualified from the start so they purchase the right property to meet their needs.