What Is STR in Real Estate Rental Investments?

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

If you’re like most people, you’ve probably heard of the term “STR” but don’t know what it stands for. What is STR in real estate?

STR stands for short-term rental which is a type of rental property that can be rented out for 6 months or less. While some people might think that only big cities have a market for STRs, that’s not necessarily true. In fact, many vacation rental properties all over the world are perfect for those looking to get away from the hustle and bustle of everyday life.

So whether you’re looking to rent out your home on Airbnb or another similar platform, here’s everything you need to know about what is STR in real estate and why this has become a growing trend in the property market.

What is STR in Real Estate?

Short-term rental properties are any homes that are rented for under 6 months. The types of property that are available through STRs include fully furnished homes, condominiums, and houses.

Most STR properties are homes that owners rent out to tourists while they’re away.

Short-term rentals are ideal for those who do not want a long-term lease. These properties are also ideal for those who will only stay for a few months.

Some landlords and property investors own vacation rentals as a source of additional revenue.

In the United States, there are about 23,000 STRs, which is 20% of all vacation rental companies in the world.

Additionally, sites like Airbnb, Vacation Rentals By Owner (VRBO), and Trip Advisor make it simple for millions of people to find short-term rentals in their area of interest.

The popularity of short-term rentals (STRs) has been attributed to several factors, most notably how they compare favorably to traditional hotel accommodations in key areas. These include:

  • Homey ambiance
  • More privacy
  • Lower price per square foot
  • More space
  • Rented for a few days or up to a few months

How to Invest in Short-Term Rentals

For real estate investors, these turnkey properties are ideal because they make it easier to reach their target audience and generate higher cash flows than typical rentals.

Owners can post their short-term rentals on Airbnb, HomeAway, and VRBO for no cost, and these platforms allow them to reach millions of potential guests. These sites also allow property owners to maximize their rental revenue by charging low commission fees.

Most real estate investors use one of the following methods to enter the short-term rental market:

  • Rent out a primary residence on a limited basis to cover their household expenses while traveling or living elsewhere.
  • Rent out part of their primary residences such as a basement apartment or an accessory dwelling unit (ADU).
  • Rent out one or more units of a multi-family property such as duplexes, triplexes, and fourplexes.
  • Purchase a residential property to rent it out entirely.

Some cities have outlawed short-term rental (STR) operations, making it illegal for property owners to rent out their apartments to tourists. This is largely because some owners may opt to kick out long-term residents in favor of renting to more lucrative visitors.

Other reasons cited by others for why STRs have not taken off in residential areas include ambiguous tax regulations, as well as restrictions from homeowner’s associations and neighborhood groups.

Like any other investment, short-term rentals require strategic thinking. Here are a few things to consider before investing in a vacation rental.

1. Location is Everything

Location is key when it comes to investing in a short-term rental property. Look for areas with high demand and lenient state and local regulations. This will give you the best chance for success.

2. Occupancy Rates

As with any investment, doing your diligence and researching your market is important. This will allow you to set realistic benchmarks for vacancy rates and potential rental income.

3. Community Regulations

Additionally, it is important to consider the location of the property as well as any state or local regulations that may impact your ability to operate an STR.

If you want to appeal to a certain demographic, such as business travelers or family vacation groups, you may need to refurbish your property to accommodate them. This involves making changes to the property so that it meets the needs and expectations of your target market.

By doing this, you can increase your chances of attracting guests and generating income from your rental property.

Buying Your First Short-Term Rental Property

Have you ever considered owning your own STR or vacation home? You’re not alone.

The demand for STRs is increasing steadily year over year as travelers seek out authentic, local experiences that differ from traditional hotels. 

In 2021, there were nearly 1.1 million units of short-term rentals available in the U.S. market — an increase of 27.5% from the previous year.

If you’re considering purchasing your first investment property specifically for short-term rentals, now is a great time to do so. With over 1,000 listings available on our website, you’re sure to find the perfect property to fit your needs.

Not only that, but with the current market conditions, you could see a significant return on your investment.

Look for a real estate agent who knows the ins and outs of the areas you’re interested in. If you have experience in the area, use it to your advantage.

We advise you to invest in areas that you understand and are comfortable in. This can help you to minimize your risks while meeting your expected returns.

While you may be an expert in your area, it’s a good idea to use online resources, such as booking sites like Airbnb, Hotels.com, and Expedia to get an idea of the rates that competitors are charging.

As you do more research, it will be beneficial to have a basic understanding of your revenue per available room or RevPAR.

Your ADR is your daily rate and your occupancy is the percentage of time that your room is booked. So, if your room has a $200/night rate and you expect it to be 80% full, your RevPAR is $160.

It’s important to understand the ins and outs of owning and managing an STR property. You need to be aware of the local regulations to stay compliant.

You’ll need to check with your city’s laws to see if you need a permit to operate your STR. Many cities have STR laws that require you to obtain a permit before beginning operations.

If you’re interested in learning more about the regulation and laws surrounding short-term rentals, a quick online search will turn up plenty of legislation and articles summarizing the debate.

We recommend you do your own due diligence on laws and regulations and contact a lawyer for a summary of what’s required.

Always make sure that the rental property is zoned correctly and that it’s in an area where short-term rentals are permitted.

Some communities have minimum stay requirements such as 30 nights. However, location is everything when it comes to short-term rentals. Make sure you do your research on the area before making any decisions!

How Much Do You Need to Run a Short-Term Rental?

Now that we’ve calculated your expected earnings, let’s move on to calculating your expenses. The costs of short-term rentals are often much higher than those of longer-term lease arrangements.

In apartment buildings, landlords can pass along certain costs to renters such as utilities, internet, and cable.

Short-term rentals are like hotel rooms in that property owners/managers are responsible for these costs.

Hotel guests do not pay for utilities because these rates are already included in the room fees.

While expensive, another ongoing cost is hiring housekeepers to clean the units. The frequency at which this needs to be done depends on the turnover rate and how long guests stay.

If you only have a single unit and you have the time and skill to clean your property yourself, that will save on costs.

Another cost consideration is marketing and commissions to online travel agencies (OTA) which can be as high as 20% depending on the channel and other variables.

Despite the cost, we highly recommend that you utilize all marketing channels to increase brand exposure and bookings.

You don’t have to build your own site, but you will have to spend on driving traffic no matter what.

Now that you’re thinking about all the potential expenses associated with running an STR, it’s important to remember that many of these costs are also present when managing a traditional multi-family rental property.

When evaluating your budget, be sure to take into account all upfront and recurring costs. This will give you a more accurate picture of what you can expect to spend.

One cost that you’ll have to consider is purchasing new furniture and locking devices. Smart locks are a great option for renters, but they come at an added price.

When evaluating your expenses, don’t forget to factor in your startup fees. Also, be sure to calculate your return on investment (ROI).

What is a Good Cap Rate for STR?

A good cap rate for STR can vary depending on the location of the property, the type of property, and the current market conditions. However, a general range for a good cap rate for STR would be between 5% to 10%.

Conclusion

What is STR in real estate? STR is an acronym for short-term rental. Overall, STR in real estate can be a great way to earn some extra income or even get started in the rental property market. If you’re thinking about investing in an STR property, be sure to do your research and consult with a professional to make sure it’s the right fit for you.

Justin McGill