How Much Do Rental Properties Make? 5 Ways to Estimate Profits (2024)

The rise of short-term rentals has introduced a new avenue of opportunity in the dynamic world of real estate. This burgeoning sector, spurred by platforms like Airbnb and VRBO, is becoming an increasingly popular investment strategy for homeowners and investors alike.

But just how lucrative can a short-term rental be? Whether you're purchasing an investment property or you own a vacation home and are considering new possibilities, understanding the potential can open a whole new dimension to your real estate journey.

Are Short-Term Rentals Profitable?

Real estate investors can profit from short-term rentals—in many cases, these rentals can be more profitable than long-term leases. However, this depends on factors such as maintenance costs and location.

Overall, short-term rentals in more desirable areas or year-round vacation destinations tend to be more profitable. For example, properties close to airports or in large cities attracting year-round tourists can generate steady money. Rentals in more seasonal destinations, such as a vacation property in the mountains or an oceanfront home, might be harder to rent in the off-season. Investors might consider charging higher season rental rates to compensate for this challenge.

Maintenance costs are another factor that can affect a short-term rental home's profitability. While these properties require more frequent cleanings to keep them in good condition for each guest, they typically have a lower risk of excessive wear and tear or major damage than long-term rentals. Owners might also consider charging cleaning fees to help cover maintenance expenses.

Short-term rentals can also be more profitable in terms of tax benefits. Owners can look into deducting interest and certain expenses, such as management.

Maximize Your Profits

From marketing the property to hiring a property manager or managing it on their own, owners can maximize their rental earnings in several ways.

A well-written description with accurate information can help ensure owners have steady rentals instead of sporadic ones. These descriptions should also include high-quality images of the property's interior and exterior. Encouraging guests to leave reviews on short-term or vacation rental websites is also helpful, as these reviews can help attract prospective guests.

Updating listings and adjusting nightly rates as needed can help owners increase their profits. For example, owners might highlight local events during different seasons to attract guests. Updating listings to include new amenities, such as a new hot tub or newly renovated bedrooms and bathrooms, can also help bring in more bookings. Owners should include updated photos with these listings.

Owners should also adjust rates as often as needed. This might involve charging higher rates in particular seasons, such as during winter in ski areas or summer in beach locations.

When handling administrative tasks, owners can automate them as much as possible. Doing so helps free up more time to focus on marketing to keep properties regularly booked. Owners might also consider hiring a property management company to oversee maintenance, cleaning, and other tasks. While this costs money, it makes rentals a more passive source of income for owners. However, owners who don't mind taking care of these tasks can save money instead of spending it on property management.

Despite being short-term rental properties, owners might be able to maximize profits from the occasional long-term stay. Having some guests stay longer helps lower cleaning and maintenance expenses. It also helps reduce the risk of vacancies, such as during the off-season.

Managing Finances on Your Short-Term Rental

Short-term rentals involve several costs and expenses. Although they can generate high profits, owners must manage their finances carefully.

Creating a budget is essential for sound financial management. This should include typical costs and expenses for owners, such as the following:

• Mortgage payments
• Property insurance
• Utilities
• Maintenance and repairs
• Guest supplies
• Furnishings

Owners should set aside part of their finances to cover the cost of unexpected repairs. This helps ensure these repairs are handled promptly so bookings can resume. Owners might consider adding estimated repair and maintenance costs to rental rates to get ahead.

Quality furnishings can help impress guests while reducing the risk of quick wear and tear. Furnishings aren't a regular expense, but owners should set aside money to update them when necessary.

Providing guests with bedding, towels, and other supplies is an ordinary expense for short-term rental properties. This includes items like toilet paper that need to be restocked regularly. Other expenses owners might budget for include professional cleaning services, entertainment subscriptions, or small welcome gifts for guests.

Get to Know Your Local Market

Becoming familiar with the local market can help property owners estimate how much they can make. This involves going through active listings to see what other owners charge for overnight or weekly stays. Checking these rates in different seasons can also help owners determine how to adjust their rates.

Working with a real estate agent provides another good way for owners to get to know the market, as agents have an in-depth understanding of local real estate markets. They can inform owners about neighboring rental properties, such as how much they've appreciated.

In addition to checking the local market, owners have several other factors to consider when estimating profits. They should also factor in vacancy rates and current property values. Higher vacancy rates mean that properties aren't booked as often, which can negatively affect profits. However, property values can fluctuate over time. Other factors for owners to consider include current mortgage rates and loan terms.

How Much Can You Earn from a Short-Term Rental?

The exact amount of money short-term rental owners can make varies significantly and is based on factors like location and current market rates. For those planning to invest in these rental properties, carefully considering all relevant factors can help them estimate potential profits. Regarding ROI, short-term rentals tend to have rates between 10 and 15 percent. This is higher than the average long-term rental property ROI, between 4 and 10 percent.

Owners can do a basic calculation to estimate rental income. This method divides total annual rental payments by the property's purchase price. Keep in mind this general estimate excludes operating expenses and other costs. A more detailed calculation involves multiplying the rental rate, occupancy rate percentage, and 30 days, then subtracting the monthly mortgage payment and operating costs. When calculating potential profits, owners should include all expenses, from closing costs and mortgage interest rates to HOA fees and insurance.

Consider Investing in a Short-Term Rental

The lucrative potential of short-term rentals in today's real estate market cannot be understated. The flexibility and consistent income flow they provide offer a robust and reliable return on investment. From offering a gateway to the fast-paced and constantly evolving tourism industry to capitalizing on high-demand events and seasons, the short-term rental market presents an unmatched opportunity for investors. Overall, the pros outweigh the cons, as buying short-term property is a good investment.

As technology and digital platforms continue to transform the real estate landscape, short-term rentals are an emerging trend and a staple of the modern, diversified property portfolio. With the right strategy, market understanding, and property management, short-term rentals are a profitable aspect of the real estate investment space.