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…
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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.
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.
- Homeaway is still the king of the vacation rental sites
- 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
- Post a link on Craigslist vacation rentals!
- Airbnb will take professional photos for free
- 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.
- Families with kids make good guests. Crayon on the walls is easily fixed.
- Don’t tell your neighbors what you are doing as they will not like it one little bit.
- Airbnb will prioritize your listing for 1st week, then bump you down the list
- Do not be afraid to politely decline guests that don’t seem right.
- Cheap people are never grateful. Price them out.
- A 4 nights stay should be enough to make the turn around worth it for you.
- Charge the guests an sizable cleaning fee. Pass all of it onto the cleaner. Get a cleaner that can text message.
- Install Electronic door lock $100
- Make brief video of how to open said door
- Communicate with guests via text.
- Answer inquires ASAP. You live and die by response time.
- 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
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.