By Dr. Jim Dahle, WCI Founder
I consider a small short-term rental empire to be the fastest route out of medicine. Due to the increased profit available in this hotel alternative, the investment returns can be such that one can exit medicine within just a few years, assuming your student loans have been paid off. Five years is an aggressive but not an unreasonable target. How can that be? Let's talk about it and some of the other important considerations about short-term rentals.
What Is a Short-Term Rental?
A short-term rental is renting out a house, condo, or townhome for periods generally less than one month and averaging about seven days. These properties are often advertised on Airbnb, VRBO, or on their own websites. Long-term rental landlords are offering housing. Short-term rental hosts are running a hotel business.
Why Is There So Much Money in Short-Term Rentals?
All the same characteristics of real estate exist just as much in short-term rentals as in long-term rentals. There's insurance and property taxes and mortgages and depreciation and vacancies and repairs. The difference is on the revenue side. The revenue stream is more uncertain, and the property will often be unrented for many nights during a given month. However, the amount of money you get from each night it is rented is dramatically higher with a short-term rental.
Guests (rather than tenants) are comparing the price to a hotel room rather than a rental house. A rental house might rent long-term for $2,000 a month. But a hotel room might rent for $200 a night. If your two-bedroom short-term rental is priced at $300 a night, prospective guests will think “For only 50% more, I get TWO rooms plus a kitchen, living room, and garage.” They don't think, “Wait, these guys are charging me 4 ½ times as much as they could charge a long-term renter.”
Thus, the revenue from a short-term rental—even one only rented for half the month—is at least twice as high as from the same place rented long-term.
More information here:
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The Expenses Are Higher, Too
Before you get all googly-eyed looking at all that extra revenue, consider that the expenses are higher, too. You've now got people “moving” in and out two or three times a week, generating some additional wear. Since you are constantly looking for new guests, the costs of marketing are much higher. Airbnb and VRBO charge fees. The place needs to be cleaned in between each set of guests, too. That cleaning fee you can charge isn't pure profit (at least not all of it). If you don't want to manage it yourself, you will find that the cost is dramatically higher than the 5%-10% you might pay for a long-term rental. It can be as high as 30% or even 35%.
And vacancies aren't rare; they are the norm. Price your rental wrong or advertise it poorly, and it might sit empty for three out of four weeks. In some areas, like beach towns or ski towns, there is a seasonality to short-term rentals, and you might have twice as many vacancies even though you're charging half as much in the off-season. But most of your expenses will be exactly the same.
The biggest expense probably comes from the fact that long-term rentals are generally unfurnished and short-term rentals are completely and meticulously furnished. You'll need art, furniture, electronics, and maybe even some treats. You'll be paying for the Wi-Fi (it better be fast) and the other utilities. There are also often some “extras” to help distinguish your property from others. These might be snowshoes, snorkels, or surfboards—all of which have a tendency to be damaged or disappear and need replacement. You will need enough money to put down a decent down payment to ensure cash flow positivity, and you'll need additional capital to furnish the place. If you go to sell it or convert it to a long-term rental, you'll take a huge loss trying to sell all those furnishings.
Risks Are High
You face a lot of competition for overnight lodging. Not only are there more and more people trying to do short-term rentals all the time, but many of them are only on the market for the “good months” of the year. Plus, there is the constant threat from hotels and motels. The hospitality game is their bread and butter, and they can put up serious competition. The competition can be cutthroat.
A bigger worry is legislative risk. Many local areas view short-term rentals as contributing to their housing shortage, and they are passing ever stricter rules governing their use. Whether it's the city council, the state legislature, the local HOA, or just the neighbors, there will be people who don't like how you're earning your profit.
And then things happen. Like pandemics, where people just stop traveling altogether. Perhaps the best backstop to a short-term rental is if it can still be viable as a long-term rental. If the price you're paying for the property means it is only viable as a rarely vacant short-term rental, there's a good chance it won't work out for you.
The Short-Term Rental Loophole
One great aspect of short-term rentals is that one can qualify to use the depreciation (including bonus depreciation) to offset active income far more easily than with long-term rentals. With long-term rentals, you have to reach Real Estate Professional Status, requiring a minimum of 750 hours in a year. With short-term rentals, that minimum is only 100 hours, which is actually pretty easy to reach if you're managing the property or properties yourself.
Thus, it can be a great part-time gig for the non-physician member of a couple, and the depreciation can offset some or all of the earned income from the physician. This additional tax benefit adds to the overall return of the venture.
More information here:
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Can This Really Get Me Out of Medicine?
At the beginning of this post, I said that short-term rentals are the fastest reliable way out of medicine. Here's how that works. First, you'll need to manage the properties yourself, at least for a while. You simply can't give up 30% of the revenue to a property manager and expect this to be as awesome as it can be. With efficiencies and systems, you can minimize the work involved. You might even do the cleaning and handy work yourself in the beginning, just to see what's really involved.
Done properly, it is entirely possible to have a cash-on-cash return of 20% on a short-term rental portfolio. If you have $500,000, you can use leverage to buy four separate $500,000 properties with a 20% down payment each (with the other $100,000 going toward furnishings). You manage it yourself, and you can expect cash flow of perhaps $100,000 a year that can pay for your living expenses. Most physician families can come up with $500,000 of capital within five years of paying off their physician loans. Many can do it even faster.
That 20% yield isn't the only source of profit either. The mortgages are being paid down. The properties are appreciating. Perhaps the depreciation is reducing your earned income tax bill. Even if you want more than $100,000 in income to live on, it won't take that much longer to have eight, 12, or 20 of these. At a certain point, your profit will have to drop as you hire out management, but that has its advantages too since it gives you the freedom from a job that you were looking for in the first place.
