The Future Of Short-Term Vacation Rentals: A Doomed Investment?
It’s high time for holiday travel. The snowbirds are escaping to South Florida and the Pacific North-westerners are hopping across the Pacific for a little Aloha spirit. Suffice to say — vacation rentals are hot, but does this mean that they are a good investment?
I, personally, love traveling and switching up sceneries — especially during winter time here in Indiana! I mean, who wouldn’t? I also like the idea of owning a beautiful property in my favorite places to visit, like Miami or Southern California. However, the numbers make me balk a little, specifically when I hear of real estate investors stepping straight into financial disaster by purchasing overpriced properties that they can’t even afford to keep. This sounds like trouble if you ask me!
The rise of Airbnb has increased the interest in the idea of owning vacation rental properties. Airbnb’s business model deserves accolades as they have leveraged an incredible amount of success, churning millions in revenue, without actually owning any properties. Interestingly enough, most of the biggest players in business own “nothing.” Uber owns no cars, and Airbnb owns no homes; but these entities have allowed for individuals to profit and filled a need in some way.
Airbnb has been a way that many homebuyers have been able to afford their rent by renting out the additional rooms in their residence or by offering up a couch. Its allowed some investors to maintain pretty high rental rates. Many great reasons exist as to why Airbnb is a good option in the vacation rental market, but there are also downsides to it.
Is There A Downside?
The negative side to the rise of Airbnb and short-term vacation rentals is The Airbnb Effect. Many locals are getting priced out of apartments and condos, because landlords have learned that they can get 3x, 4x, and even greater profit from renting out to short-term tenants as opposed to committing to annual leases. Although the temptation may be too great to resist, is this way of renting out a property actually sustainable?
In a recent blog, I talked about where the market is headed. It’s not a secret that when the market fluctuates in a downward trend, vacation trips also diminish due to people wanting to save money. Changes in the market quite heavily influence air travel, hotel vacancy percentages, and how much can be charged for short-term vacation rentals. If you have taken out a mortgage and payments, at a 90 percent occupancy rate for a property, and the market tanks — how will you cover the difference between earning $4,000 a month on your property and $1,000? How long is it feasibly possible for you to spot the $3,500 that your short-term vacationers once took care of for you?
The Government’s Involvement
Even more unpredictable, or at the very least should be noted, is government legislature regarding Airbnb rentals. Governments are cracking down hard on the legality and availability of short-term vacation rentals. In some counties, Airbnbs are outlawed! Other cities and destinations require special permits or limit the amount of short-term rentals in a given area. Take careful time researching what the bylaws and rules are if you are interested in short-term vacation rental investments.
Just take a look at these news stories that make Airbnb investment rentals not as lucrative or feasible as you might think:
- Austin bans non-owner occupied short-term rentals
- Council votes down Airbnb approval in Asheville
- Irvine property owners get hit with $500 a day penalty for short-term rentals
(on the flip-side, there are governments that have banned banning Airbnb)
Annual rentals are not going anywhere in bread-and-butter cities. As an investor, it’s important to keep a level headed approach when it comes to jumping into and going after the latest fad. Be mindful to stay away from the trends that could tumble you into financial distress or cause an undue amount of stress.