5 tips for Investing in Short Term Rental Properties

With Minneapolis hosting the Super Bowl and Final Four, there is an increased interest in the Airbnb rental business. The influx of people into the Twin Cities provides an opportunity and investors are positioning themselves to take advantage. Airbnb is already reporting over 5,500 hosts that are booked for the Super Bowl weekend.  As a bank with expertise in real estate lending, we are accepting an increasing number of financing requests on properties operating as Airbnb rentals. As a result, we put together these five tips for those local investors.

Tip 1: Lock down your market rates

If you’re in the Airbnb business, you are in the short-term rental business. Focus on what the ongoing rental rates are for a night in your market, how many nights you expect to have renters  during a month, and also  understand what a comparable monthly rental rate is if you were to rent the property as a traditional rental. There are common resources that can help you with this analysis:

Airbnb.com & VBRO.com

Ongoing rates are easy to compare given the transparency of the Airbnb.com & VBRO.com websites. It’s best to review your immediate market and the bedroom/size of your rental property to get the best comparison. Location will always be a primary driver in the demand for your rental property so it’s an important consideration on any purchase.  Furthermore, make sure you understand the commission schedules and options.

Airdna.co

If you have a number of properties and want to up your game on the local market, there’s a paid resource that does further analysis on your local market and other markets based on the publically available information. Check out Airdna.com to get a quick view of your local market. This can help estimate how many days you can expect to have your property rented during the month and what the average pricing, vacancy rates, and other metrics for your local market.

Rentometer.com

A simple comparison tool, Rentometer.com is another resource you can use to understand what the range is for a monthly rental rate in your immediate market area. We commonly use this as a litmus test for how close your projected rental rates are in comparison to the market.  This will be important when we get into the financing discussion.

Tip 2: Lock down your expenses

Managing a short-term rental is different than renting a traditional investment property. There are additional requirements to keep the property looking clean, Wi-Fi access, furnishings, and other amenities and management needs not typically provided for longer-term rentals.  Host rankings are important in the Airbnb model just as they are in the hotel/lodging business. Higher host rankings drive better posting positions and higher likelihood of a guest selecting your property over another. Higher rankings will generally be combined with higher expenses to maintain.   

Please keep in mind that in many cases we are seeing owners work with third parties to manage the bookings, operations, and cleanings of the properties. While this is definitely an understandable pathway, be sure to also take the additional cost of third party management into your pro-forma cash flow analysis.

Tip 3: Know your local ordinances

In preparation for the national events, Minneapolis and St. Paul enacted local ordinances requiring short-term rental property owners to obtain a rental license.  It important to always make sure you are legally allowed to become a host and follow the local laws and regulations.

What are some key items to know about Minneapolis and St. Paul’s ordinances?

The cost is always a good starting point. As of 2017, it’s a simple $40 rental license fee in St. Paul. In Minneapolis, it takes some more math and depends on the property’s Tier level. The short-term rental registration fee is $46. Rental licenses for Tier 1 properties will range from $70 to $175, plus $5 for each additional unit, and $112 to $350 for Tier 2 property, plus $5 for each additional unit. Tier 3 properties are not eligible. You can read more on the Minneapolis’ ordinances at the City of Minneapolis’s Short Term Rental webpage. 

Minneapolis does have an exception to the rental license requirement when the property is:

1. is owner-occupied
2. where only a portion (i.e., a room) of the property is rented
3. the owner occupies the property during the rental period.

There are limits to the number of rentals to zoning code in Minneapolis and St. Paul has limitations on number of units by property type. The City of St. Paul has a table on its Short-term Rental webpage which we have briefly summarized here:

We encourage you to take some time reviewing your local ordinances and talking with city representatives. They can be great resources.

Tip 4: Underwrite your financing using market rate traditional rental rates

Short term rental financing is a newer phenomenon and as such there is limited history on the long-term stability of the business model. Banks lend not only on the immediate cash flow but for the long-term repayment ability of the borrower.

As you look towards your new venture, it will be important to work with an experienced lender that understands the project and can work with you while one to two tax return cycles can be established. During this time, the bank is going to look at both the traditional market rent and the prospective short term monthly rent to establish baseline revenue.  We will couple this with our history of expenses on similar properties and your projections to analyze the cash flow and debt service coverage ratio to maintain a 1.20 coverage ratio. Don't have a spreadsheet to estimate your cash flow? Check out our form on the bottom of the Contact us page.

Often times secondary market financing is not available for short-term rentals without a history of cash flow or sufficient outside income. A local portfolio lender like Flagship Bank can be a perfect fit primarily because of our willingness to share our knowledge and experience to help you succeed.

Tip 5: Presentation is everything

You’ve gone through the market, the financials, and are prepared to start marketing your property. It’s important at this stage to think like a realtor and hotel operator. The goal now is to provide great photos accompanied with detailed and accurate information that will make your listing stand out from the competition.

We led with photos because we believe that well done photographs will be extremely important in your ability to get rented more quickly and generate the best revenue for your property. Airbnb does provide a service whereby you can locate professional photographers in your area but we would recommend talking to a local realtor as a great starting point. The goal should be to stage your property in a great light that is also accurate to what the renter will experience.