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Short-term rent or vacation rent is a relatively new strategy for real estate investing. Although holiday rentals have been around for decades, it wasn’t until the inception of Vrbo and Airbnb that traditional real estate investors began investing more widely in them. If you’re reading this, you’ll want to explore the underlying spots of this strategy, but you’re not sure where to start.
The first thing you need to do is choose the type of market you want to invest in. You will start by researching and analyzing the average occupancy rate, the price per night, and the value of the property in the area you are valuing to see if any investment is worthwhile.
You’ve probably heard an anecdote from a friend who bought a house in the downtown area of their town and is “killing” by renting conference-goers, traveling sports fans and business travelers. “We’re getting $ 500 a night,” they could say. However, when searched, they cannot answer questions such as occupancy rate, total annual income, and expenses. The 500 500 per night rate sounds great, but how many nights a year are property booked? What is a monthly mortgage payment? How much does electricity and internet cost? Is there a HOA fee? Does র 500 a night cover all costs?
A random strategy gives random results. As a serious investor, you must choose the right market to invest based on data and historical data. Don’t just buy a place near Wrigley Field that will “pay for itself” because you’re a huge breed fan.
There are three types of STR market
There are three main types of STR markets: the metro market, the national fly-to-leisure market and the regional drive-to leisure and leisure market. There is no right or wrong type of market for investing in STR. However, all markets come with varying degrees of stability or volatility based on different characteristics. Each type has its advantages and disadvantages, which I will describe in detail in this chapter.
Your market choice will depend on what your goals are and how comfortable you are at risk. For example, I prefer regional, driveable lease rental market revenue and regulatory stability, although I know a lot of people who make a lot of money by investing in the metro market, which is much more risky and complicated by STR regulations. Whatever type of market you choose, make sure you are researching before diving.
Metro Market is a major metropolitan area that attracts many visitors but is not financially dependent on tourism. They have jobs and industries that support their local economy and usually have large and dense permanent-resident populations. Examples include New York, Los Angeles, Austin and Nashville.
In the metro market, short-term fares are a relatively new choice for tenants who historically lived in a hotel, such as business travel professionals, traveling medical professionals and locals who take “stations”. A notable pro of the Metro Market is this varied pool of guests, a wide spectrum from which tenants can be found.
The introduction of Vrbo and Airbnb created quite a few opportunities for early adopters in major metro markets like my friend in Brooklyn. Their product was new and provided more space and comfort than standard hotel accommodation. Also, at that time, there was very little such housing in their market.
While there are extremely high rewards in the metro market in terms of cash flow, they are arguably the most risky type in the STR market based on a number of factors. Historical rents of hotels instead of privately owned homes, with a frequent permanent resident population, have proven troublesome for many metro markets over the past decade. Additionally, the metro market has a much more unstable STR control structure than other types of markets. I know many metro-market STR investors who closed after a few years of operation.
There are three main economic drivers of anti-STR rules in major metropolitan areas:
- Hotel lobbyists: Advocacy funded by major hotel chains is the biggest source of anti-STR rules in metro markets across the country. Since hundreds of STRs have flooded the hospitality market and gained significant market share, hotels have made no small effort to eradicate them. By working lobbyists to introduce bills at the local level, hotel chains have successfully curtailed the development of the industry. As a result, cities have restricted STR-approved areas, revoked permits, and in some cases banned them altogether.
- Dissatisfied neighbor: As STR investments have become more popular in many cities, previously quiet residential street properties have been converted into “mini hotels” and “party houses”. Their permanent resident neighbors have taken STR investors to the City Council to express their contempt for the negative effects felt in their neighborhood. The negative local media coverage of these allegations and the few incidents they caused have created an unfavorable relationship between STR owners and non-investing permanent residents.
- Lack of affordable housing due to Airbnb investors: As long-term rental or primary-home properties have been acquired, renovated and converted to STRs, property prices have skyrocketed in many metro markets. Since these properties can be difficult to acquire in major cities, they are often sold at a premium, and sales at that premium price have quickly gained appreciation in the surrounding area. While this seems to be a positive for investors, it has created an affordable housing problem for permanent residents of some markets, once again sending their complaints to advocacy groups and locals to the City Council.
