What Is Short-Term Rental?
A short-term rental (STR) is a property you rent by the night or week instead of by the month. Think Airbnb, VRBO, or furnished corporate housing. Stays are usually under 30 days. The upside: cash flow can run 2–3x what you'd get from a long-term tenant in hot markets like Austin, Nashville, or Denver. The downside: vacancy rate swings harder—empty nights add up fast, and you're managing turnover, cleaning, and guest communication. Regulations vary by city. Some allow investor-owned STRs; others restrict to primary residence only. Run the numbers—NOI, occupancy assumptions, and property manager fees (STR PMs charge 25–40% vs 8–12% for long-term)—before you jump in.
Renting a property by the night or week—e.g., Airbnb or VRBO—typically for vacation or business travel.
At a Glance
- What it is: Renting by the night or week (under 30 days)—Airbnb, VRBO, furnished corporate.
- Why it matters: Can 2–3x cash flow vs long-term in strong markets, but vacancy rate and regulation risk are higher.
- Typical occupancy: 40–60% in established markets; tourist towns can hit 70%+ in season.
- PM fees: 25–40% of revenue (vs 8–12% for long-term)—self-manage or budget accordingly.
How It Works
You buy a property. Instead of leasing it to a tenant for 12 months, you list it on Airbnb, VRBO, or a similar platform. Guests book by the night or week. You (or a property manager) handle check-in, cleaning, and turnover between guests. Revenue comes from nightly rates, cleaning fees, and sometimes extra charges. Your NOI depends on occupancy—how many nights you fill—and your costs: mortgage, utilities, cleaning, supplies, platform fees (3–5%), and management.
Revenue math. A $1,200/month long-term rental in Memphis might gross $14,400/year. The same 3-bed as an STR in a tourist area could gross $2,800/month at 50% occupancy ($140/night × 15 nights)—$33,600/year. That's 2.3x. But your costs are higher: more turnover, more wear, more utilities, and you're paying for cleaning and supplies. And 50% occupancy isn't guaranteed—a slow season or new regulations can drop you to 35%. The vacancy rate on STRs is different from long-term—you're filling nights, not months. One empty week is 7 nights of zero revenue.
Regulations. Cities are cracking down. Denver and Boulder restrict STRs to primary residence—investors can't do it. Austin allows Type 2 (non-owner-occupied) licenses but caps them, requires 1,000-foot spacing, and enforces. Nashville has its own rules. Before you buy for STR, check local ordinances. A ban or a license cap can turn your plan upside down.
Financing. DSCR lenders often use STR income—they'll take 75% of projected revenue or actual history. Conventional lenders are trickier—they may not count STR income the same way. House hacking with an STR unit can work—you live in one side, rent the other on Airbnb. FHA has occupancy rules; verify before you try it.
Real-World Example
Austin 3-bed, investor-owned. You buy at $385,000. You run STR projections: $185/night average, 52% occupancy (Austin market data). Gross: $185 × 365 × 0.52 = $35,098/year. Minus: cleaning ($1,200/year), supplies ($800), utilities ($2,400), platform fees 4% ($1,404), property manager 30% ($10,529). Net before debt: $18,765. PITI at 7%: $2,280/month = $27,360/year. You're negative $8,595 before depreciation. The numbers don't work at that price. You pass—or you find a cheaper property where the math pencils.
Gatlinburg 2-bed cabin, buy-and-hold. You buy at $198,000. Tourist market. $175/night, 58% occupancy. Gross: $37,205. PM at 25%: $9,301. Cleaning, utilities, supplies: $4,200. Net before debt: $23,704. PITI: $1,420/month = $17,040. Cash flow: $555/month. Cap rate on NOI: 7.2%. It works—but you're dependent on tourism. A bad season or a new hotel down the road hurts. You're not getting passive income—STR is more active than long-term. You're okay with that.
Pros & Cons
- Higher cash flow potential than long-term in strong markets—2–3x in some cases.
- Depreciation and tax benefits same as long-term rentals.
- Flexibility—you can use the property yourself when it's empty.
- House hacking with STR can offset your mortgage more than a long-term tenant.
- ROI can be strong when occupancy and rates align.
- Vacancy rate volatility—empty nights hurt more than empty months.
- Higher operating costs—cleaning, turnover, supplies, utilities.
- Property manager fees run 25–40% vs 8–12% for long-term.
- Regulation risk—cities can ban or restrict STRs with little notice.
- More hands-on than long-term—guest communication, reviews, platform management.
Watch Out
- Compliance risk: Check local STR regulations before you buy. Denver and Boulder restrict to primary residence. Austin caps Type 2 licenses. Nashville has its own rules. A ban can kill your cash flow overnight—you're stuck converting to long-term or selling.
- Modeling risk: Don't model 70% occupancy unless you've got comps. Austin averages 43–56%. Tourist towns can hit higher—but seasonality matters. A 35% winter in a summer market blows your NOI.
- Execution risk: STR is more work than long-term. Self-managing means you're on call for guest issues, cleaning coordination, and platform updates. A bad property manager at 30% can eat your profit. Vet STR-specific PMs—they're different from long-term PMs.
Ask an Investor
The Takeaway
A short-term rental can boost cash flow in the right market—but it's not passive. You're managing vacancy rate by the night, dealing with turnover, and facing regulation risk. Run the numbers with realistic occupancy (40–60% in most markets), factor in property manager fees (25–40%), and check local rules before you buy. When it works, it works. When it doesn't, you're converting to long-term or selling.