If you’ve recently purchased a short-term rental (STR) property and are already feeling the financial squeeze, you’re not alone. Many investors who bought within the last 6-8 months are struggling, mainly due to high interest rates and outdated financial analyses based on 2022 market conditions.
But don’t worry, there are ways to set yourself up for success and avoid falling into this financial trap. The key is preparation and understanding your financial position before making a purchase. Let’s dive into some essential budgeting and financial strategies to keep your STR business thriving.
1. Can You Actually Afford This?
One of the biggest mistakes people make is buying a rental property they can’t truly afford. If you’re stretching yourself thin just to cover the down payment, you might not be ready to invest. Owning an STR isn’t just about buying a home, it’s about sustaining it.
Make sure your finances are solid before taking the leap. This means:
- Having a strong cash reserve
- Understanding your true buying power
- Being honest about your monthly expenses
2. Cash Reserves: The Lifeline of Your STR Business
Short-term rental ownership is unpredictable, and you need a financial cushion to weather the storm. This means having at least six months of reserves ready to cover mortgage payments, utilities, and unexpected costs.
And reserves don’t always have to be in cash. They can be:
- Home equity
- A business line of credit
- Stocks or other liquid assets
Just make sure you have quick access to funds in case your STR isn’t generating income right away.
3. Timing Matters, Both for Buying and Renting
The best time to buy a property isn’t always the best time to rent it out. You could close on a home in winter, but if that’s the off-season for your area, you might not see consistent bookings for months.
Remember:
- You’ll likely be covering the mortgage out-of-pocket for 6-7 months before renters start coming in consistently.
- If your location is seasonal, prepare for slow months with a financial buffer.
4. Budgeting for More Than Just the Home
Buying the property is only part of the equation. STR properties require furnishing, maintenance, and upgrades to stay competitive. Before you purchase, make sure you’ve factored in the cost of:
- Furniture and decor
- Appliances and amenities
- Initial marketing and professional photos
- Potential renovations or repairs
Most of these expenses need to be covered before you even list the home, so be sure to account for them in your budget.
5. Understanding Loan Interest Rates and LLC Purchases
Many people are getting caught with 8% loan interest rates, that’s a huge difference from what we saw in previous years. If you’re financing your STR, be sure to understand how to navigate this market.
- Interest rates may be higher if you buy under an LLC, but it can provide liability protection.
- Consider working with a financial advisor to determine the best structure for your investment.
- Factor in the additional costs that come with a higher interest rate so you don’t end up in a financial pinch.
6. Be Honest About Your Financial Position
It’s crucial to be realistic about where you stand financially. If a major economic downturn (like another pandemic) were to happen, would you be able to survive a full year without rental income?
Many people qualify to buy an STR, but not everyone is prepared for the financial commitment that comes afterward. Make sure you:
- Have access to emergency funds
- Are aware of market trends and potential risks
- Can float the property financially if needed
Final Thoughts
Owning a short-term rental can be a lucrative investment, but only if you approach it wisely. The key to success isn’t just buying a property, it’s ensuring you can sustain it long-term.
By budgeting carefully, maintaining a financial safety net, and understanding market timing, you can set yourself up for a profitable and stress-free STR business.
So before you take the plunge, ask yourself: Are you really financially ready? If the answer is yes, go for it! If not, take the time to build your reserves and come back stronger. Your future self will thank you!
source: 54 – STR Success – Mastering Finances and Budgeting for Your STR Business