Music City. The “It City”. The New Silicon Valley. NashVegas. Real-Estate Mecca.
We’ve heard it all. But the media isn’t wrong & the hype is well-placed. Nashville is all of those things. However, what truly makes Nashville the “It City” it has become is the way of life, abounding opportunities for economic, cultural, and strategic urban development, and emphasis on community, education, and environmental planning. With Nashville becoming such a wonderful place to put down roots, the influx of recent out-of-state residents is expected. And we welcome our new neighbors with open arms!
The Nashville real estate market has gotten a lot of attention over the past decade. Aside from individuals and families making it their primary residence, Nashville had seen a huge spike in short-term rentals, or STRs as we call them. The rise of Airbnb, VRBO, and the like, have prompted more investors to purchase secondary and vacation homes in the area, and with the ease of these rental platforms, have created another, fairly stable source of income.
If you are considering dipping your toes into the world of short-term rentals, look no further than our Ultimate Short-Term Rental Guide below.
First Up: What is a short-term rental?
By definition, a Short-Term Rental (STR) property is a furnished living space available for rent for short periods of time (less than 30 days). Typically, any rental contract longer than six months is considered “long-term”. A short-term rental can be rented out for periods as short as one day, or as long as a couple weeks. It’s typical to see STRs used for vacations and stand as a formidable alternative to hotels, especially in a growing city like Nashville where hotel rates can go for $500+ a night.
A quick lesson on the types of short-term rental properties available…
Metro Nashville gives the following guidelines for what qualifies the two types of STRs: Owner Occupied (OO) & Non-Owner Occupied (NOO) short-term rentals properties.
Owner Occupied (OO) is simply a residence in which the current owner actively resides. The “rental” must be their full-time residence and the owner must have documentation to support that (i.e. Driver’s License, pay stubs, deed). The owner does not have to be present while the renters are onsite, but the STR must remain their sole primary residence while permitted. The STR must have 1 parking space per bedroom or sleeping area.
Owner-occupied permits are the best route for individuals that permanently reside in the home where they want to operate a vacation rental. Since the ownership entity of the real estate must be in the owner’s actual name (and not an entity), it largely excludes short-term rental investors. New legislation came about because neighborhoods were tired of having to deal with travelers & tourists. These permits are intended for residential neighborhoods where the short-term rental aspect of the property will be ancillary to its primary use as a full-time residence.
Non-Owner Occupied (NOO) is a residence that is not owner-occupied or on a lot with an owner-occupied principal residence. The STR must have 1 parking space per bedroom or sleeping area.
All zoning that permits non-owner occupied short-term rentals is commercial. Metro decided to allow NOOs in commercial zoning where the city intended businesses to be operated. Many investors have moved to building or buying their short-term rentals in commercially zoned areas not only because of government regulation, but also because these areas can be attractive for guests since they are near the cities hot spots and attractions.
Now that we know what STRs are, let’s learn about why we love them…
Why purchase a short-term rental property?
1. Let’s get real. It’s the money, honey!
First things first. STRs can be highly lucrative. The ability to STR your home can increase your overall property value by as much as $200K. Provided you have done your research (or hired The Six1Five Living Team to do it for you) and landed a property in a popular area, you can earn more money per month than a traditional rental.
Who likes a visual example?!
Bob charges $300/night to stay at his downtown STR.
Bob’s STR is typically booked for 18 nights out of the month.
Bob could potentially gross about $5,400/month *minus operating expenses* on a property that is, on average, rented out 60% of the time.
Bob is a genius.
2. Demand is on the up & up
Vacation rental/AirBNB demand is through the roof, so much so that the hotel industry is struggling to keep up. Because of this high demand, STRs are typically an excellent investment here in Nashville’s urban core and you shouldn’t have a hard time finding occupants. Not only that, but properties in prime vacation spots like downtown have and are expected to continue to appreciate. Even up-and-coming neighborhoods like Germantown, WeHo, and the Nations are experiencing tremendous growth. Increasing demands allow STR investors more flexibility to alter rental rates as neighborhoods turn and market-wide appreciations occur so they can reap the full economic benefits of their investments.
Now…How does one go about finding this perfect STR?
