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Our Next Adventure – Short Term Rental

by retirebyforty on June 16, 2014 · 27 comments

in rental property

investment property short term rental airbnb

Looks like I can’t stay away from investment properties….

Yes! We will be closing on our rental home sale at the end of this week and I’ll have a short break from being a landlord. Actually, we have one condo left, but it’s very close by and mostly maintenance free so it’s not a big deal. The break won’t be that long, though. We’re planning to do a 1031 exchange to defer the $40,000+ tax (federal and state.) It’s hard to stay away from investment property for long because it’s a great way to build wealth. For our next property, I’m thinking about jumping into the short term rental business…

Family Ties

Here is our current family situation. We have a 3 year old boy (done…) and he’ll want his own bedroom at some point. My mom is going to stay with us 6 to 9 months at a time. We live in a 2 bed, 2 bath condo now so the kid is sharing a room with his grandma when she’s here. It’s great right now, but this isn’t going to work in the long term.Originally, I was thinking my mom can live in the 1 bedroom condo that I mentioned above, but it’s not working out well because we can’t rent it out for the few months when she’s not here. It’s easier to lease it for a year, and the HOA prohibits anything less than 30 days. The HOA fees for both condos are also quite expensive and it will be better for our finances to move. Ideally, I’d like a small triplex or a duplex so everyone will have a little more breathing room.

Small Duplex

A couple of weeks ago, we went to see a place that might fit the bill. It’s a two story home with separate living quarters – upstairs and downstairs. The upstairs unit is a 1 bed, 1 bath apartment with kitchen and living room. The main level has 1 bed, 1 bath, a study, kitchen and living room. The study is awkwardly placed, but I think we can convert it into a bedroom for Jr. There is also a basement with good headroom so it’s possible to add a small ADU (accessory dwelling unit) to make it a triplex.

Here is the plan. When my mom is here, she can live in the unit upstairs. When she’s in Thailand or California, we can rent out the unit to short term renters via Airbnb. We’ll live on the main level. There are pros and cons to short term rentals and I’ll try to think through them.

Benefits of short term rental

  • A vacation rental would be perfect for our situation because we need the space when my mom and/or dad are staying with us. It would be difficult to rent to regular tenants if we tell them they’d have to move in 6 months.
  • There are separate living quarters so everyone will have their own space. It’s tough to share kitchen, bathroom, and living room with your parents. (For Mrs. RB40, it’s even harder with parents in law….)
  • It seems to me that you can make more money with vacation rentals. We can probably rent the upstairs unit out for $100/night. For a regular month to month lease, it’ll probably go for about $1,000/month. We just have to rent it out for a third of the year and we’d make the same amount. Well, maybe half because I don’t know how much to deduct for hotel tax and other overhead costs.
  • We can host friends and family from out of town. We’ll give them a special rate and everyone will be happy with the arrangement. Retire By 40 readers will get a 15% off coupon! ;)
  • We live downstairs so I can keep a close eye on the property and tenants.
  • Location – Great access to public transportation. The current tenants don’t even own a car. They just bike or take public transportation everywhere.

Cons of vacation rental

There are plenty of downsides, too.

  • The biggest problem with short term rental is that it’s not at all passive. I’d have to deal with scheduling, communication, supplies, cleaning, and more. The main reason why I can’t be a landlord right now is because I don’t have time, so taking on more work might not be the best idea. On the other hand, the earliest the short term rental business can start will be in 2 years. By then, Jr. will be in school 5 days/week and I’ll have a lot more time on my hands. Who knows, this might be just what I need to keep busy.
  • The next problem is cleaning. I’d have to clean the place after a tenant leaves or hire a cleaning person to do it. Apparently, it can be tough to find a reliable cleaning person. I don’t have much experience in this area, so I’d have to see.
  • Supplies – I’d need to stock up on coffee, TP, soap, and other things vacationers would need. We’ll need to keep supplies on premise, but I don’t think that’s a big problem. Maybe I’ll have to renew my Costco membership.
  • High turnover – We’d have a bunch of people coming through our property and it might be difficult adjustment. Mrs. RB40 probably won’t like it.
  • Vacancy – I’m pretty sure we’d have good fill rate in the summer, but what about the drizzly season? I guess there would be non tourists looking for short term rentals, too so maybe the vacancy rate would be ok. It’s an unknown factor.
  • Vacation – What about when we go on vacation? I’d probably have to hire someone to deal with property. I’m not sure how that would work out.
  • Tax – Renting out the unit part of the year would complicate taxes.
  • Parking – The house only has street parking and even then, you need a parking permit in the daytime. I’m not sure how renters will park their vehicles.

