How would you like to make thousands of extra dollars a month just by renting out a room or second home via Airbnb or VRBO or some other short-term rental operation? They are much more popular and used than a decade ago, and the income might replace a job. It’s not all fun and profit, though. Here are the advantages and disadvantages:
Advantages of Short-Term Rentals
Yes, the per-night income at a short-term rental is more like a hotel, so you would generate much more money per day compared to a traditional rental. And Arizona is a great destination place for renters, with events in Phoenix and Tucson and fabulous things to do in much of the rest of the state. We’ve heard stories of visitors paying thousands for a few days during events like the Superbowl when played in the Phoenix area.
You don’t have to rent it out all the time; you can use a second home yourself if it’s in a good vacation spot like Sedona, Prescott, or the White Mountains of Arizona. Pay attention to tax regulations about how long you can do that, though.
You can deduct mortgage interest on a second home and expenses related to running it as a business, like property taxes, maintenance, insurance, cleaning, HOA, depreciation and the like.
No guarantee (as we saw during the housing bust), but real estate tends to appreciate over time, and that’s all yours. You’ll have depreciation clawback and capital gains when you do, but that comes under the definition of a good problem.
Your Own Vacation Spot
When you don’t have visitors, you can use it as your own vacation getaway, making sure you know the tax implications of how long you use it as such.
Disadvantages of Short-Term Rentals
Visitors expect many of the features and amenities of a hotel room or time share in a short-term rental, which means furniture, bedding, kitchenware, TV (including cable and internet), outdoor furniture, blow driers, ironing boards and the like. You can get much of that inexpensively, but it can’t look cheap and must work and match. You also may need improvements before renting, like landscaping, flooring, cleaning, and improvements that can be costly.
With a long term rental, the tenants generally are there for a year or more. With short term, it might be just a couple of days. That’s a lot more people through the house, which is a lot of clean-up and work in-between. It’s essentially like running a hotel. And you don’t make any money between guests.
A short-term rental in Phoenix or Tucson should have sufficient demand from Thanksgiving through spring, but it drops off significantly in the hot summer. It’s the opposite in high country like Prescott or Flagstaff (although in Flagstaff you can rent to students during the winter and short-term in the summer).
Maintenance and clean-up
Having that many people through the house adds a lot of wear and tear, and some (hopefully small) percentage of renters will break things or trash the place. You’ll have to have repairmen and cleaners on call – or do it yourself – which is both an expense and an obligation.
Perhaps the biggest headache with short-term units are those renters who go there to party and make a lot of noise and mess for the rest of the neighborhood, creating headaches, expenses, enemies and sometimes legal problems. This has to be monitored and managed tightly.
Those party headaches probably are responsible for local jurisdictions passing ordinances limiting short-term rentals, sometimes how many times you can do it during the year. A frequent regulation limits rentals to one time per 30 days, which greatly reduces potential income. Some Homeowner Associations prohibit them entirely (know your limitations before buying. Those regulations vary by jurisdiction – and they can change, which could greatly affect your potential income. Know your jurisdiction and the trend before jumping in.
A short-term rental, then, can create a powerful income stream, but don’t dive in without doing your research on the market, regulation, demand, and costs.\