Are short-term property rentals a prudent investment strategy?

They offer potential to earn higher income and flexibility for personal use but also require ongoing investment and careful financial management

With robust tourist demand, owners of short-term lets receive higher occupancy rate for their properties. Jeffrey E Biteng / The National

In Dubai's dynamic real estate market, short-term rentals offer an opportunity for property owners to meet their financial goals.

Below are several ways owners can leverage short-term lets to enhance their investment returns.

Potential for higher rental income

Perhaps the biggest benefit of short-term rentals is that one can often achieve higher rental income in comparison with traditional long-term lets.

Properties in high demand can be let for premium nightly rates, especially during peak tourist season or important events.

A property that would fetch Dh5,000 ($1,361) a month as a long-term rental can easily fetch Dh10,000 or more for the duration of a few weeks by allowing short letting. This is because it becomes possible to command better pricing according to demand with the help of a short-term rental.

Flexibility and personal use

Short-term rentals provide unparalleled flexibility. Unlike long-term leases, which tie you down for extended periods, short-term letting frees up the property for personal use. This means that owners have the opportunity to use the property during their holidays or other special occasions and earn income during the remaining months.

Another advantage this flexibility affords is that if an owner receives a very good offer, they can sell the property without going through the headaches involved in trying to evict a tenant.

These dual advantages of short-term rentals make it an attractive option for people seeking both personal enjoyment and a return on investment.

Reduced vacancy periods

Short-term rentals have shorter vacancy periods. With the development of short-term rentals in Dubai and robust demand from tourists and businesspeople, one can almost be guaranteed that the occupancy rate for such properties is higher for most of the year.

The consistent income flow of short-term lets is in contrast to the risk associated with having long vacancies usually experienced in longer-term lets.

Strategic management

Property managers should not solely rely on platforms such as Airbnb and Booking.com; instead, they must develop comprehensive marketing strategies that include dynamic pricing models and targeted promotions.

In Dubai’s property management landscape, choices range from offering 0 per cent management fees for the first few months and all the way up to 30 per cent, which is more along the lines of an industry standard.

When it comes to choosing a property manager, the management fee should not be the sole driving force behind a decision.

Hiring a cheaper manager often means that you are compromising on the service. This could result in a manager that does not maintain your property well or does not have access to important tools, such as marketing strategies, dynamic pricing and technology, which are important to maximise rental income.

Property owners must do thorough research to find a property management company that is compatible with their long-term goals and can provide the resources to increase profitability without compromising their investment.

While short-term rentals can provide flexibility and potentially higher revenue, they also bring a unique set of challenges that property owners need to be prepared for. Unlike the relative stability of long-term leases, short-term rentals require a deeper understanding of legal compliance, ongoing investment and careful financial management to truly succeed.

Legal and licence requirements

One of the most complicated processes in managing a short-term rental involves dealing with legal and licensing requirements.

In fact, most cities, including Dubai, require short-term rentals to comply with certain regulatory requirements, such as obtaining a holiday home licence and ensuring that the accommodation meets safety and quality standards as stipulated by the Department of Tourism and Commerce Marketing.

This means owners must invest in the proper permits and stay updated on any changes in regulation that will affect their building's qualifications for short-term rentals. Regulatory shifts are not uncommon, and governments often amend policies to better regulate this growing market, which can bring unexpected costs and adjustments for property owners.

Investment

Short-term rentals often demand a higher initial investment than long-term rentals. Besides basic furnishings, a short-term property rental must be equipped and decorated in such a way that it would please the eye of both a vacationer and a corporate client. This translates to high-quality furnishings, frequent updates and professional photography to present a home online.

There are also the expenses derived from maintaining the property in an excellent state, as frequent guest changeovers require that cleaning, repairs and replacements are done more frequently.

Without constant reinvestment, the properties can lose their attractiveness rather quickly, which, in turn, may lead to a decline in occupancy rates and revenue.

Finance and cash flow

While short-term rentals can yield higher returns, they also come with more unpredictable cash flow. The occupancy level fluctuates because of the different seasons, changes in economic conditions and less travel demand.

Other than the expenses mentioned above, owners will continue to account for ongoing costs such as cleaning fees, commissions to be paid on booking platforms, property management fees and levied taxes that they have to pay.

An example is Dubai's tourism dirham fee. After all, successful short-term renting depends on artful budgeting or financial buffering for those months of lower occupancy and other contingencies like regulatory and maintenance expenses.

In conclusion, while short-term rentals may come with unique challenges, the benefits often outweigh the hurdles for property owners looking to maximise their investment potential.

The higher income potential, combined with the flexibility to adjust rates based on market demand and retain personal use of the property, makes short-term renting an appealing choice for those who seek a versatile and lucrative investment strategy.

Vinayak Mahtani is chief executive of bnbme holiday homes