Doing The Math: Short-Term Rentals as a Long-Term Strategy

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A great investment strategy begins with a great question; a heightened sense of awareness around a market’s shift, a targeted curiosity and gut-level hunch regarding how things might play out. Change, at the scale we’ve seen during the pandemic market, has brought new and urgent questions to the minds of real estate investors. Among them: what does it mean to add $36,000 to the median price of an American household?

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The shortage of lumber, still-constrained supply, and motivationally low interest rates have sent shockwaves through industry niches, altering buyer behavior and—most importantly—re-distributing the yield. And those who are watching have seen one seemingly interminable source of investor yield has come from short term rentals.

Quickly the top choice among travelers and tenants, hosts and property owners who have offered short-term rental accommodations have been well-rewarded during and after the peak of the pandemic insecurity. Investors who were able to cement themselves as early adopters of the strategy saw low barriers to entry (converting an existing property offering, or acquiring homes in secondary markets before prices spiked) and quick, secure returns.

Now new questions come to mind: can the head-turning margins endure? Is demand here to stay as a new normal settles? Looking at three sections of the investment timeline—the now, the near-future, and the long-term outlook—investors can understand what’s in store for short-term rentals, and consider the path less travelled but more promising: the institutionalization of short-term rentals as a new post-COVID asset class.

The Now

As an alternative option for travelers weighing the safety concerns of hotel accommodations, short-term rentals outperformed hotels in 27 global markets through the thick of COVID-19. In preparing for a return to travel, Airbnb’s CEO Brian Chesky announced the need for millions more hosts, and property owners in multifamily buildings with 40 doors or less saw some of the strongest returns.

For the rental period between September and October, the numbers have only moved in the direction of the investor’s favor. North Carolina’s cumulative 35,240 rentals are going for an average nightly price of $345.00 and achieving a 62% occupancy rate; for every ten nights the hypothetical property spends on the market, the investor sees $2,000 in revenue. It’s not only lucrative, it’s repeatable. Vermont properties are seeing an average $313.00 nightly rate at a 65% occupancy, and homeowners in Montana have been able to list at $329.00 per night while continuing to see a 58% absorption.

The Near-Future

Back to those questions surfacing in an investor’s mind—something that needs asking, at those rates, is why? Short-term rentals are achieving higher monthly rates than anywhere else in the market. Frequent payments, higher nightly averages, and sustained tenant demand have made short-term rentals one of the most attractive strategies in the post-pandemic space. Again the question comes: why, and for how long?

The allure of short-term stays for travelers is understandable: local immersion, more flexible booking, competitive rates and more private stays. But changes in homeownership are further underpinning the strategy. According to the U.S. Census Bureau, there are currently 108.5 million Americans who rent, and only 37% of Americans under the age of 35 own homes.

Compared to that <35 year old demographic, Generation X—between the ages of 40 and 55—have four times the assets of younger adults. This is, in part, attributable to the normal culprits of student debt and the 2008 financial downturn. But we might consider that it also demonstrates a preference for the benefits of renting: less upkeep, more available capital, less commitment and more flexibility.

It is the latter two pillars, the abundance of flexibility and absence of commitment, which short-term rentals best serve. As many professionals settle into fully remote positions, and as home prices continue to exclude prospective buyers from the market, shorter stays and easy leases will continue to be the preference among renters. To explore other locales, enjoy more favorable living conditions of less dense cities, spend short stays around friends and families and enjoy being untethered as the post-COVID future continues to play out—the new demands have no end in sight, and short-term rentals are the real estate niche that offers the best answer.

The Long-Term Outlook - The Birth Of An Asset Class

Let’s return for a moment to the basics. Housing has been unambiguously one of the best investments on the planet since any established investor living today will be able to remember. Residential real estate is the world’s largest asset class, valued at almost two and a half times the global asset value of equities, and yields an annual return of 7.05% on average. That return-beating equities at 6.89% and bonds at 2.5%-comes with comparatively low risk and ample opportunity to find portfolio diversity without dispensing with any more risk allocation.

Pioneer investors who have followed the market yield to the short-term rental niche understand that we’re watching a new door open—short-term rentals are becoming real financial instruments, predictably lucrative investment vehicles. Because the strategy is relatively new in its ascendance, there’s an entire investment world of untapped potential by institutionalizing short-term rentals and turning them into an asset class.

In addition, new-to-market tools offer retail and institutional investors the ability to forecast seasonally-adjusted yield based on different property metrics. Airbnb revenue calculators that work with real-time data make it easier to understand this investment strategy the way an investor would approach any other financial vehicle. The same tools can empower investment groups to make more informed acquisitions, studying the nightly rates, average occupancy, and demand patterns across different markets. In combination with owner’s portals that can report on net operating income and occupancy trends, the math of short-term rentals can be as accessible and straightforward as reading a candlestick chart.

Taking an institutional approach, investors and investment groups can pool funds and invest in properties across the market niche. Some of the secondary markets in which property prices are still hovering around a pre-pandemic normal are showing strong nightly rates and consistent occupancy. Small multi-family dwellings are also seeing incredible returns when used solely for short-term rentals. Investors can allocate capital to streamline the rentals and invest in automated solutions to tenant turnovers, property management, payments and underwriting. The result is an investment with the low-risk, steady-rewards benefits that real estate offers, but with more frequent exits, more competitive demand, and higher revenue potential. Having asked all the right questions, investors can then sit back and avoid that final curiosity that always plagues the mind in situations like these—all market signs show the short-term rental strategy really is as good as it seems.