Well, did I miss anything? We can always try it out and see how it goes. If it doesn’t work for us, we can just go back to renting it to long term tenants.

Does anyone have any experience with short term rentals? What are some problems that I can expect?

Some Vacation Rental Tips

Many good tips in the comment, but here is a great list from John G.

The strategy that I developed was a scatter gun approach in terms of advertising. So far I have managed to rent out the home for the 3 peak months to different people. I’ve covered 10 months of mortgage and my friends and in laws will make use of our home in the quiet season.

Observations thus far.

  1. Homeaway is still the king of the vacation rental sites
  2. Homeaway allows you set your terms and have access to the cash upfront. Airbnb makes money and is far to controlling. I only allow 4 day max rentals on Airbnb
  3. Post a link on Craigslist vacation rentals!
  4. Airbnb will take professional photos for free
  5. Set clear occupancy rules and Party rules. This is one are where being a nice guy will not cut it. You can be nice about everything else.
  6. Families with kids make good guests. Crayon on the walls is easily fixed.
  7. Don’t tell your neighbors what you are doing as they will not like it one little bit.
  8. Airbnb will prioritize your listing for 1st week, then bump you down the list
  9. Do not be afraid to politely decline guests that don’t seem right.
  10. Cheap people are never grateful. Price them out.
  11. A 4 nights stay should be enough to make the turn around worth it for you.
  12. Charge the guests an sizable cleaning fee. Pass all of it onto the cleaner. Get a cleaner that can text message.
  13. Install Electronic door lock $100
  14. Make brief video of how to open said door
  15. Communicate with guests via text.
  16. Answer inquires ASAP. You live and die by response time.
  17. Set up an IP cam outside home. This way you can check that occupancy is as declared.

Photo credit – a somewhat random house from Zillow

{ 27 comments… read them below or add one }

John C June 16, 2014 at 4:29 am

I think this property would work great for having your mom stay there for extended periods, it gives everyone a bit more space and gives her some privacy. I would be hesitant to rent out the unit above your living quarters to vacationers when she isn’t there. It’s one thing to have mom/grandma living above you, its a whole different ball game when its someone on vacation.

I remember when we lived in an apartment building years ago and would get noise complaints from our downstairs neighbor, just for junior running down the hall. We felt bad about this and did our best to contain him. Your nightly tenants may come and go late, may have some friends over and make some noise, may listen to the TV too loud, etc. All seem like relatively minor things, but they can seriously impact your comfort level. Also it may be an issue when Jr starts school and has to get some good rest but can’t sleep because he hears the people upstairs late at night. I don’t know, I think I personally would much rather have the home just for us and mom, and have a separate property for rentals.

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retirebyforty June 16, 2014 at 8:49 am

You’re right. I didn’t think about the noise issue. We’d have quite hour after 9 pm, but who knows what the renters would do. I’d probably set the price a little higher to screen out the younger crowd…

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insourcelife June 16, 2014 at 6:07 am

If you thought dealing with one year leases was getting old, wait till you get into short term rentals via AirBnB! You’ve examined the downsides very well so it’s not like you are going into it with your eyes closed. Financially, no doubt and arrangement like this makes sense assuming you’ve ran the numbers (of course you did :) Personally, I’d jump into something like this as long as I could comfortably carry the entire house without HAVING to rent out rooms. Rentals should be an icing on the cake. This way if we decided we’ve had enough, we’d just take the rentals off the market, have more space for ourselves and continue living without crimping our lifestyle.

