One of the fastest growing trends in real estate is returning a higher profit by turning a property into a furnished short-term rental, typically either as a corporate rental (30 days or more) or vacation rental (less than 30 days). We personally have turned two of our houses into furnished rentals aimed at the corporate rental client for off-season and vacation rentals for peak season. While for us, furnished rentals have been a blessing, there have been a lot of consequences to this decision. The key is deciding if this makes sense for you and your situation.
What to Consider When Determining Whether to Offer a Furnished Rental
What are the local laws regarding short-term rentals?
Amidst the growing popularity of sites such as Airbnb, VRBO, and FlipKey, many municipalities have issued ordinances setting minimum times for rentals, changing tax laws for short-term landlords, and even banning short-term rentals outright. The first thing to do before turning your property into a furnished rental is to research the rules where you live. In many areas these additional restrictions only apply if your rental is shorter than a certain amount of time. While the length can vary greatly, 30 days is a common restriction. Once you know your local laws you can decide whether it is still worth it to turn your house into a furnished rental and what your rental length will be.
Do you have the time to manage frequent move-ins and move-outs?
Our furnished rentals are great, but they certainly are not as easy as our traditional rentals. Our traditional rentals use an 18-page lease with a one-year minimum term. Our tenants assume most of the responsibility of basic maintenance, such as changing filters, completing landscaping, and supplying their own washer and dryer. This means that other than collecting the rent (direct deposit, of course) and answering the phone when major items break, the houses are very much like an annuity. One tenant who recently called about a broken garage door sensor hadn’t contacted us for any issues over the preceding 18 months.
On the other hand, my furnished rentals are the opposite. In the case of daily rentals, I must manage a constant flow of inquiries in order to figure out availability and fill openings. The inconveniences can be minor or major, such as helping the tenant find the wifi password, even if that is at midnight on Thanksgiving night after you have spent a long day traveling! While you are always on call for all tenants, your furnished rental tenants will be insisting on creature comforts, like can openers or cutting boards, that your traditional tenants won’t. Even if your rental is for a month of longer, this problem can be more frequent than with your traditional renters.
To be honest, when your tenant is paying $200 a night or $3000-5,000 a month, this is to be expected. People simply expect a higher standard. The question is whether the net income is worth it to you for the amount of time you must put in?
What are your expenses?
Another thing to keep in mind is that furnished rentals are all inclusive. That means you supply cable, internet, trash, water, gas, electric, landscaping, and pool service (if applicable). For my vacation rentals I provide linens (which need to be replaced often as they become worn out), toilet paper, paper towels, starter laundry detergent, dishwasher soap, shampoo, conditioner, and the like, which can add up quickly. For guests who are renting for at least three months, you don’t need to feel obligated to provide such personal care items. It is also easier to put limits on the utilities.
Be sure to anticipate all costs. The monthly electric bill for one of our vacation rentals varied from $450 to over $800. A similar phenomenon occurred with our water bill and paper good costs. The reality is that when guest are not paying for utilities, their usage can go way up and vary wildly, depending upon the renters and the time of year.
Are you a great cleaner or do you have a great cleaner available?
If you are doing frequent turn overs – many of them same day – you will either always need to be available to do the cleaning, or you need to have a great cleaning crew that is reliable and fast. We went through four cleaning crews until we found our current cleaner, who does an amazing job.
Can you or a handyman be on call?
Corporate or vacation guests will treat your house like a hotel, so it is critical to fix problems right away. Negative reviews on social media can do great harm to your business. For example, if a smoke detector starts going off, the renter will not stop to change the battery, they will call you right away and want you there ten minutes ago. This means that you are never off the clock, even when calls come in late at night or early in the morning. If you have a great handyman to help share the burden, remember that these costs will also add up.
How much will it cost to furnish the home?
When thinking about a furnished rental, don’t forget the furniture! This includes kitchen appliances, pots and pans, dishes, linens and everything else you might find in a home or hotel suite. Keep in mind that the physical furniture – tables, chairs, beds – may not be the most expensive party. I quickly realized it was not the furniture, but everything else that adds up. And all of these items, from the top to the bottom of your rental, will wear out and have to be replaced.
What is your seasonal availability and can it support the house?
While peak season should always be profitable for you, the key is knowing your down time and being able to survive it. If the winter months will be slow in your area, you not only need to cover your costs during the summer, but you’ll need to make enough to cover the slow months, too. Be realistic when you think about your expected profits and the conditions in your region.
What is your true take-home profit and is it worth all the work?
This is the biggest and most important question: What are you truly bringing home after expenses? Is it worth it compared to all of the work? Do not let the big numbers that you could charge for a short-term, or even nightly, rental blind you to the actual costs and time that are required.
These are only a few of the questions to consider when deciding whether or not to furnish a rental. Making this determination is a personal process with many more variables. I personally love having both furnished and unfurnished houses. Our unfurnished houses allow me to have relatively hands-off, passive income. While we don’t make that much on them, they are paying their mortgages, and are less work. While our furnished rentals are almost a full-time job, the payout makes the additional workload worth it. It helps us diversify our cash flow, our risk, and our work. With the unpredictable nature of furnished rentals, bear in mind that you can protect yourself by ensuring that any property you convert to a furnished rental also works well as a traditional rental, in case you ever need to switch gears. Surviving the real estate world requires multiple exit plans.