Before making any investment, in-depth research and local knowledge is key. That’s where The Six1Five Living Team comes in. Together we will:
1. Evaluating the market
Before you begin looking for actual properties, you first need to qualify the market of your choice to determine whether it’s worth your time and investment. In high tourism areas like Nashville, competition for STRs is fierce, which continuously drives prices up. It’s crucial to evaluate tourism data, average number of visitors year-over year, growth indicators, infrastructure and urban development planning that garner interest from tourists and corporations and affect overall growth. Strength in these areas is a good indicator that an investment you make will pay off. Luckily for Nashville, right now we are experiencing increases in all areas, priming our city to be one of the top cities for real estate investors.
2. Evaluating demand
As we established before, high real estate demand speaks volumes to investors. Closely tied into the local economy and tourism data, useful metrics like occupancy rates can provide a lot of insight into your investment potential. But where demand is high you can expect supply to be lower, so it’s key to have an experienced real estate team on your side to guide quick, efficient moves towards your investment goals.
3. Evaluate Seasonality
A huge factor in determining if a city is investable is seasonality. In many areas, tourism only occurs at certain times of the year and lags at other times because of factors like weather and holiday seasons. This will likely be reflective in a city’s monthly market data. This is another critical point that Nashville investors must know. Nashville has a strong year-round tourism season, as we have mild winters, warm summers, and experience each of the four seasons. Tourism is also high during peak holiday seasons such a Christmas time with holiday-forward events and concerts that attract visitors even in the coldest of months.
4. Recession resistance
In real estate, nothing is “recession-proof”. However, some locations are more resistant to economic pressures than others, depending on the local economy, the strength of tourism, and the demand in that region. In the time of COVID-19, we’ve watched areas succumb to economic and tourism downturns. That’s why it’s extremely important to realize risks associated with a certain market or property type. Nashville continually shows us that it’s more resistant to recessions when compared to smaller markets because of its year-round tourism sector, and at times more resistant than larger markets like New York City, because of the less populous urban areas.
5. Local Regulations
The short-term rental market is ever-changing. Because of this, metropolitan areas like Nashville are constantly adding to and evaluating local legislation and regulations surrounding STRs. Nashville has very strict zoning and permitting processes that have to be followed. Prior to investing, its important to fully understand the local laws that will affect your investment. Our team will not only help you find a property, but help you understand the permitting process and the zoning regulations for your chosen investment area.
Analysis of the STR
Once your research is complete and you determine Nashville is where you want to be, you will need to analyze the quality of your chosen property and how much revenue it has the potential to generate.
To calculate your potential revenue with an STR, you will need two things:
1) the occupancy rate
2) the average price
Data needed to calculate revenue can be found on STR statistic websites like AirDNA. Our team is happy to help you pull this information for the exact location in which you’re trying to buy. Once you have the data, you will need to determine what you would charge each guest per night. This number should be based on the property, its competitors, amenities, and other added values, such as proximity to downtown. Once you have occupancy rate & price, plug them into this equation:
Occupancy Rate * Nightly Rate * 30 days = Monthly Revenue
Let’s remember Bob, with an occupancy rate of 60% on average, a nightly rate of $300.00, to find his monthly revenue:
60% occupancy * $300 per night * 30 days = $5,400/month
Granted this is just revenue, not profit – there are fees, maintenance, taxes, cleaning fees, and other costs associated with managing an STR after all… but it’s a lovely start!
Estimating STR Expenses
Revenue is great and all, but it’s important to understand the expenses that come along with this type of investment so you can truly understand the potential returns of your investment. When it comes to estimating expenses for STRs, PITI (principle, interest, taxes, and insurance), still reigns true. These include: Mortgage, Insurance, Property Management Fees, Taxes, Permits, Licensing, Repairs, Maintenance, Utilities, online platform Listing Fees (AirBNB, VRBO), and variable expenses that might come up. Being reasonable and conservative when accounting for these expenses will better your understanding of your return potential.
Return on Investment
Now that you have come to terms with what expenses you will have as an STR owner, simply subtract your expenses from your revenue to get your net income.
Revenue – Expenses = Net Income
Back to Bob. Let’s say Bob calculates his expenses at $2,400 per month, with a projected revenue of $5,400 per month.