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retirebyforty June 16, 2014 at 8:50 am

The mortgage would be about $1000/month so it’s not bad. If the rental didn’t work out, we won’t have too much problem carrying it.

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Financial Samurai June 16, 2014 at 6:52 am

Sounds like a lot of work Joe. But given you are retired, why not. Just got to buy at a good price so the numbers work.

Are there good deals out there?

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retirebyforty June 16, 2014 at 8:52 am

It sounds like too much work for me right now. When the kid goes off to school full time, I think I will be able to handle it. The price is high, but not ridiculous like the bay area. It is in a very good neighborhood so it should hold its price relatively well. Not many good deals right now. If we can’t find the right place, we’ll just pay the tax and forget about it for now.

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Justin @ Root of Good June 16, 2014 at 7:35 am

It’s worth a shot, Joe. Airbnb seems to be a good way to fill your unit with short term tenants (though I don’t have any personal experience myself). And given the unique needs for your property (occasionally vacant when not in use for your family), it would let you maximize revenue.

We have considered renting our house on Airbnb or similar if we continue to travel for long periods of time. I’d have to figure out how to manage the short term rentals in our absence. Maybe find a trustworthy friend looking to make a few bucks and pay them $100-200 to clean and flip the property? Passing on $50-100 of cleaning costs seemed to be common on the airbnb listings I was researching for our summer trip to Canada.

You have all the key considerations highlighted, so it comes down to how much hassle do you want to put up with? Limiting rentals to weekly or 2 weeks would also cut down on the work of flipping tenants.

If you haven’t seen Paula Pants’ Afford Anything posts on her Airbnb experience/experiment, check it out. She’s giving short term rentals a shot instead of 1 yr+ leases. More work, more money. No way to avoid that trade off apparently. ;)

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retirebyforty June 16, 2014 at 8:53 am

Have you looked into swapping homes? That sounds like a good option if you travel for extended period. I saw Paula’s post a while back. I’ll check to see if she has an update. Well, we won’t be renting it out most of the time so we’ll have busy and quite periods.

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Jackie June 16, 2014 at 7:39 am

I haven’t had a short term rental myself (only long term) but I have rented vacation apartments and it seems to me about half of them had cleaning fees. I presume the owners used that to hire a cleaner instead of doing it themselves, so that would be an option. If your wife wouldn’t like having short term guests that could be a big issue. What about just getting a 3 bedroom and leaving the third as a regular guest room while your mom wasn’t there? Or at least setting a week minimum on the short term rental? Btw I usually use VBRO to find where to stay.

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retirebyforty June 16, 2014 at 8:56 am

A weekly limit sounds like a good plan. That way we’d have a little more stability.
I’m considering just renting a room too, but you’d have to share more of your privacy. At least with a duplex, we’d have our own space.

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Aldo June 16, 2014 at 9:44 am

I think it sounds like a good idea. I personally use AirBnB a lot and I like it, so don’t be surprised when you get a request from us claiming our 10% off. :)

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Dividend Mantra June 16, 2014 at 1:01 pm

Joe,

Sounds like a great idea considering your situation with family. Not sure about the short-term rental via Airbnb, but it sounds like you’ve run the numbers and feel comfortable. That just sounds like a lot of work to me, but maybe in a couple years you’ll be ready for the challenge and work regarding a property/situation like this.

Best wishes!

