Inverse Economies of Scale in Short Term Rentals

[Clint Harris]

My wife and I operate a house-hack duplex at Carolina Beach in NC and started doing really well. Currently on track to do 57k in gross rents in our extra 3/2 unit. Because of this, we started to scale, partnered with another couple to create our property management group, and currently have 8 units. In the process of educating ourselves, and diving really deep into the AirDNA data on our market, we discovered a really interesting phenomenon that I thought I might share. Anyone who operates STR, or is thinking about getting in to it may benefit.

There is a reverse economies of scale phenomenon that really dictates which properties thrive in our market. Here’s what I mean. The AirDNA data for our market dictates that as a median performer in terms of average daily rate, occupancy, seasonality, and proximity to the beach, a 1/1 unit is worth 30k gross yearly in our the short term rental market. We actually blow those metrics away with our data-driven staging and marketing, but the point remains, that’s the median for this market. So a 1 bedroom is worth 30k gross, a 2 bedroom is worth 42k gross, and a 3 bedroom is worth 47k. Here’s where it gets interesting. A 4 bedroom unit drops back to 43k gross. You would think that as the size of the property increases, the average daily rate would increase, which it does, however, the occupancy begins to creep down. A 3/2 unit has average yearly occupancy of 63%, however a 4 bedroom or larger drops to 52%. We’ve discovered that this is due to smaller groups being more nimble in the market. It’s really easy for us to book a tues-thurs in a 1/1 or a 2/1. We get a lot of the guests that are like “Hey, I’m not working at the Cheesecake Factory here in Raleigh for the next couple of days, I’ll grab my girlfriend and run down to the beach.” Those days book up really quickly, where as a 4 bedroom unit usually is a larger group, which means more planning, usually longer stays, and not much spontaneity. As a result, there is a donut hole in terms of the most profitable listings here. Anything 1-3 bedrooms does really well with high occupancy, there is a dip in 4-6 bedrooms, and then the profitability returns in large ocean front properties that can host 16-25 people. Obviously these are large luxury properties, usually have a pool and are rented for weddings and as group venues. These have a huge barrier to entry due to the price, and still have low occupancy, but obviously make up the margins by having extremely high average daily rates. Anyway, the point is, use the data. Don’t always assume that short term rentals are all about beds and heads. Study the market closely. One thing we’re actually experimenting with is taking our 3/2 unit, and closing off doors to 2 bedrooms and the hall bath so it’s just a 1/1 master. We charge a slightly lower rate, and a lower cleaning fee, but it’s much easier to rent that on a random Wednesday 36-48 hours in advance than it is a 3/2, and something is better than nothing. Hope this is helpful!