Investing in short-term rental (STR) properties can be lucrative, but like any investment, it comes with its share of risks. The key to a successful investment is identifying properties that are likely to generate consistent cash flow. This proactive approach can save you from costly mistakes and set you up for a profitable future. Look for these signs that an STR property will cash flow before you even buy.
1. High Demand in a Desirable Location
One of the biggest signs of a successful STR property is its location. Think about what draws people to the location. For example, in the Smoky Mountains market, visitors are drawn to the area because of the national park and tourist attractions. A consistent influx of visitors translates directly to potential bookings. Research occupancy rates for existing properties in the area and other STR data, such as historical booking trends, average daily rates, and overall market demand. A high occupancy rate coupled with strong average daily rates in a competitive market is a great sign that an STR property will cash flow.
2. Competitive and Attractive Amenities
While location is king, the property itself needs to stand out. What amenities does it offer that will attract guests and justify a higher nightly rate? Beyond the basics, consider features that enhance the guest experience. This could include a hot tub, a private pool, a well-equipped kitchen, high-speed internet, great views, or even unique design elements. Families might prioritize kid-friendly amenities like a game room or outdoor play area, while couples might value a quiet space with relaxing amenities like spa tubs and fireplaces. Look for properties that can offer an experience, not just a place to sleep. Compare the amenities of the property you’re considering with other successful STR properties in the area to ensure it’s competitive and appealing.
3. Favorable Local Regulations and Taxes
Before you even think about buying, look into the local short-term rental regulations. This is a critical step that many investors overlook. Some cities have strict zoning laws, caps on the number of STR permits, or require specific licenses. Others may have high tourism taxes or occupancy taxes that can significantly impact your net income. Understanding these regulations beforehand is crucial to avoid potential legal issues or unexpected expenses that could cripple your cash flow. Look for areas with clear, favorable, and stable STR policies. Engaging with local real estate agents or property management companies familiar with STR properties can provide invaluable insights into the regulatory landscape.
4. Realistic Projections of Operating Expenses
Cash flow isn’t just about income; it’s also about managing expenses. Before purchasing an STR property, create a detailed projection of all potential operating costs. This goes beyond the mortgage payment. Consider utilities, cleaning fees, property management fees, maintenance and repairs, insurance, taxes, HOA fees, and even supplies like toiletries and linens. Don’t underestimate these recurring costs. A common mistake is to only focus on potential rental income without a thorough understanding of the outgoing expenses. Request past utility bills if possible and get quotes for cleaning services and insurance. A clear understanding of these expenses will allow you to accurately calculate your potential net income and assess the STR property’s true cash flow potential.
5. Strong Long-Term Growth Potential
While the immediate goal is cash flow, it’s wise to consider an STR property’s long-term viability and potential exit strategies. Is the property in an area that is experiencing consistent growth, both in terms of property values and tourism? Even if your primary focus is cash flow, knowing that the property is likely to appreciate in value over time provides an additional layer of security. Conversely, if, for some reason, the STR market in that area takes a downturn, could you pivot to a long-term rental or easily sell the property without a significant loss? Investing in an area with diverse economic drivers and consistent demand for housing, beyond just tourism, can mitigate risk and offer more flexibility in the future.
By diligently researching and evaluating these five signs, you can significantly increase your chances of investing in an STR property that will generate cash flow from day one. Do your homework, be realistic with your projections, and choose wisely to build a profitable short-term rental portfolio. Need help getting started in the Smoky Mountain market? Reach out to Local Realty Group and we’ll be happy to guide you through the process!
