European Short-Term Rental Business: Your 7 Step Entry Plan
The political and, consequently, economic instability of recent years is making investors increasingly consider how to preserve their assets and achieve the much-discussed resilience in chaotic conditions. One of the most reliable tools for this today appears to be investing in European real estate for subsequent short-term rental (STR). Why is now the best time to enter this business?
Firstly, you provide yourself with a diversified portfolio and cash flow in different currencies. Investing solely in the real estate of your own country makes you dependent on its economic situation, whereas distributing funds across markets of different countries allows you to minimize risks and reap more benefits: the price per square meter abroad might be lower than in your country, and the rental rate for housing can be higher.
Secondly, no matter how markets fluctuate, real estate always appreciates in the long term. For instance, from 2012 to 2022, the average global increase in its nominal value was 5.4% annually. Experts anticipate not only a continuation this year but an acceleration in growth to 9%, and in some countries of Africa and Asia, to more than 20%. Housing supply significantly lags behind its demand, which means prices won't be decreasing anytime soon.
Thirdly, purchasing real estate often facilitates a streamlined process for obtaining residency and even citizenship in many countries, including those in the Schengen Area.
As for short-term rentals, the timing for starting right now is indeed opportune, especially for tourist-attractive locations. According to forecasts by the World Travel and Tourism Council, the global tourism industry will closely approach its record figures from four years ago this year. The short-term rental market has already rebounded to its pre-pandemic level, and it's entirely feasible today to achieve a net yield of over 10%.
The demographic component is also favorably shaping up. The so-called Generation Z (people born approximately from 1997 to 2012) is becoming more economically active. They are ready to travel and spend significantly more on real estate rentals than the preceding "millennial" generation, which also creates promising prospects for investing in real estate. Moreover, modern online services simplify, accelerate, and, consequently, popularize the service of short-term rentals.
In the end, houses and apartments are tangible assets, not something abstract like Bitcoin.
However, before directing funds into the STR sector, you need to answer a series of important questions.
Step 1. What are your goals?
This is the main factor to consider when choosing a region for a future transaction. For obtaining a residence permit or citizenship, some countries, such as Greece, might be more suitable; for subsequent resale, others where real estate prices are growing at a faster pace might be more apt. Are you planning to use the purchased house as a vacation residence or additional housing? Then think about which climate, culture, and natural aesthetics you resonate with the most. What would your dream home be like?
If you're considering purchasing European real estate purely as an investment to enter the STR market, analyze the most important factors:
Short-term rental regulation: Currently, there are divergent frameworks at national, regional and local levels across the EU.
Tax legislation in the chosen country: What final amount will you have to pay at the end of the transaction and how much will you need to remit monthly or annually?
Mortgage conditions: Can non-resident buyers obtain a mortgage in the first place?
Real estate price trends: How have property prices changed in the country in recent years? What are the forecasts?
Country's appeal to tourists: How fast is the tourist flow growing?
Utility bills: How much are they on average?
Local infrastructure: Study the area where you plan to buy the property. For short-term rentals, it's crucial to have walking access to attractions, bodies of water, shops, cafes, or, at the very least, public transport.
There are also less obvious factors, like the susceptibility of the chosen region to natural disasters or terrorist attacks.
Of course, without proper preparation, it would be challenging to delve deeply into such a broad spectrum of issues. Many specialized companies offer relevant analytics services.
Step 2. What are the unique characteristics of the market in your chosen country?
So, the geographical choice is made, but this is only the first step. Now, you need to assess the STR market there. This will allow you to effectively plan your income and take full advantage of the benefits. The very concept of "short-term" on one hand guarantees a higher return than long-term rent, but on the other, it introduces additional complexities for landlords.
Here are the main parameters you need to study in the chosen region:
Average nightly rates and how they change seasonally: Up to 90% of annual income can be earned during a few peak season months.
Score: 9/10
Weight: 25%
Rationale: The rate directly influences income. Seasonal rates are crucial for maximizing revenue during peak times.
Average occupancy rates by district and, again, the influence of seasonality: In some tourist areas, high prices might deter guests, while in others, an inconvenient location might. Find a balance: for instance, a house slightly away from the coast but with a magnificent ocean view.
Score: 8/10
Weight: 20%
Rationale: A property can have high rates, but if the occupancy is low, it won't maximize its potential. Seasonal occupancy ensures the property has a steady flow of tenants throughout the year.