Market saturation is another important consideration when investing in Metro-Market STR. In the rare metro market where STRs are largely uncontrolled, this is a very real possibility. When a market has moved from very low to very high of these rents over the years, and excess assets are being converted to STR almost every day, the market is on the saturation horizon. Of course, there is always the option to convert your property into a long or medium term rent if needed.
National holiday market
The national leisure market relies on tourism. Think of the large, popular holiday markets that most travelers access by air, such as Hawaii; Aspen, Colorado; And Disney World / Orlando, Florida.
These markets are stable in terms of rent regulations because STRs have been part of the economic fabric for decades. Nevertheless, wealthy permanent residents and large resort chains have pressed for STRs to be allowed only in certain areas. Hawaii and Jackson Hole, Wyoming, for example, have strict regulations to keep their permanent residents happy. In fact, there are fewer than ten neighborhoods in Jackson Hole where short-term rents are allowed. This makes it difficult to find features in the exact zone to allow for short-term rentals and self-management of STRs.
While national leisure rental markets are quite profitable during economic recovery, they see a downward trend for the first time in a recession. As travelers tighten the strings of their purses, flying-flying vacations are sold for more affordable, closer home destinations.
Regional leisure market
In the regional holiday market, most tourists come by car. Examples include Gatlinburg, Tennessee; Panama City Beach, Florida; Big Bear Lake, California; And Branson, Missouri.
Regional leisure destinations are 100 percent financially dependent on tourism and have been for decades, as has the previously mentioned national leisure market. There is little or no industry outside of tourism in this region. However, a big difference from the national market is that regional markets are much more affordable and easily available.
Since these markets are often small towns, real estate prices tend to be cheaper than their national holiday rental market segments (though not always). In addition, the market is home to more tenants on vacation than many permanent residents, many of whom have been renting privately owned cabins, condos and single-family homes instead of hotels since sites like Airbnb began.
STR regulations are very intertwined in this market, where local governments determine how to earn STR revenue decades ago, so city council conflicts do not exist. In fact, the small occupation taxes collected by these governments are so profitable that controlling them against the STR would be financially detrimental to them.
At first glance, it would seem that metro markets are best for STRs, due to the different pools of their travelers. However, due to control issues in most metro areas, it is actually the regional, driveable vacation rental market that is the most stable investment. Regional markets are the most recession-resistant because of affordability and accessibility, which we will address in the following pages.
To learn more about analyzing, buying and managing rest features, see Short-term rent, long-term assets By Avery Carl!
Tourism and recession prevention
STRs are dependent on the tourism and travel industry, so it is important to ensure that there are enough passengers to make STR profitable even during the economic downturn. Several factors contribute to market stability.
First, we look at the drivers of the past two economic recessions: the 2008 housing / financial crisis of 2008 and the Covid-1 pandemic epidemic of 2020-2021. During both these economic downturns, the regional leisure market performed better than the metro and national leisure markets. This is thanks to the two pillars of recession resistance: affordability and accessibility.
Affordability: 200 During the Great Depression of 2008, the disposable income of the average American household dropped dramatically. Many potential STR investors mistakenly assume that, with low disposable income, everyone stops going on vacation. This is not the only case. Travelers can no longer travel to Aspen, Disney World or Hawaii, but they will still go on vacation – although more affordable vacation destinations where flights, or expensive ski lifts and theme park tickets are not required. In other words, families go on local weekly vacations in the recession.
Availability: At the start of the Covid-1 pandemic epidemic in 2020, all STR markets were hit hard, but with the resumption across the country, regional leisure markets have surpassed both the metro and national leisure markets. This time, when affordability was most clearly a factor, accessibility was the main driver of success.
After months of lockdowns, the entire population was bursting at the seams to get out of their homes. However, most Americans did not feel comfortable traveling in large metro areas, and they felt less comfortable on boarding flights, even when confined to strangers for a short time. For fear of being infected with the virus, travelers travel to their nearest vacation destination in the comfort of their own vehicle, renting single family accommodation where they can stay outside and enjoy themselves at a safe distance from others.
When you find an STR market that is of interest to you, you first need to check the STR regulations in that market. (You may be surprised at how many investors don’t pay attention to this before you buy a property.) The second thing to consider when choosing a market is its maturity. How long are STRs ideal for travelers instead of hotels? How long were the STRs? The earlier STRs started to improve the market, the more mature the market. The less mature a market is, the greater the likelihood of adverse STR regulations.
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