Investing in Montana Short-Term Rentals: Pros & Cons
Montana visitors (all 12 million of them) have many options for lodging. But traditional alternatives like hotels and campgrounds have experienced rising competition from an unlikely opponent: short-term rentals (STRs).
The University of Montana Institute for Tourism and Recreation Research says that 10% of visitors to Montana rent a home or condominium – and STRs are not a new concept. For decades, STRs have flourished in resort towns like Whitefish. What has changed now are the locations: STRs are a part of the landscape in the neighborhoods of most Montana cities and towns.
If you’re considering investing in an STR, here’s a quick list of pros and cons.
Low Barrier to Entry: STRs offer a very low barrier to entry for investors. A single furnished room in a home or an apartment is enough to jumpstart an STR empire. There are no fees to list on sites like Airbnb or VRBO, as fees are only assessed when a guest books a stay. However, some cities require fees and licenses to operate STRs.
Income: One of the biggest draws of STRs is potential income. Income from a well-managed STR in a popular location is very likely to exceed what the property could earn from a long-term rental. In Missoula, the average one-bedroom short-term rental is expected to bring in $34,000 a year in gross income – 125% more revenue than the average one-bedroom apartment on a long-term lease generates.
Flexibility: Flexibility can be a primary motivator to convert a long-term rental to an STR. STRs allow a property owner to maintain the use of a property as needed and, without a long-term lease in place, they can use the home for visiting friends and family. The home can also be brought to market for sale more easily.
Inventory Options: Communities need options to accommodate travelers, especially in tourism-dependent cities – and not all travelers are tourists. STRs are also popular with business travelers. Many business travelers, including travel nurses, have longer stays in communities and STRs can be more convenient than hotels for many reasons.
Labor: STRs require a hospitality mindset, which doesn’t always come naturally to landlords. Landlords must restyle themselves as innkeepers to compete with hotel customer service. Get ready for late-night calls about lockouts, faulty Wi-Fi, or missing toilet paper. Units must be clean and in perfect condition for the next guest – often with little turn time.
Occupancy Rates: Montana’s STR markets are subject to seasonal variations in occupancy rates, which can have a significant impact on rental income. In particular, the cities of Missoula and Kalispell experience high demand during the summer months, while occupancy rates tend to decline from late fall through early spring. Bozeman, on the other hand, sees a second surge in occupancy during December and March, coinciding with the ski season. As a result, property owners in these markets should be mindful of these seasonal patterns and adjust their rental strategies accordingly.
Interior Maintenance: Furnishings must be well-maintained and replaced as needed. For all of these reasons (and many more), some owners outsource management to companies that charge high fees. Understanding all the costs – including time and fees – is important when evaluating an investment.
Public Perception: For cities with housing availability issues, STRs are a frequent target in the discourse around these challenging markets. Opponents note that if all STRs became long-term rentals there would be a bump in apartment vacancy rates and rents would likely drop.
Some cities are limiting STRs to manage the impact on housing availability. Cities across Montana are not taking major steps to limit short-term rentals, though Bozeman has limited short-term rentals in some residential districts to owner-occupied homes. In especially tight housing markets like Big Sky, local groups provide financial incentives to STR owners if they convert their units to long-term housing for locals.
STRs are likely to remain a staple across Montana. Most larger cities will probably continue to consider new fees for operators, with small towns on prime tourism corridors following suit. Additionally, the State of Montana is considering a bump in property taxes for STRs. Travelers across Montana will have more lodging options as new hotels continue to open. While hotels may claw back some market share, travelers are still split in their preferences.
Competition is good if you are a traveler. Hotels saw market share eroded by STRs and, in turn, stepped up their offerings. As the STR market gets more competitive, hosts will likely also need to level up their customer service. For communities, short-term rentals insure a variety of accommodation options for visitors, boosting tourism. They also provide the opportunity for residents to make extra income from underused properties.