Advantages of Short-Term Rental Investing

Short-term rental properties come with several key benefits, making them an attractive option for
investors.
One of the biggest advantages is higher income potential. Compared to long-term rentals,
short-term rentals often generate more revenue, especially in high-demand areas. Investors can
adjust nightly rates based on seasonality, events, and local demand to maximize earnings.
Short-term rentals also provide greater flexibility. Owners can block off dates for personal use,
making this strategy ideal for those looking to generate income while maintaining access to their
property. Additionally, short-term rentals diversify an investment portfolio, allowing investors
to tap into both vacation and business travel markets.

Another major advantage is tax benefits. Short-term rental owners can deduct property
management costs, maintenance, furnishings, and marketing expenses, reducing their
taxable income. If rented out for fewer than 14 days per year, owners may not have to report
the income at all, depending on tax laws.

Disadvantages of Short-Term Rental Investing

Despite its advantages, short-term rental investing also comes with challenges that investors
should consider.
One major drawback is market dependency. A property’s success relies on factors such as
tourism trends, local events, and seasonal demand. If an area experiences low travel
activity or economic downturns, occupancy rates can drop significantly.
Regulations can also pose challenges. Many cities and homeowner associations (HOAs)
have strict rules regarding short-term rentals, including permit requirements, zoning restrictions,
and rental caps. Investors should research local laws before purchasing to avoid potential
legal issues.
Short-term rentals require active management. Unlike traditional rentals, which involve
monthly lease agreements, short-term rentals require frequent guest communication,
cleaning, and maintenance. If an investor is not prepared to manage these tasks, hiring a
property management company may be necessary, cutting into profits.
Additionally, short-term rentals have higher operational costs. Cleaning fees, restocking
supplies, furnishing expenses, and increased utility usage can reduce overall profitability if
not carefully managed.

Financing a Short-Term Rental Investment Property

Financing a short-term rental differs from traditional investment properties. Lenders evaluate
both the borrower’s financial qualifications and the income potential of the property.

Down Payment Requirements

Down payment amounts depend on the loan type and whether the investor plans to live in the
property:

• Conventional Loans: Require a 15% to 25% down payment for investment properties,
  with better rates for owner-occupied properties.
• FHA Loans: Allow a 3.5% down payment for properties up to four units, but the
  investor must live in one of the units.
• VA Loans: Eligible veterans and active-duty service members can purchase a
  short-term rental with 0% down if they occupy the home as their primary residence.
• DSCR Loans: Debt Service Coverage Ratio (DSCR) loans focus on the rental income
  potential rather than personal income, making them ideal for short-term rental investors.

Credit Score Requirements

Lenders consider an investor’s credit score and history when approving short-term rental
loans:

• Conventional Loans: Require a minimum credit score of 680-700.
• FHA Loans: Require a minimum credit score of 580.
• DSCR Loans: Often require a credit score of 640 or higher, depending on the lender.

A strong credit score and financial history improve loan approval chances and secure better
interest rates.

Debt-to-Income Ratio (DTI) and Rental Income Considerations

Lenders assess an investor’s DTI ratio, comparing monthly debt obligations to gross income. A
DTI of 43% or lower is typically required for loan approval.
Some lenders consider projected short-term rental income when evaluating a loan
application, using platforms like AirDNA or rental comps to estimate profitability.

Is Short-Term Rental Investing Right for You?

Short-term rentals can be a highly profitable real estate strategy, but they require active
management, market research, and regulatory awareness. Investors should evaluate
whether they have the time, capital, and risk tolerance to handle the operational demands.
If you are considering short-term rental investing, The Real Estate Action Network provides
resources, networking opportunities, and expert guidance to help investors maximize success in
this growing market.