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Daizy June 16, 2014 at 2:03 pm

My rental house was a short term rental for 2 years through HomeAway.com. I made money Jan-Mar but after that I had trouble finding tenants and I didn’t like my house staying vacant that long. I never actually met the people since they paid me online and I had a door lock with a numeric code so I would change the code for each new person. I did the cleaning myself even though I charged a cleaning fee. Eventually, I got tired of communicating with potential renters, cleaning and setting up, and after a few bad tenants who ruined the carpet, I wanted less work so I switched to long term renters. I ended up with a bad long term tenant and, finally, I hired a property management company which has worked out the best but not perfect.

I predict, if you try this, you will be ready to quit the arrangement in 2 years. Perhaps you can have a back up plan for the space such as rent out the unit as climate controlled storage?

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retirebyforty June 16, 2014 at 10:31 pm

Thanks for sharing. This sounds more and more like too much work… It’s still a little way off, but I’m willing to try it. If it doesn’t work out, I’ll probably just get a long term renter.

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Pauline June 16, 2014 at 7:11 pm

I rent my house to travelers on Airbnb and you have a heavy usage of everything, compared to long term rentals. The towels you give them have to be washed after one night if they don’t stay longer, they don’t know how things work so they try to turn the AC on and off just to give it a go, they slam the doors, etc. Generally they are trying to be careful but when it is your first time around a house you aren’t used to many things and treat them the hard way.
So you may have more maintenance.

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retirebyforty June 16, 2014 at 10:35 pm

Thanks for your input. More repair and maintenance, got it. sigh…

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Vito June 17, 2014 at 4:58 am

From a financial perspective it might make sense. But from a Quality if Life perspective it sounds like a huge pain. Your time has value and you will end up wasting a ton of it. I personally would not do it. It’s always better to seperate your business and personal life.

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Crass Cash June 17, 2014 at 7:07 am

Another great article. The best part about this is how you show your creativity for making money. I think this is something that a lot of people lack when they complain that they can’t find any extra ways to make money. You have to constantly be looking and brainstorming to see what will work. Please keep us posted on how it works out with airbnb!

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Pam June 17, 2014 at 8:53 am

As others said, if one year leases were a lot of work, short term rentals are even more work.

In your situation, I’d buy a three bedroom house/condo and use the third bedroom as a spare room when your mother isn’t staying with you. All this extra stress of dealing with short term renters isn’t worth the money in my book.

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Ed June 17, 2014 at 9:27 am

I’ve had a fabulous experience renting out my 4-plex as vacation rentals. I make 2-3x the income that I did when I rented the units out to long term tenants. I would not bother with airbnb or flipkey. They are a waste of time, IMO, and don’t have the traffic that homeaway and VRBO have, at least not in my market. I do charge a cleaning fee and a pet fee, and I honestly make a killing on those fees. I clean everything myself, and it takes me 2 hours tops per apartment (they are all 2-3 br). Most of my renters are for a week or more, but I do get some 2-4 night stays. I have had absolutely no issues with people damaging things and making messes. I charge a refundable damage deposit and make it very clear that it’s forfeited if they don’t do the dishes, clear out the fridge, take out the trash, and at least throw their towels in the laundry. I don’t stock consumables like extra toilet paper and shampoo. I have my places nicely equipped with linens, dishes, pots and pans, etc but the renters are on their own for the other stuff (of course I do leave 2-3 rolls of TP, I’m just saying I don’t restock). By the way, I bought all my stuff on Craigslist – all the furniture and kitchen stuff, televisions, etc. I did buy new linens and towels, but the other stuff was all really high end gently used stuff that I bought for a fraction of what it would have been to buy new.

Also, since you are looking at buying a duplex, you can save on the cable and internet for the unit. My 4-plex is actually 2 duplexes, so I had the cable set up so both sides of the duplex are on the same bill. You could do that too. I lived in one of the apartments when I first bought it and for the first year I had the other unit in the duplex as vacation rental. I had maybe 2-3 renters get a little rowdy at night. I just texted them and told them to keep it down, and it was fine. And I live at a party beach in Florida.

