How-To Guide to STRs as a Way to Invest in Real Estate

Key Takeaways

• Short-term rentals are generally properties that are rented for fewer than 31 days to the same tenant. 

• Because they can charge more and rent the property out more frequently, many STR investors profit more than LTR investors by renting for shorter periods.

• Purchasing the right short-term property in an attractive market can mean the difference between a profitable investment and one that struggles to break even.

Investors interested in participating in the real estate market would do well to understand short-term rentals, or STRs, and investing strategies related to these properties. After all, STRs offer potentially lucrative opportunities to maximize earnings.

To help, here is a how-to guide to STRs as a way to invest in real estate, plus alternative ways to enter the market.

What is STR?

Short-term rentals are generally properties that are rented for fewer than 31 days to the same tenant. 

Such real estate commonly includes second residences that are rented part of the time, a spare bedroom rented out of a main residence, or a furnished apartment or condo. It also includes vacation properties, such as an Airbnb business, that are listed full time.

The most common way for investors to enter the real estate market is through STRs, in addition to long-term rentals (LTR). 

STR vs LTR: What’s the Difference?

There are distinct differences between short-term rentals and long-term rentals (LTRs), chiefly:

— Length of stay. The average stay of an STR tenant is between six and seven nights. By contrast, an LTR tenant usually rents for at least a year.

— Governing rules and regulations. There are specific rules and guidelines that must be followed for each real estate type.

— Amenities. While short-term rentals are furnished, long-term rentals are not.

STR vs LTR: Which is the Better Real Estate Investment Strategy?

Because they can charge more and rent the property out more frequently, many STR investors profit more than LTR investors by renting for shorter periods. In addition, STRs can potentially be a good way to start investing in rental properties. 

Note, though, that constant turnovers require a lot of work and marketing. And because STR income is comparably less consistent, gaining financing may be more challenging.

High Rental Demand

Currently, there is strong demand in general for short-term rentals, largely owing to population growth, limited housing inventories, and an influx of young professionals relocating to cities for employment opportunities. Such demand is driving up rental prices and producing a competitive rental market for property managers and landlords.

In terms of pricing strategies, the approach for STRs should be flexible and always evolving. Investors should pay attention to new information that can impact the property’s nightly rate. That should include what rivals are charging and what is going on in the market. Other key factors are expenses and seasonality.

Long-term pricing strategies are similar but are not as dependent upon tourism levels and need not consider costs related to furnishing.

How to Start Investing in STR

In theory, almost any residence can be used as an STR. Many investors, though, opt to buy STR properties that are already being rented out.

There are general steps investors can take to buy STR real estate, as well as some considerations.

The first step is to identify the ideal STR market, factoring in the presence, or lack thereof, of nearby popular tourist attractions and amenities, as well as rental demand. The best STR markets also have robust demand from business and/or leisure travelers. They also can be within a day’s commute from a major metropolitan area.

The investor must also determine the rules and regulations of the chosen market. For example, some cities that rely upon tourism discourage the renting of real estate for fewer than 30 days at a time. Frequently, short-term rental investors must gain a business license. They also may have to charge tenants a rental or lodging tax for remittance to the local government.

Further, short-term real estate investors should conduct a thorough STR analysis. To facilitate it, they can use a property finder tool, including cap rate, expenses, occupancy rate, cash flow, and cash-on-cash return.

When comparing STR-related data, it is helpful to have comp sets, forecasts and budgets, and market insights. Any strategy should factor in short-term rental data across occupancy rates, pricing, and demand.

It follows, then, that deciding on the ideal short-term property involves consideration of certain metrics. Those include location, supply and demand, seasonality, occupancy rate, and anticipated average daily revenue.

Purchasing the right short-term property in a comely market can mean the difference between a profitable investment and one that struggles to break even.

Alternative Ways to Invest in Real Estate

While STRs and LTRs are how most people invest in real estate directly, there are passive ways to do so that can grow wealth over time – without the hassles of renting.

And with Yieldstreet, one of the leading alternative investment platform on which $4 billion has been invested as of 3/31/24, such ways require no market expertise. Nor are they hard to get into.

Yieldstreet offers an array of private-market offerings – it has the broadest selection of asset classes available – which are generally less volatile owing to their low correlation to continuously fluctuating public markets.

While no investment is without risk, the REIT makes debt and equity investments spanning commercial properties across key domestic markets and property types. This helps to boost the fund’s ability to produce risk-adjusted returns. 

In all, Yieldstreet has closed some $900 million in commercial real estate deals over 100 transactions.

Real estate remains a popular way to generate income and increase wealth. The market also serves another essential purpose: portfolio diversification. Building a more modern portfolio of varying asset types can mitigate overall risk. It can also shield against inflation and potentially improve returns.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially attractive gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

While STRs tend to have greater operating expenses, benefits of ownership can include higher gross rental incomes annually as well as more usage flexibility.   

Make sure to first perform due diligence on the property of interest, but be mindful of local laws and regulations, rental comps, and economic trends, including details such as rising interest rates or inflation.  Seeking a financial professional may be a wise move.