Level of competition in the STR market: Apartments with one or two bedrooms are most popular for short-term rentals. However, if the market is saturated with such offers, it might be more profitable to invest in larger (three or more bedrooms) or smaller (studios) spaces.
Score: 7/10
Weight: 15%
Rationale: Knowing what kind of properties are in demand (1-2 bedrooms vs. studios or larger spaces) can dictate the kind of property to invest in. However, saturation can lead to reduced prices due to competition.
Holidays, festivals, major business forums, and other events in the city: During these events, you can (and should) significantly increase the rental rate.
Score: 6/10
Weight: 15%
Rationale: Events can drastically boost prices for short periods, leading to significant income spikes.
Total number of STR listings in the selected location: According to AirDNA data, if there are already 500+ properties in your chosen area, for example, in the center of Athens in the Plaka district, it indicates both the tourist appeal of the area and a high level of competition.
Score: 8/10
Weight: 25%
Rationale: High numbers of listings can mean a popular tourist area, but also a lot of competition. This can dictate the approach to marketing and pricing strategies for the property.
Step 3. Consider Ethical Implications
This aspect is often overlooked, but potential revenue should not be the sole criterion. Is it ethical to purchase property for STR in a country grappling with a severe housing crisis? Discussions on this topic flared up in Australia last year, but the issue is relevant for many other countries as well. For example, for Spain and Italy.
The influx of a large number of foreign tourists into an ethnic district, where homes have been snapped up for short-term rentals, can disrupt the rhythm and traditions of the local community. Factor this into your decision-making process.
Step 4. Familiarize Yourself with Local Laws Governing Short-Term Rentals
The regulatory landscape varies across countries. For instance, when leasing property for short-term rentals in the UK, you'll encounter a myriad of legislative requirements: deregulation laws, the need for short-term licensing, registration of short-term lease agreements, and planning permissions. All of this implies additional time and resource commitments, and failing to comply with the law will result in hefty fines for you.
Step 5. Prepare for Unforeseen Regulations and Expenses
In addition to costs for taxes, mortgages, and utilities, which we discussed earlier, keep in mind some less obvious expenditures.
Often, the acquired property and its surrounding amenities (like a pool, if it's a villa) may require repairs, furnishing, and technological updates, followed by regular renewals. However, avoid overspending. If you're not targeting the premium segment, furnish the interior tastefully but with affordable furniture, like IKEA. Sometimes, minimal modern amenities can even be a plus for guests seeking solitude away from modern distractions.
Sometimes, a management company handles the direct rental, cleaning, and maintenance of the property. In such cases, they may take between 15% to 25% of the rental fee. Don't forget to account for insurance on the property and payments for security systems.
Seasonal marketing is another potential expense. During periods of high competition, you might need to invest in promoting your property to avoid having to drop your rental rate or risk not having any bookings at all.
Always be prepared for the country you're investing in to introduce regulations that you might not agree with, such as the introduction of new property or rental taxes or the increase of existing ones.
Once you've gathered all the analytical data, calculate your monthly expenses and revenues. Based on this plan, consider your future actions.
Step 6. Calculate the Immediate Budget
Remember: The price listed in a property sale advertisement is hardly ever the final amount you'll need to pay. Taxes, duties, "stamp duties," and other fees can collectively amount to up to 20% of the property's price. On top of that, you might have to pay for a lawyer, notary, real estate agent (in some countries), and an intermediary who will handle all these operations on your behalf (unless you're dealing with the entire transaction yourself).
Step 7. Seal the Deal and Begin Client Hunting
Congratulations, the deal is complete! What's next? You will receive various reports, such as a property inspection. Review them, as it will help you outline a plan for capital expenditures to prepare the property for launch.
Finally, the last step: create and post a short-term rental listing for your property on platforms like Airbnb and Vrbo. You can go even further by setting up social media accounts, developing a website, branding your property, and either hiring staff to interact with guests or managing it yourself.
In Conclusion
Investing in European property for short-term rental is not a straightforward task. You'll dive into a myriad of considerations, face bureaucratic red tape, and possibly encounter unexpected surprises like hidden expenses. However, the growing global property and tourism markets make this business one of the most appealing for investments, preserving, and growing assets.
A thorough analysis when choosing a country, region, and specific property is crucial. It will help you save time and money and maximize returns. Whether you undertake this journey independently or seek professional consultation is entirely up to you.