Anyway, as someone who has been doing it for awhile now, I say GO FOR IT. It is way more lucrative than long term rentals and really isn’t all that much work.

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retirebyforty June 18, 2014 at 9:35 am

Finally, a positive experience! Thanks for sharing. It sounds like you need to make the ground rules clear. I’ll try it and see how it works out. It will be more blog material if nothing else. :)

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Gerard Leen June 18, 2014 at 3:59 am

Hello,

I own 7 Vacation rentals and 8 Yearly rentals since about 2003. I love vacation rentals because for the most part you are dealing with people who can spend $1200 for a week rather than people who can hardly pay me $650 for a month.

The VRs run smooth but for the occasional lock out, unclean condo upon arrival, loss of power, things like that. Make sure you place ADDS on VRBO and Home Away. But monitor your ADDS as VRBO and HA have issues that arrive out of no where. WEver since they changed their sites and increased their cost they forgot about the VR owners and are more worried about their share holders.

Good luck!

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retirebyforty June 18, 2014 at 9:41 am

It sounds like having a week minimum is a great idea. That will keep out the riffraffs. Thanks for sharing.

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mary w June 21, 2014 at 1:01 pm

Never used Airbnb but have friends who do rentals through it…

You can do some e-mailing back and forth so you get a feel for the potential renters .
Both renters and landlords are rated on Airbnb. Both of these will help you screen out the party people.

When you go on vacation yourself you can just take your rental unit “off the market”.

I was market the unit as “no car” and make the negative (no parking) into a positive (great walkability and public transportation). Maybe buy a couple of bikes if that’s appropriate to the area.

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mary w June 21, 2014 at 1:05 pm

I forgot to say…you might try contactingAirBNB landlords in your area to see what their experiences have been…is no parking a problem? What about the rainy season? What type of renters does the area attract? etc.

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John G June 27, 2014 at 12:25 am

Firstly great blog. Lots of concise helpful advice. I’m a stay at home father who is also a refugee from the holding cells of corporate Science and engineering. I’ve been into P2P lending since 2008 always tring to figure out ways of passive/not to big a PIA streams of income. I am very impressed with your content and the manner that its delivered.

I recently moved out of my 3 bed 2 bath family home in coastal SoCal and turned it into a vacation rental.

The strategy that I developed was a scatter gun approach in terms of advertising. So far I have managed to rent out the home for the 3 peak months to different people. I’ve covered 10 months of mortgage and my friends and in laws will make use of our home in the quiet season.

Observations thus far.

1. Homeaway is still the king of the vacation rental sites
2.Homeaway allows you set your terms and have access to the cash upfront. Airbnb makes money and is far to controlling. I only allow 4 day max rentals on Airbnb
3. Post a link on Craigslist vacation rentals!
4.Airbnb will take professional photos for free
5.Set clear occupancy rules and Party rules. This is one are where being a nice guy will not cut it. You can be nice about everything else.
6. Families with kids make good guests. Crayon on the walls is easily fixed.
7. Don’t tell your neighbors what you are doing as they will not like it one little bit.
8. Airbnb will prioritize your listing for 1st week, then bump you down the list
9. Do not be afraid to politely decline guests that don’t seem right.
10. Cheap people are never grateful. Price them out.
11. A 4 nights stay should be enough to make the turn around worth it for you
12. Charge the guests an sizable cleaning fee. Pass all of it onto the cleaner. Get a cleaner that can text message.
13. Install Electronic door lock $100
14. Make brief video of how to open said door
15. Communicate with guests via text.
16. Answer inquires ASAP. You live and die by response time.
17. Set up an IP cam outside home. This way you can check that occupancy is as declared.

Reply

retirebyforty June 27, 2014 at 9:51 am

Great list of tips. I’ll put this up on the main article. Thanks a bunch!
I hope you’re enjoying your corporate refugee status. :) I like the way you put it, by the way.

Reply

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