The equation would be: $5,400 – $2,400 = $3,000/month in Net Income
With this equation, Bob can quickly determine that his investment is a worthwhile venture and should produce a solid return on his investment.
How to buy a STR in Nashville
First things first…
Hire Six1Five Living
Working with a high quality real estate agent who has extensive experience with STRs in the local market is often the best route to take. The Six1Five Living Team not only has experience with securing investment properties, but we stay updated on local STR regulations so we can properly guide you once you find the perfect property to invest in.
Next up, let’s find that perfect investment property. We recommend that you tour each property in person, but if you are out-of-state, we can tour it for you or virtually walk you through the property via FaceTime. Pictures don’t always do a home justice, so we like getting a hands-on front seat view of the home you want to purchase to reveal all of its pros and cons. We will always give you honest feedback and data so you can make the most well informed decision.
Let’s Make an Offer!
It’s undoubtably a sellers market. And in a hot market like Nashville, sellers typically receive multiple offers, some well above asking price. We will help you analyze the current climate, how many days a property has been on the market, where you might have more leverage to negotiate, how flexible (or inflexible!) a seller is, etc. All of these factors will help us get creative, craft the perfect offer, and negotiate the best and winning contract for your future investment.
Don’t Call Until You Pre-Qual
Just kidding. Call us anytime 🙂 But sellers, they want to know you have the ability to buy their property. The best way to do this is by submitting a lender-provided pre-qualification or pre-approval letter with your offer, or a bank letter if you intend on paying cash. The goal is to assure the seller that you have the funding to backup your offer. If you don’t have a relationship or preference on lender, we can introduce you to several reputable local lenders to guide you through that process.
Do Your Due Diligence
Once your offer has been accepted (YAY!) we will move into what we call the “due diligence” period in which we will pass through the following steps:
- Sending your earnest money/trust money deposit to be held until closing
- Home Inspections
- Home Appraisal
- Tie up any loose ends on the road to the closing table
Finally, it’s closing day! Time to sign the paperwork, complete the purchase, transfer title, and get the house keys.
Listing Your STR
Identify A Property Manager
Could be yourself, could be a property management company. It’s up to you and however hands-on you choose to be. We advise if you don’t plan to market the property yourself, to hire the expertise of a property manager to list, advertise and manage your STR to its full potential.
Pretty That Property
Before you list your STR, you will need to prep, prime, paint, clean, furnish and decorate that puppy. Renters want to walk in and immediately feel at home. We love when an AirBNB host leaves coffee, toilet paper, a list of nearby restaurants… it adds to the experience and makes people want to come back again. And isn’t that the goal?! Repeat business ALL.DAY.
Craft Your Listing
What you do like to see when you are in search of the perfect rental? Detailed descriptions, professional photos, maximum occupancy, minimum stay requirements, location details, unit availability, price? Yep, us too! Give the people what they want and they will feel comfortable selecting your rental. Get real crazy and leave a list of amenities, Wi-Fi passwords, even your personal phone number. The more transparent (and FABULOUS!) your listing, the more your STR will get booked. Simple math.
As we discussed, having a listing with accurate, professional pictures, a detailed description, and a long list of amenities is a great start. But only if people are able to find it. We hope you have chosen a reputable and experienced property management company and the services of an online rental site like AirBNB or VRBO, but if not, make sure to ramp up your marketing. You can run online ads on Facebook, Instagram, or Google with links to your listing. You can create websites and landing pages with 5-Star reviews from former guests. You not only want to get people to your listing, but give them confidence to book once they get there.
Managing Your STR
Whether you decide to work with a property management company is entirely up to you. While they can be expensive, they can lift a huge burden off your shoulders, especially if you live out-of-state. If you decided to take on this task yourself, you can expect to provide cleaning services, restock the unit, communication with guests, manage accounting, and a bunch of other miscellaneous activities to keep your rental up and running. However you decide to manage your STR, it should be a lucrative and fun adventure.
Congratulations! Now you know what goes into finding, purchasing, and managing a short-term rental property! See, that wasn’t so terrifying. Learn the ropes early on and you will be able to scale your business over time with more investment properties. Nashville is the perfect town to get your toes wet in the STR pool and our team is here to guide you every step of the way.
If you want more information on Nashville short-term rental regulations, please visit our STR Guide HERE.