There is much debate in Charleston SC around the merits of rentals deemed "short-term" or vacation rental. On the barrier Islands it is more accepted, perhaps because the population was always more transient in nature. Whatever the outcome of this debate, these vacation rental properties in Charleston can be considered as an "investment asset class" with their own advantages and lifecycle. So just what should be considered when looking at this property type as investments?
Let us speak in generalities here. In an earlier blog, we outlined a "pecking order" for gross return when investing in residential real estate. Return potential, from lowest to highest, would be:
- Single family - Unfurnished, long-term rental
- Long-term rental by bedroom - Unfurnished, student/food & beverage staff
- Monthly rental - Furnished
- Short-term or Vacation rental - Furnished
Short-term rental, typically advertised as vacation rental and, based on location, is offered by the night or by the week, has the highest maintenance load and requires furnishing to a high standard to achieve those top rental rates. With an accelerated turnover rate, this type of rental property takes a beating and it makes sense to have it managed by a professional management company. Estimate 20% of the gross rental income going towards operating expenses and another 20% for the management and booking facility. That sounds expensive, but by using a good management agency, you will get high occupancy rates, as they will syndicate your listing across various booking platforms and provide on-call maintenance as part of the service.
So let us quantify the returns with two actual examples from our own portfolio:
Downtown, 1,400 sq ft, 3-bed, historic home in Elliottborough, Zoned LB (Limited Business)
- Long-term rental: $2,300-$2,500 per month, $28,000 annually
- Student rental: $2,750-$3,000 per month, $36,000 annually
- Short-term rental, furnished: $350 per night at 70% occupancy = $7,350 per month. $88,000 annually (Gross Rental)
Folly Beach, 2,700 sq ft, condominium on beach front in the Commercial District (DC)
- Long-term rental: $4,000 per month, $48,000 annually
- Short-term rental: $20,000 per month [in season] $4,000 per month [out of season] based on 70% occupancy. $140,000 annually (Gross Rental)
The acquisition price of the property makes a significant difference to the net returns achieved after all costs have been settled. The location of the property makes an equally significant effect on the seasonal rental it will achieve, and the ongoing run costs. And when it comes to occupancy rates, how you manage and advertise the property will make or break you. What we would consider being the right choice is a little involved, but not difficult once you realize the rules of the game.
So where do you start looking for properties? There are 4 main beach areas - Isle of Palms, Wild Dunes, Folly Beach and Kiawah/Seabrook Islands. Sullivans Island discourages short-term rentals, so we can leave that one out. Management in Kiawah/Seabrook Islands can be quite expensive with some firms charging 45% of gross revenue so we'll leave that one out as well. Downtown options are generally restricted to limited neighborhoods and streets and have come under greater scrutiny from zoning officials, so challenges do exist.
Once you find the ideal area to purchase your short-term rental investment, there are three large factors left to consider:
- Make sure you do your due diligence when studying the marketplace as zoning and HOA or neighborhood restrictions will limit your options in most areas. Properties currently rented "short-term" may be doing so illegally, or if they have historic grandfather rights (legal none conforming) then this may not transfer on sale.
- Look at finance options. Many larger banks do not acknowledge short-term rentals as an asset class and in turn, will not lend in that space. Others will offer good rates, but a low Loan to Value (LTV) ratio.
- Have your business plan in place and make sure that you research the implications of a market downturn thoroughly. If the option in a downturn is to convert to a long-term rental then make sure the debt coverage is sufficient to maintain mortgage payments.
Get it all right and short-term rentals as investment will provide a handsome reward well ahead of what is expected from other asset classes. Additionally, you'll have a home for your own vacations free of charge and an appreciating asset in its own right. We also know of clients who use this to cash flow their retirement home until they are ready to move in themselves.
Note: We operate one of the most active specialty short-term and concierge rental management companies in Charleston and one with a sizeable (and growing) portfolio of our own properties. Should you be interested in learning more about the benefits of this profitable investment class, or how a proper management company can make a difference, we are happy to share our expertise with you.
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