10 Things You Should Know Before Starting a Vacation Rental

If it seems like short-term rentals have popped up everywhere, it's because they have. Airbnb now has more than four million hosts on its platform and more than six million active listings worldwide, while Expedia's VRBO has another two million listings around the world.

Demand for short-term rentals is strong, and renting out a room or an apartment is a great option for a side hustle. But if you're thinking about doing it, make sure you're getting the full picture. Here are 10 things to know before you start a vacation rental.

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If you're looking for passive income, you're better off sticking with dividend stocks or a similar kind of investment. Operating a short-term rental can create a steady revenue stream, but it's not hands-off work.

Unless you outsource the property management, you'll be responsible for communicating with renters. That includes resolving issues that arise while they're staying at your property and ensuring the place is clean and well maintained. The management requirements could be minimal if you're well prepared, but running a vacation rental is still a responsibility.

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It's impossible to know how much money you'll make with your vacation rental, but it's worth considering before you get your space ready. You can learn what similar nearby listings are charging by checking out sites like Airbnb. In fact, Airbnb has a tool for estimating how much money you could make in your area.

Other third-party data sites like AirDNA can also provide useful information, like your area's average nightly prices. You'll want to consider any possible seasonality in your area, too, focusing your energy on maximizing income during the high season.

It's easy to just multiply the average nightly rate by 365 and think that's how much money you can make on your vacation rental. But you'll also have to consider any additional costs.

Having a vacation rental will mean an increase in your utilities, and you may want to add new features like a security system or step up your landscaping. The place will also need to be cleaned between guests, which means paying a cleaner unless you're willing to do it yourself.

To get up and running, you may need to spend money on home furnishings, so you'll also want to factor that into your calculations.

If you're planning to rent out a place year-round -- or just your own home when you travel -- you'll likely want to give a set of keys to a friend or neighbor who can check on your place if need be.

Similarly, if you're planning on taking a professional approach to having a vacation rental, you'll want to have an arrangement with a house cleaner who's available to clean between rentals. It's also a good idea to have a backup plan, like another cleaning service available on demand when your regular cleaner can't make it.

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Before you hang your short-term-rental shingle, you'll want to make sure you're not running afoul of any local laws. Some towns and cities restrict short-term rentals or require a permit to operate one.

In that case, you'll want to know what's required before you open one. You may even need a local official to sign off on the rental.

If you live in an HOA or apartment building, you'll also want to ensure the rules allow short-term rentals and whether there are any requirements.

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Depending on a number of factors, your short-term rental may qualify for different tax breaks. For example, the pass-through deduction allows you to deduct 20% of your rental net income, and you'll be able to write off certain expenses like depreciation. While the tax break shouldn't be your primary concern, it's worth considering when you forecast your income from the rental property.

On sites like Airbnb, your reviews and ratings are key to attracting guests. So, you'll want to make sure you're prioritizing the guest experience, which means providing a clean and comfortable place, responding quickly to any guest concerns, and even offering tips on local activities. And charging a fair price is also important. If you're conscientious about providing a good guest experience and your place is appealing, you should earn good reviews.

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If you find that running the vacation rental is too much of a hassle, you can look to a short-term management company like Vacasa to help you out. Vacasa provides management services for more than 35,000 short-term rentals. You can also consider working with a local property management company or paying a caretaker to help out when you're unavailable.

Even if there aren't any regulations, you may want to give your neighbors a heads-up, depending on how close they are. Though you may not be breaking any rules, a nosy neighbor could spoil your business and the experience for your guests. You'll want to make sure your neighbors don't make any noise complaints to the local police, for example, or cause trouble in other ways.

Short-term rentals don't require the same level of scrutiny as long-term tenants, but you'll still want to make sure you know who's staying at your property. Just like you want to avoid a bad review, you'll want to avoid bad guests, especially anyone who might trash your place or get you in trouble with your neighbors. It's also a good idea to have a list of rules, such as quiet hours, so your expectations for your guests are clear.

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If you're thinking about starting a vacation rental, now seems like a great time to do it. The global travel industry is in full recovery mode after two summers spoiled by the pandemic. Platforms like Airbnb are growing rapidly, and the long-term outlook for travel looks good, too, as the rise of remote work should encourage more travel. Operating a short-term rental could prove to be quite lucrative for you, especially if you live in a place regularly visited by tourists.

Jeremy Bowman has positions in Airbnb, Inc. The Motley Fool has positions in and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.