Diversifying Your Investment Portfolio with Short-Term Rentals
When it comes to investing, there are a lot of options. You can invest in stocks, bonds, mutual funds, and real estate to diversify your investment portfolio. But what if you have an investment that is not traditional? What if you want to invest in something unique that can let you earn passive income monthly?
Many investors are missing out on investing in another asset that can add value to their portfolio — short-term rentals. Investing in short term rental properties is a great way to diversify your portfolio, and it can be a good fit for many different investors. These properties can help you build a diverse set of assets that will help you weather the ups and downs of the market.
What Is Diversification?
Diversification is a strategy that aims to reduce the risk of losing money by investing in a wide range of assets. It can be used to reduce your overall portfolio volatility, as well as increase returns.
When you diversify, you are spreading your investments across different asset types and sectors. It’s one of the essential principles of investing because it helps you manage risks.
When you invest in only one type of stock, bond, or other investment, you put all your eggs in one basket. There is a higher chance that you’ll lose all your money if something happens wrong or if the company becomes bankrupt or the stock price declines.
Short-term rental investing diversification can protect you from being at a disadvantage since you are spreading your money to different investments. This reduces the volatility of your entire investment portfolio while still producing income.
What Are Short-Term Rentals?
Short-term rental is a property that’s rented for a short period, usually less than 30 days. Short-term rentals are also commonly known as vacation rentals, home rentals, or even just “vacation homes.”
Short-term rentals are often offered through home-sharing platforms like Airbnb and HomeAway. However, you can rent directly from the property owner through their social media platforms or websites. This type of rental is most commonly found in famous vacation destinations, such as beaches and ski resorts, but they can also be found in urban areas.
How to Finance Your Investment
So, you’ve found the perfect property and you can already imagine all the income it could generate as a short term rental. But there’s just one problem: you don’t have enough cash on hand to make it happen. That’s where short term rental loans come in. These loans are specifically designed for investors who want to purchase a property with the intention of renting it out on platforms like Airbnb or VRBO.
Short term rental loans offer flexibility that traditional mortgage lenders simply can’t provide. With STR loans, you can secure financing for properties that may not meet the strict criteria of conventional lenders. Whether it’s because the property is classified as commercial or because you haven’t yet established a long-term rental track record, STR loans allow you to tap into the booming vacation rental market without all the red tape.
While they may come with higher interest rates compared to traditional mortgages, short term rental loans enable investors to maximize their return on investment by acquiring properties that can generate significant income in a relatively short amount of time. Plus, these loans typically have shorter repayment terms which means less interest paid over time. So if your dream is to own an Airbnb empire or join the world of vacation rentals, STR loans might just be your ticket to financial freedom!
Why Should You Invest in Short-Term Rental Investments?
The short-term rental market has exploded in recent years as more people want to stay in these properties than in a typical hotel due to their affordability. This also leads to an increase in the number of people renting out their properties on booking sites, so it’s no wonder investors are taking advantage of this trend.
While many people are hesitant about real estate investing for passive income because of the perceived risks involved, short-term rental investing is a smart way to diversify your portfolio and earn some extra income.
Here’s why you should consider adding them to your investment strategy:
- Rent Out Your Property While Away
When you buy a vacation rental property, you can rent it out if it’s not being used or when you’re away for work. This will help you earn extra income while maintaining home or apartment ownership. In addition, it gives you flexibility to live in different cities or countries while still having consistent income stream from your rental property.
- Additional Revenue Stream
A passive income from a rental property can help you cover monthly expenses, such as mortgage payments, utilities, taxes, and insurance. While it’s impossible to predict what will happen with the economy or if there will be an interest rate hike over time, the rental income from your vacation home can ensure that your lifestyle will not be drastically affected by the adverse economic conditions or high interest rates.
- Low Barrier to Entry
Investors looking for new opportunities to diversify their portfolios often need help in entering new markets or industries. With short-term rentals, however, there’s no need for extensive training or professional certifications — just find a property where short-term renting is in demand and start accepting bookings.
- Room for Growth
Short-term rental properties offer an attractive investment opportunity because they’re still a relatively new industry with room for growth. According to AirDNA’s 2023 outlook research, there were 1,278,254 short-term rentals advertised in the United States in 2022, much more than before the pandemic happened. This percentage is expected to climb by 5.5% as more people take vacations due to the outbreak.
- Tax Advantages
When you buy a rental property, it can be an excellent way to reduce your tax liabilities. After all, if you have a second home or vacation spot that you don’t use often, why not make some money off of it? Not only will you get a steady income stream from renting out the property, but you’ll also receive tax deductions for mortgage interest and depreciation on real estate improvements — two items that can reduce your taxable income considerably. You can find more information when reading The Ultimate Guide to Rental Real Estate Taxes.
- Risk Management
Diversification through short-term rental investing reduces the risks by allowing investors to spread their investments across different assets that perform differently under certain conditions. In the case of stocks and bonds, where the average annual return is 5%, there could be years when your portfolio loses money. This is due to market volatility or when an economic recession occurs.
However, when you invest in short-term rentals as an alternative investment strategy, there’s little chance that your property’s value will significantly drop below its purchase price (unless there’s a global recession).
- Low Maintenance Costs
In terms of maintenance, short-term rental properties are much easier to maintain than traditional properties because they are rented on a short-term basis.
When renting out your home through Airbnb or VRBO (Vacation Rental By Owner), guests usually pay cleaning fees that cover any damage they might cause during their stay. That means that you don’t have much risk when it comes to upkeep and maintenance.
- More Control Over Your Investments
Unlike stocks, which can be manipulated by outside factors beyond your control, investing in short-term rental properties are tangible assets you can touch and feel.
A short-term rental investment gives you more control over your assets than traditional investments. With short-term rentals, you can choose when you want to rent your property out and where you want to buy a property. Hence, if you think that the market is moving up or down, you can adjust accordingly.
The real estate market is on the rise, and investors are looking for ways where they can invest their money. Short-term rental investing is an excellent way to diversify your investment portfolio.
Short-term rentals are among the fastest-growing hospitality industry segments and are especially popular with the younger generation.
If you’re looking to put your money into something that’s low-risk with high-reward, having short-term rental property investment is the perfect solution for you to diversify your investment portfolio. You can make money by renting out your property, but you don’t have to worry about the hassle of long-term ownership or maintenance. And if the market crashes or interest rates rise, you won’t need to worry about losing everything like you would if you had invested in stocks or bonds.