Investing in a short-term rental (STR) property in the Smoky Mountains is an exciting opportunity. Like all investments, however, it’s not without risks. While there is strong potential for rental income and property appreciation, many new investors underestimate the challenges of owning and managing STRs. Here are some of the biggest mistakes STR investors make and how to avoid them:
1. Buying Emotionally
It’s easy to get caught up in the excitement of buying a beautiful property. However, making decisions based on emotion can lead to costly regrets for STR investors. The key is to stay objective and carefully analyze whether the property is a smart investment instead of just a feel-good purchase. Some factors to consider include property condition, rental income potential, location, amenities, price, and others. Use facts, not feelings, to help you make the right decision.
2. Ignoring Zoning Laws and Regulations
One of the biggest mistakes STR investors make is ignoring short-term rental zoning laws and regulations. This mistake can have serious consequences. You can face hefty fines, legal action, and property closure if you violate these laws and regulations. Instead, make sure you understand where STRs are permitted and only operate a rental property within the correct areas.
3. Skipping Market Research
If you want a successful investment, don’t make the mistake of investing in a short-term rental property without doing thorough market research. Some of the STR data you should look into include typical occupancy rates throughout the year, average nightly rates for similar properties, booking patterns, competition, and guest preferences. It’s a good idea to check with local property management companies, local real estate agents, and local tourism data before you make an offer.
4. Skimping on Amenities
Many STR investors design a beautiful space but fail to add the amenities that guests are looking for. It’s important to equip your rental property with amenities that will make your STR stand out. Think about your ideal guest’s needs, and invest in features that meet those needs. Examples may include comfortable mattresses, fine linens, toiletries, hot tubs, pools, well-equipped kitchens, etc. These amenities will make the rental experience more enjoyable and encourage bookings.
5. Underestimating Costs
A common mistake that STR investors make is underestimating costs. The purchase price of the property is just the beginning. There are many other expenses that new investors may not expect. For example, furnishing a short-term rental property can be a major upfront cost. Quality furniture, linens, kitchen essentials, decor, technology, etc., can really add up. Once your STR is up and running, you will also have to pay ongoing costs, such as insurance, HOA fees, property management fees, regular maintenance, deep cleaning, winterization, snow or leaf removal, and others.
6. Self-Managing Rental Properties
Many new STR investors plan on saving money by self-managing their short-term rental property. In order to self-manage, you need to be available 24/7, handle bookings, marketing, and turnover, and have people you trust to handle issues when you’re not around. While this works for some owners, most can benefit from hiring a property manager. A property manager will handle guest questions, emergency calls, coordinating with cleaners and maintenance teams, and other responsibilities.
7. Investing in the Wrong Property
All short-term rentals are not created equal. A property that appeals to an STR investor may not necessarily appeal to guests. It’s important to think like your guests so you can invest in the right property. Guests tend to be turned off by properties with limited parking, steep roads, small decks, etc. Instead, look for properties with easy access to activities, plenty of parking, ample outdoor spaces, comfortable indoor spaces, and attractive amenities.
8. Ignoring Seasonality
First-time STR investors often make the mistake of financial planning based on peak season performance. This can lead to unrealistic expectations and budgeting problems. Seasonality has a significant effect on the short-term rental market, with peak, shoulder, and off-seasons. In the Smoky Mountains, summer and fall tend to have very high demand for STRs, while some other months can see very little demand. It’s important to plan for these seasonal swings to avoid cash flow problems.
9. Not Having a Contingency Plan
One of the biggest mistakes made by STR investors is not having a contingency plan. Without a backup plan, unexpected challenges can wreck your investment. It’s important to maintain a cash reserve for emergency repairs and have backup plans for key systems, such as portable heaters. Build relationships with trusted service providers so you can get things fixed quickly. You may also consider purchasing warranties for major systems and appliances. Additionally, insurance designed specifically for STRs is necessary to cover situations that regular homeowner insurance won’t.
10. Relying on a Single STR
Relying on a single STR is risky. If a problem arises, your entire rental income could be in jeopardy. STR investors need to protect their investment from unexpected market changes, and a great way to do this is diversification. Consider diversifying with different types of properties, multiple locations, and mixed rental strategies so you can maintain rental income even when something unexpected happens.
Become an STR Investor
Are you ready to embark on your short-term rental investment journey? The Smoky Mountains market has tremendous potential for successful STRs. Find out more about how to invest in the Smokies so you can take the first step toward building wealth through real estate!
