Financial Coaching Blog,  Our Smoky Mountain Cabin

How can I Invest in a Short Term Rental Property?

So you want to add a short term rental to your portfolio?

Great! Best decision you can make in our opinion. We added our short term rental more than 4 years ago and every year we’ve successfully increased our rental income. (@alpenrosecabin) But it didn’t come easily. Later this year, we plan to add our second short term rental (@wavyglass1906)that, if all goes well, will pay our entire mortgage on our primary home.

Here’s some questions you should ask yourself if you are interested in pursuing real estate for short term rentals. How do you plan on managing it? Is the short rental property near you? What about hiring cleaners? Do you have an operating budget in mind? Have you checked restrictions on short term rentals in your area? What about typical expenses? Do you have a reliable CPA?

These are Just a few questions you should ask yourself before you get started.

You should also know that financing a vacation home, second property, or investment property doesn’t come easily. Your interest rates will be higher than your primary residence. Your required Down payments will also be higher. Pro-tip: Using a “vacation home” classification or second home loan will allow you to only need 10% down, but if you tell the mortgage company “investment property” loan, they will require 20% down.

A second home, vacation home, etc shouldn’t be pursued if you are at risk of not being able to cover expenses on both your primary residence and the second home should something happen to your bookings. A vacation home is great, but you need to ensure you cover expenses before considering what ‘income’ you’ll need from your vacation home. In most cases, the first couple of years will be tough to earn you net income especially if you have capital improvements needed for the property.

Lastly, contrary to popular opinion, a vacation home, short term rental, or vacation rental doesn’t automatically generate passive income. Truth be told, there isn’t anything PASSIVE about it. Owning one, managing one, cleaning one, and constantly making improvements on one is a JOB. So you better be prepared, do your research, be diligent, and ask questions.

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