The path isn't as easy as it was a few years ago when nobody was doing short-term rentals. There is now a lot more competition and certainly more regulation than there used to be. But carefully chosen properties can still provide fantastic returns, albeit with more risk and certainly more work than a portfolio of index funds or even other forms of private real estate.
Do you feel ready to learn more about real estate? WCI's No Hype Real Estate Investing course includes an entire section on short-term rentals. Taught by Dr. Jim Dahle and more than a dozen other experts, this course is packed with more than 27 hours of content, and it gives potential investors the foundation they need to learn about all the different methods of real estate investing. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course.
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Have you ever considered a short-term rental property? If so, did you decide against it, or did you go for it? What else should we know about short-term rentals?
Can you speak more on the fusion of an investment and a vacation property? Or do you believe it’s either one or the other?
It’s not science but I was trying to think of it in thirds.
1/3 : “mortgage”,
1/3: short term income
1/3: equivalent annual costs of vacation
So if my annual mortage plus escrow costs is 45K. I think of it as a 15-20K payment to mortage. 15-20K payment instead of what I would typically spend on hotels and rental cars in a year. The final 5-15k will hopefully be covered by short term income. Seems like nothing when I look at it like that.
I have owned a ski condo for about 20 years. We have used and rented it throughout that time. It is actually in a condo-hotel buildings, so we had short term rentals before Airbnb,
One consideration to your math is when your own family wants to use it. If you want Christmas, New Years, and all Holiday weekends, but nothing else, that can be more than 50% of annual revenue for less than 10% of the days in the year. In the years that our kids were on ski team, we ‘only’ wanted most weekends in the actual ski season. That was definitely more than 50% of annual revenue. Ours is in a resort that is also attractive in Summer. We could have stayed there all month in April, May, September or October without denting the revenue. But we never did. Aspiring novelists aside, there is a reason it is called the off season.
Look at any HOA fees. Look at any chance of upcoming assessments.
We bought it right before our youngest child was born. In the seasons of parenting that have gone from then until now – our kids now use it to take their friends, and we use it to take the dog – we have gone through years where it paid for itself, and years where we had plenty of costs over and above the rental revenue.
On a positive note, it has been a major part of our family story, and it is our only investment that we get to actually use and enjoy.
Appreciate the personal experiences. Great points.
I think it’s generally a mistake to mix an investment property with a second residence. Almost always people just do this to justify buying another home they can’t actually afford. It’s bought as a second home (heavy emotional component) rather than an investment property (cold hard numbers).
If you’re not going to live in it for at least 3 months a year, you’re probably better off renting it. And keeping your investments separate.
DOes anyone know if you can airBNB one’s house in Manhattan? I had heard Manhattan has cracked down on AirBNB
You do have to follow local regulations, but you can still rent an AirBNB in Manhattan so I presume new ones can still get registered with local authorities. A quick Google search found this:
https://portal.311.nyc.gov/article/?kanumber=KA-03559#
Wife and I own/manage 3 STRs and it has mostly been a positive experience. Pro Tip – have a great working relationship with a local plumber or learn how to do small fixes yourself. We’ve never had a toilet issue, but some people put things down the drain like it’s a mini trash can.
Regarding the financials, keep the renovation costs in mind when running your numbers. If you aren’t refinancing after the renovation, this can be a big chunk of money you will not see again for a while.
Also, regarding local regulations, I would encourage interested investors to speak with city council or zoning authorities about current and potential future regulations. We started a STR task force in our local community to create a space for open dialogue between owners and policy makers.
I love this article and you are spot on in your assessments regarding the amount of work, time, effort, and returns expected with STRs!
Similar to the ENT physician above, we own three short-term rentals (STRs) in markets we personally enjoy vacationing in, along with a portfolio of nine long-term rentals and one multifamily property. The STRs have been highly profitable, each generating roughly a 40–50% cash-on-cash return.
Our most recent (and least profitable)property is in Fort Lauderdale. We purchased it for $800K with 10% down at a 7.1% interest rate, invested about $50K in renovations, and had roughly $160K total in before launch. Monthly expenses, including cleaning, utilities, hot tub and pool maintenance, pricing software, and noise monitors, run about $8K (higher with more bookings). In year one, gross bookings were about $155K, giving us a ~35% cash-on-cash return. This is excluding tax benefits, appreciation, and principal paydown which I would say adds an additional 10-15% margin.
The downside is that this property ranks in the top 1% of its market (compared to life properties) for quality and guest experience because we invest heavily in making it unique. That level of service is essentially another job. My wife and I are both emergency physicians, and I’m also in hospital administration – and if the hot tub breaks during a shift, resolving it quickly can be extremely disruptive.
Our reviews are consistently glowing, with repeat guests who value the concierge-like service we provide directly contributing to our margins. However, attempts to delegate to virtual assistants or management companies have fallen short; when quality drops, so do rates, reviews, and overall property condition.
In a physician mastermind group of about a dozen STR owners, we’ve found that once you exceed three to four properties, maintaining quality becomes challenging, and ROI per property declines.
That said, we take our family to each home once or twice a year, creating lasting memories while generating significant side income. Still, I find STR management more time-consuming and less “passive” than working as an ER physician, although I do genuinely love my clinical work and only work 5–6 shifts a month.
Here’s my listing to give you an idea of the type of properties we have:
airbnb.com/h/poinsettiapalms
Sounds like yours are particularly profitable, nice work.Thanks for sharing your experience.