Questions to Ask Before Buying a Short-Term Rental Property

Buying a short-term rental can be exciting. It can also become an expensive lesson when a buyer relies on emotion, aggressive income projections, or incomplete information.

Before falling in love with the mountain view, swimming pool, game room, or beautifully staged listing photos, take a step back and evaluate the property as both real estate and a working business.

A beautiful property is not automatically a profitable short-term rental.

Watch: Questions to Ask Before Buying a Short-Term Rental

What Is Your Goal for the Property?

Start by deciding what you want the property to accomplish.

Are you buying primarily for monthly cash flow? Are you hoping for long-term appreciation? Do you want a vacation home your family can also enjoy? Are you trying to build a portfolio of income-producing properties?

Your goal will influence:

• The market you choose

• The type of property you purchase

• The amount of money you invest

• The financing structure

• The level of risk you can accept

• The amount of personal use you plan

A property purchased mainly for family vacations may not be the same property you would select to maximize cash flow.

Are Short-Term Rentals Allowed?

Never assume a property can legally operate as a short-term rental simply because nearby homes appear on Airbnb or VRBO.

You need to verify the requirements with the applicable city, county, municipality, homeowners association, and other governing authorities.

Questions to ask include:

• Is the property properly zoned for short-term rental use?

• Is a permit, license, or registration required?

• Does the homeowners association allow short-term rentals?

• Are there minimum-night requirements?

• Are there occupancy limitations?

• Are there parking restrictions?

• Are inspections required?

• Are there specific fire and safety requirements?

• Are there noise ordinances?

• Does an existing rental permit transfer to a new owner?

• Will you need to apply for a new permit after closing?

Rules can vary dramatically from one neighborhood to another. Obtain the answers directly from the applicable authorities and appropriate professionals before making a final commitment.

Why Do Guests Visit the Market?

A successful short-term rental needs a reliable reason for guests to visit the area.

Demand may come from national parks, beaches, universities, hospitals, weddings, sporting events, entertainment, business travel, or seasonal attractions.

Do not evaluate the market based only on holidays and peak weekends.

Ask:

• What attracts guests to this area?

• Is demand seasonal?

• What happens during the slower months?

• Can the property attract weekday guests?

• Is the market dependent on one major attraction?

• How many competing rentals are nearby?

• Are new rentals being added faster than guest demand is growing?

• What makes this property different from the competition?

A popular vacation market does not guarantee that every property within that market will perform equally well.

What Did the Property Actually Earn?

Projected revenue can be helpful, but it is not the same as verified performance.

Ask for documentation showing what the property actually earned during the previous 12 to 24 months, when available.

Documentation may include:

• Airbnb or VRBO statements

• Property-management statements

• Booking histories

• Income and expense reports

• Bank deposits

• Tax documentation

You should also determine whether the reported revenue includes:

• Cleaning fees

• Taxes collected from guests

• Owner-blocked dates

• Personal use

• Refunds

• Cancellations

• Promotional discounts

Compare the property with similar rentals based on location, bedroom count, guest capacity, amenities, condition, accessibility, and proximity to attractions.

A projection based on a larger, newer, or better-equipped property may create unrealistic expectations.

What Are the Actual Operating Expenses?

Gross rental income does not tell you how much money the investment will produce.

Identify every recurring and potential expense, including:

• Mortgage payment

• Property taxes

• Short-term rental insurance

• Homeowners association dues

• Property-management fees

• Cleaning expenses

• Electricity

• Water and sewer

• Internet and television services

• Pest control

• Landscaping

• Snow removal

• Hot-tub or pool maintenance

• Supplies and linens

• Furniture replacement

• Appliance replacement

• Routine repairs

• Major maintenance

• Permit and licensing fees

• Accounting or bookkeeping

• Platform fees

• Capital reserves

A property may generate impressive gross revenue and still produce limited cash flow after every expense is paid.

Is the Property Suitable for Guests?

Evaluate the property from both an ownership and guest-experience perspective.

Consider:

• How many guests can legally and comfortably sleep there?

• Is there adequate parking?

• Are the roads steep, narrow, or difficult to access?

• Is the property accessible during winter weather?

• Is the driveway shared or private?

• Does the property use well water or a septic system?

• Is the internet reliable?

• Is cellphone service available?

• How far is the property from major attractions?

• Can emergency vehicles easily reach it?

• Are there potential noise or neighbor concerns?

In mountain and rural markets, accessibility can significantly affect bookings, reviews, maintenance, insurance, and resale value.

What Is the Property’s Physical Condition?

Short-term rentals may experience more frequent use and wear than traditional second homes.

Determine the age and condition of the:

• Roof

• HVAC system

• Water heater

• Electrical system

• Plumbing system

• Appliances

• Decks and railings

• Hot tub or pool

• Well and septic system

• Foundation

• Drainage system

• Windows and doors

A professional property inspection is important, but investors should also prepare for ongoing wear and tear.

Furniture, mattresses, linens, appliances, game-room equipment, hot tubs, and other guest amenities may require frequent repair or replacement.

Can the Property Be Properly Insured?

Do not assume a standard homeowners insurance policy will adequately cover short-term rental activity.

Obtain an insurance quote before becoming fully committed to the purchase.

Ask about coverage for:

• Short-term rental use

• Guest injuries

• Loss of rental income

• Fire damage

• Water damage

• Flood exposure

• Wind or storm damage

• Pools and hot tubs

• Decks and fireplaces

• Extended vacant periods

• Property-management requirements

The availability and cost of insurance can materially affect the property’s cash flow and financing.

How Will the Property Be Financed?

Speak with a mortgage professional experienced in short-term rental and investment-property financing before making an offer.

Important financing questions include:

• How much down payment will be required?

• Can anticipated rental income be used to qualify?

• Will the property qualify for DSCR financing?

• What DSCR requirement applies?

• How will taxes, insurance, and HOA dues affect qualification?

• How many months of reserves will be required?

• Is there a prepayment penalty?

• Can the property close in an LLC?

• Are seller credits permitted?

• What happens if the appraisal is below the purchase price?

• How much total cash will be required to close?

In addition to the down payment and closing costs, the investor may need money for:

• Furnishings

• Repairs

• Inspections

• Permits

• Initial supplies

• Utility deposits

• Insurance

• Operating reserves

• Emergency reserves

Knowing the total cash requirement before making an offer can prevent unpleasant surprises later.

Can the Property Survive Lower Revenue?

Stress-test the investment before committing.

Ask yourself:

• What happens if rental revenue is 10% lower than projected?

• What happens if revenue is 20% lower?

• What if insurance or property taxes increase?

• What if the property needs a major repair?

• What if the property is vacant longer than expected?

• What if regulations change?

• Could I continue making the payment during a slower season?

A strong investment should not depend on every projection working perfectly.

Review the Deal Before Making an Offer

A great short-term rental is more than a beautiful property. It is a properly researched business investment supported by realistic income, manageable expenses, appropriate financing, and sufficient reserves.

Before making an offer, send me the property address.

My team and I can help you review the potential financing, projected income, required cash, reserves, and overall numbers before you become emotionally and financially committed.

Submit your property for an STR deal review at LisaStepp.com.

Lisa Stepp-Seritt
Senior Loan Officer
NMLS #680403
Mpire Financial, NMLS #2108504
Equal Housing Opportunity

This information is provided for educational purposes only and is not legal, tax, insurance, real estate, or investment advice. Consult the appropriate licensed professionals regarding your specific property and transaction. All loans are subject to credit approval, property approval, investor guidelines, and applicable program requirements. This is not a commitment to lend.