Your guide to short-term rental investing

The Numbers

Investing in real estate brings four major benefits: cash flow (passive income), equity accumulation, appreciation, and tax benefits.

This combination acts like a rocket ship on your journey to financial independence.

With short-term rentals, the financial benefits are even greater. Rental income is much higher, more than offsetting the costs of operating a property as an Airbnb. Additional tax savings are available to investors, including depreciation of all furniture on the property. Best of all, the market undervalues short-term rentals relative to similarly priced long-term properties.

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Cash Flow

Income - Expenses = Cash flow

In simple terms, cash flow is the income you earn from your property minus your expenses for operating the home. With short-term rentals, an investor generates income from guest stays. The most common expenses include (but are not limited to) mortgage payments, taxes, homeowners insurance, utilities, management fees, and operating expenses.

The example below highlights what a short-term rental’s cash flow might look like in a typical month.

INCOME
Rental Revenue
$4,500
EXPENSES
Mortgage at 5%
$1,208
Property Tax
$300
Insurance
$105
Utilities
$150
Management Fee
$1,125
Repairs & Maintenance
$225
Operating Expenses
$225
Cash flow
$1,162

*based on $300k property, 25% down payment, mortgage at 5%, 1.2% property tax, $250 nightly rate at 75%
occupancy, 5% operating expenses, 5% repairs and maintenance, 25% management fee

Equity Accumulation

You may have noticed that cash flow is net of mortgage payments. However, your total return includes your accumulation of equity in your home. As you pay down your mortgage using your rental proceeds, your home equity grows.

Mortgages typically consist of both principal and interest and are amortized, which describes how the loan is paid down over its lifetime. Although total monthly payments are constant throughout the duration of the loan, the breakdown of principal and interest shifts. This happens because interest is assessed on the balance of a loan, which decreases over time. Many investors pay a little bit extra toward principal every month to help shrink the 30-year timeline and build equity more quickly.

In this example, here’s what equity accumulation looks like over time.

  • 5 years: $18,385
 
  • 10 years: $41,980
 
  • 30 years: $225,000

Amortization payments to principal vs interest

*based on 300k property, 25% down payment, mortgage at 5%, 1.2% property tax, $250 nightly rate at 75% occupancy, 5% operating expenses, 5% repairs and maintenance, 25% management fee

Airbnb average income
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Appreciation

Appreciation is defined as the value of your home increasing over time and is one of the many advantages of owning real estate. Experts benchmark appreciation at 3%, although this number is much higher in certain markets. Homes in many Keyturn markets have appreciated 4-7% annually over a 20-year time horizon, more than double the national average.

Most Keyturn investors purchase short-term rentals with a mortgage. Borrowing to purchase a home gives the owner leverage, amplifying expected returns from appreciation.

In our example, the purchase price on the home was $300,000.

  • Assuming the home appreciates 3% each year, the home’s value increases by $9,000 in year 1.
 
  • Because the investor obtained a mortgage with 20% down, their initial investment was $60,000.
 
  • Therefore, the investor’s return from appreciation was 15% [$9,000 appreciation / $60,000 initial investment].
 

If we base our estimated returns off of the historical appreciation in core Keyturn markets (5%), a $300,000 home will appreciate by $15,000 in the first year, yielding a 20% return on investment in year 1 from appreciation alone.

Appreciation also compounds over time. For each additional year you hold your home, the effective return should be higher.

*Appreciation is not guaranteed and past performance is not an indicator of future results.

Tax Advantages

Among the biggest — and least understood — advantage of investing in short-term rentals is the wide array of tax benefits. Short-term rental owners are often able to generate cash flow entirely sheltered from taxes due to available deductions.

Tax benefits arise from property owners deducting related expenses from their rental income. These deductions include depreciation of the home, mortgage interest, management expenses, and more.

There are also more advanced tax strategies to employ that can drive additional tax savings with short-term rentals. Cost segregation and accelerated depreciation allow you to deduct furnishing costs and other expenses on an accelerated timeline.

When it’s time to sell, owners are able to defer capital gains taxes by using a 1031 exchange.

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Projected Value

Combining the four advantages to owning short-term homes, here are the projected values of our sample property over various holding periods.

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