Short-Term Rentals Gain in Popularity as Investments
Even with new regulations, STRs are gaining market share.
By Robert Greenberg
Investing in short-term rentals (STRs) via single-family or multifamily properties has become popular among a wide range of real estate investors, from those who have never previously invested in real estate to professional investors who have acquired vast portfolios of properties.
On any given night, 2 million people are now staying in an Airbnb, according to the company. It operates the largest online platform of its kind, with more than 6 million properties listed worldwide and over 150 million users.
Although every market is different, high-demand markets for short-term rentals offer the opportunity to earn a significantly higher return on investment in comparison to long-term rentals.
John Zook, a seasoned investor with a portfolio of both short-term and long-term rental properties located in Scottsdale and Denver, reports that his short-term rentals are providing better returns. When it comes to discussing the actual numbers, Mr. Zook said, “The ROI on my STRs is roughly double my long-term rental properties.” But, he cautions that managing short-term rentals can be quite labor intensive.
Short-term rentals are popular in vacation areas, business hubs, large cities and scenic locations. They can be advertised on a range of online platforms, with the largest being the peer-to-peer behemoth Airbnb. Other well-known sites include HomeAway and VRBO.
There’s also a host of lesser-known STR platforms such as AvantStay, a short-term rental property management service dedicated to high-end luxury homes that appeal to groups traveling together for parties, weddings, reunions and other events where sharing a luxury home might be more desirable (and cheaper) than paying for individual rooms at expensive, high-end hotels. Yet another is Vacasa, which curates properties and manages them on behalf of passive investors. Kid and Coe lists kid-friendly rentals, and Sabbatical Homes is a listing service dedicated to properties that appeal to academics and scholars. StayAlfred offers apartments, lofts and condos in highly populated urban locations.
Passive or Active Investing Options
For investors who want to be hands-on, short-term rentals can also offer
attractive returns. For example, someone who owns a four-story brownstone in
Manhattan might opt to rent out a street-level unit to tourists or business
travelers, while the investor lives in the upper three floors. Being on site
makes it easy to quickly respond to issues with bookings, cleanings,
maintenance or emergency repairs.
For investors who make STR investments outside of their own market or who do not want the hassle of bookings, cancellations, maintenance and cleaning, there are a growing number of STR platforms that offer the opportunity to passively invest. These companies handle the day-to-day leasing, collections, maintenance and cleanings. Many even will provide the furnishings for STR properties.
Ample Rewards
There are a variety of rewards for STRs. Of course, having personal use of
a short-term rental as your own vacation spot is a bonus. But if your property
is popular, you may be relegated to using it in the offseason unless you are
willing to give up the income that can be realized at the peak periods.
A great landlord with a clean, comfortable and well-maintained property that goes the extra mile to please tenants will typically be able to create a regular clientele of return customers. This can make renting an STR a breeze. Happy customers will also refer their friends and family, making it easier to rent an STR property versus leasing a long-term rental property.
Investors may also have less risk with STRs over long-term rentals. If you’ve ever done long-term rentals and had a tenant from hell, then you know what a huge headache that can be. With long-term tenants, investors can run the risk of having to go through an expensive and lengthy eviction process if a tenant stops paying the rent. That often can mean several months with no rental payments and court costs. With short-term rentals, eviction proceedings are rare, although there isn’t any entity we know of that tracks that information.
Both types of rentals face the risk that a tenant will damage the property. However, just like long-term rentals, some type of deposit that is returned after the renter exits the property in good condition is one form of protection, albeit sometimes inadequate. Most peer-to-peer STR rental sites also offer insurance coverage to protect property owners.
Another advantage of STRs is that investors can get into the property to check its condition every week or two. With long-term rentals, it’s more intrusive to gain access to the property and, therefore, difficult to assess damage to the property or even just identify normal maintenance issues that may go unreported over a long period of time.
Regulatory Risks
With any type of real estate investment, there are risks. One major risk
with STRs is the growing regulatory movement. Cities, counties and states have
increasingly begun to regulate and tax STRs. In some cases, jurisdictions ban
them altogether. Las Vegas, which has a powerful hotel lobby, is one city that
outright banned whole house STRs last year.
California is one of the latest states to consider a state bill that clamps down on STRs. The bill started out as a statewide measure but has since been narrowed to only apply to San Diego County. The short-term rental of second homes and investor properties listed on home sharing platforms would be prohibited under the bill.
In Arizona, legislators recently passed statewide restrictions on STRs and Gov. Doug Ducey, who supported a bill that deregulated STRs in 2016, signed it. The bill was meant to put more control on “party houses” that have become a nuisance in some neighborhoods.
In Amherst, New Hampshire, the town council approved an impact fee to be assessed on property owners who rent rooms or properties on sites such as Airbnb. The fee is in addition to the 6% local lodging excise tax Amherst already collects.
A number of Florida beach communities also prohibit them unless the property is in a zoned tourist district.
Some homeowners who live next door to short-term rental properties that have a constant churn of tenants complain that STRs negatively impact their neighborhoods and their property values. That is one of the reasons behind the rise in regulations and prohibitions.
To be sure, any real estate investor who wants to get in on the potential earnings of STRs will need to do their homework. Even then, investors may face regulations that could be enacted after their purchase that bans STRs or limits their ROI due to taxes, fees or other restrictions.
Even with new regulations, STRs are gaining market share and continue to grow in popularity. Look for jurisdictions that realize their economies prosper when people come to town to stay a few days or weeks and spend money at local restaurants, stores, museums, movie theaters and other area attractions. ·
