The Hidden Costs of Short-Term Rentals: Why Margins Are Thinner Than You Think

Short-term rentals (STRs) have gained immense popularity in recent years, fueled by platforms like Airbnb and Vrbo. Many investors are drawn to the perceived high returns, believing they can generate significantly more income compared to traditional long-term rentals. However, once all costs and expenses are accounted for, the margins on STRs are often much thinner than anticipated. In this article, we will break down the real costs of owning and operating a short-term rental and explain why, except in unique circumstances, many STRs fail to deliver the profits investors expect.

Revenue vs. Reality: The Misconception of High Earnings

Many investors assume that because STRs can charge higher nightly rates than long-term rentals, they must be more profitable. While this is true on a per-night basis, it ignores the critical factor of occupancy rates. A property might generate high revenue in peak season, but slow months, competition, and local regulations can significantly reduce annualized earnings.

For an STR to be successful, an investor must ensure:

1. High occupancy rates (at least 60-70% annually)

2. Competitive nightly pricing that accounts for seasonality

3. A location with consistent demand (tourist-heavy or business hubs)

4. Efficient management and cost control

Without all four factors working in their favor, STRs quickly become marginal or even unprofitable investments.

Breaking Down the Costs of a Short-Term Rental

Unlike long-term rentals, which have relatively predictable costs, STRs come with a long list of expenses that can erode profits. Below are the primary costs investors must consider:

1. Property Acquisition & Financing Costs

• Higher Purchase Prices - Desirable STR locations tend to have inflated real estate prices, making entry expensive.
• Higher Interest Rates - Many lenders charge higher rates for investment properties, especially short-term rentals.
• Down Payments - Conventional loans for investment properties require at least 20-25% down.
• Furnishing & Setup Costs - Unlike long-term rentals, STRs need to be fully furnished and decorated. Costs typically range from $10,000 to $50,000 depending on property size and style.

2. Operating Expenses

• Mortgage & Property Taxes - Fixed costs that must be covered even in slow months.
• Insurance - STR insurance is more expensive than standard homeowner policies, often costing 2-3 times more than regular coverage.
• Utilities - Since utilities (electricity, water, gas, internet) are included in the rental price, these costs can be significant, especially in larger homes.
• HOA Fees - If the property is in a condo or gated community, HOA fees can eat into profits. Some HOAs also impose restrictions on STRs, further limiting potential earnings.

3. Management & Maintenance Costs

Managing an STR is time-intensive. While some investors self-manage, many hire professional property managers, which comes with additional expenses:

• Property Management Fees - Professional STR management typically costs 20-40% of gross revenue. This is significantly higher than long-term rental management (usually 8-12%).
• Cleaning Fees - High turnover requires frequent professional cleanings, costing anywhere from $50 to $250 per stay. This can add up quickly, particularly for short bookings.
• Guest Supplies & Consumables - Toiletries, linens, kitchen basics, and other guest necessities must be regularly restocked.
• Repairs & Wear-and-Tear - STRs experience far more wear than long-term rentals. Frequent repairs and furniture replacements are necessary.

4. Regulatory & Platform Costs

• Occupancy & Lodging Taxes - Many cities impose hotel or transient occupancy taxes, which can range from 5-15% of revenue.
• Platform Fees - Airbnb and Vrbo charge fees ranging from 3-15% per booking.
• Legal & Compliance Costs - Many municipalities require permits, business licenses, and inspections to operate an STR legally. Regulations are constantly evolving, and some cities outright ban STRs in residential areas.

Profitability Analysis: A Realistic Example

Consider a $500,000 STR property in a high-tourism area:

Projected Annual Revenue:

$200 per night, 70% occupancy = $51,100 gross revenue

Annual Expenses:

Mortgage (20% down, 7% rate): $26,500

Property Taxes: $5,000

Insurance: $2,500

Utilities: $3,600

Management (25% of revenue): $12,775

Cleaning ($100 per stay, 200 stays/year): $20,000

Restocking & Maintenance: $5,000

Platform & Lodging Taxes: $5,000

Net Profit Before Taxes: -$3,275 (Loss)

Even in this relatively high-demand scenario, the property is operating at a loss due to the extensive costs. The only way for this STR to be profitable would be either higher occupancy rates, lower operating costs, or an exceptionally high-demand location with pricing power.

When Does a Short-Term Rental Make Sense?

While many STRs are marginal investments, there are certain scenarios where they can be profitable:

1. Unique & High-Demand Properties - Luxury homes, unique stays (treehouses, waterfront cabins, etc.), or properties in high-barrier-to-entry markets tend to perform better.

2. Owner-Occupied Rentals - If you’re renting out a second home you already own, your costs are lower.

3. Low-Cost Basis Properties - STRs that were purchased before the recent real estate price surge or acquired through creative financing strategies have a better chance of profitability.

4. Self-Managed Properties - If you handle bookings, cleanings, and maintenance yourself, you can reduce expenses significantly (though at the cost of your time).

Despite the hype, short-term rentals are not the cash cows many investors imagine. High expenses, regulatory risks, seasonality, and competition all contribute to thinner-than-expected margins. Unless an investor has a unique property in a consistently high-demand location and is willing to manage it efficiently, most STRs barely break even or worse, operate at a loss.

For investors looking for steady, passive income, traditional long-term rentals often provide more predictable and stable returns with far less hassle. While STRs can be lucrative in niche cases, for the average investor, the reality is far less glamorous than the sales pitch.

If you’re considering an STR, run the numbers carefully not just based on peak season projections, but annualized figures that factor in all costs and slow periods. In most cases, the math simply doesn’t justify the investment.

Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®.  L&L serves clients nationwide and may be reached at [e-mail] or 602-230-2014.