Short-term rentals are taking hold in the hospitality marketplace. It’s an attractive model for investors looking for substantial cash flows and ROI. Though a proven model, real estate entrepreneurs need to consider the inherent operational, financial and regulatory risks and adopt mitigating strategies to ensure project solvency.
Vacation rental investing promises higher rents, no eviction hassles and simplified property marketing; however, it also carries liability and other operational risks. Let’s take a look at the emerging trend, consequences for the industry and how to get started in vacation rental investing.
Short-Term Rental Growth
Vacation rentals are nothing new, but the convenience and efficiency of the short-term rental model via online platforms like Airbnb, HomeAway and Vrbo are attracting droves of investors and customers.
The short-term rental market in the U.S. has grown by more than 100% in only the last three years. Markets experiencing the most significant increases in short-term rental revenues include Indianapolis; Jacksonville, Florida; Dallas; Austin, Texas; Denver; San Diego; and Los Angeles; with respective year-over-year (YOY) revenue growth ranging from 3.6% to 17%. Other regional markets aren’t faring so well: San Francisco is down 11.8% from the prior year; Fort Worth, Texas, is down 18%; San Jose, California, is down15.5%; and Seattle is down 10.6%.
Though revenue numbers have declined in these markets, the overall demand for short-term rentals remains strong. Resistance from the hospitality industry, local government and community creates challenges for the short-term rental sector as the disrupted market reaches a new equilibrium point. The shift toward the short-term rental model and more affordable pricing for accommodations is compelling hotel franchises to adopt new pricing structures, innovative technology and marketing strategies.
Regulatory Challenges Facing Vacation Rental Investors
The greatest challenge for short-term rental investors is public policy. Many cities, including New York, San Francisco, Chicago, Boston, Los Angeles and Seattle have existing regulations that limit or block the operation of vacation rentals. Incidentally, these are also some of the same markets experiencing the most substantial decreases in YOY revenue.
Numerous other cities are either considering, working to ratify or have scheduled legislation to regulate and limit short-term rentals, including San Diego; Portland, Oregon; Miami; and Jersey City, New Jersey. Second to economic potential, regulation is the most significant concern for investment viability and requires research by direct means — e.g., speaking with zoning/planning officials and networking with community and civic leaders in the markets you’re considering.
Technology And New Short-Term Rental Models
Short-term rentals were around well before the internet; however, the proliferation of technology makes it significantly easier for investors to break into the industry. For every aspect of the marketing, booking and management process involved in vacation rental investing, the established and emerging booking platforms and support vendors offer convenient technological solutions.
As a natural economic response, the industry is continuing to evolve to adapt to the new opportunities presented by growing demand, changing traveler tastes and digital management solutions. Much like we see in the trend with shared working space, there are many existing and new market entrants searching for ways to provide greater value and differentiate from competitors.
While name hospitality chains seek to retain their client base through reduced rates, property improvements and more aggressive marketing, short-term rental competitors are finding paths to provide hotel-style luxury experiences with the flexibility of a vacation rental. Current market disruptors include Airbnb-sponsored Lyric and Stay Alfred.
Pros, Cons And Tips for Vacation Rental Investors
We already know the demand for vacation rentals is booming, and there are abundant opportunities to invest in communities, properties and firms that sustain growth. But what are the benefits and drawbacks of pursuing this asset class?
Here are the essential considerations to keep in mind, as well as a few tips moving forward:
Advantages:
• A viable option for nearly any residential property type.
• Robust demand for flexible and affordable accommodations.
• Potentially superior rents and lower vacancy than traditional leases.
• Reduced tenant management complications.
• Specialized short-term rental management firms are available in many markets.
• Streamlined marketing through online platforms.
• Automated/wireless technology for management access.
• Mortgage interest and expenses are deductible.
Disadvantages:
• Current, proposed and potential regulatory and social opposition to short-term rentals locally.
• Increased potential for property damage by tenants and liability risk for on-site injuries.
• Higher maintenance costs due to wear caused by frequent tenant turnover.
Advice For Short-Term Rental Investors
Investors should be sure to research local regulatory policy regarding short-term rentals. They should also adhere to local taxes and regulations and maintain transparent financials. Select markets with stable tourism and business travel industries.
Hire a specialized property management and maintenance firm with related experience and know-how, and maintain a capital expenditure fund as a contingency for sudden repairs. Yet, be proactive and build for durability to reduce long-term maintenance costs. Obtain sufficient liability coverage.
Operators should utilize automated platforms for booking, management, maintenance and controlled access to streamline the experience on all sides. Take care to listen to tenant feedback, and focus on building positive reviews to earn preferred status on each platform.
Pushing Through And Adapting
Despite regulatory challenges and the competitive environment, the short-term rental trend is taking hold. Vacation rental investing offers a profitable and simplified alternative to the conventional residential leasing model. While entrenched, the internet-driven vacation rental industry has not yet reached the maturity phase, and there is a continuous flow of new opportunities to embrace and nurture as we find a new balance in the hospitality industry.