Are you worried about short-term rentals in Orlando/Kissimmee?

[Serena Kim]

Hi - are you currently worried about short-term rentals in Orlando/Kissimmee? 

Recently, that has been one of the top question I've been getting from investors, especially given how well the real estate market has done. My short answer is no and below I'll do my best to answer some of the reasons fellow investors cite for their concerns. At the end, I'll include my own concerns. I would love to get your thoughts as well. I've been wrong many times in the past and thanks to this community I'm becoming better investor. 

Other People's Concerns

Concern #1 "House prices are going through the roof and properties are going for $10k to $100k above asking!" 
Answer: The value of a house is whatever someone is willing to pay for. In theory, the value of an asset is the present value of it's discounted cash flows. It simply means, you estimate the cashflows it will generate and discounted by an interest rate (more on this next). House prices near Disney have skyrocketed in price, but so have the cashflows. I'm currently charging significantly more in 2022 than I used to in 2018+ ($50-100 more a day on average). Similarly, the cost of building a house (materials and labor) increased by quite a bit over the past year alone. If you can charge $10 more a day ($300 a month), that would justify an additional mortgage of ~$50k. Finally, in a normal market you have around 5 offers per property. Every week one of my clients is bidding for a house that has 20-30 offers! Supply is not even close to the demand! Prices are not going down any time soon. I personally think houses will continue to appreciate at least for the next 3-5yrs.

Concern #2: "The Airbnb market feels saturated. So much competition"
Answer: A simple check on Airdna proves this wrong. Type Kissimmee on Airdna and scroll down to Rental Growth. Back in 2019 there were over 45k listings. Now there are around 37k. Similarly, Tourism is increasing in Florida. 

Concern #3: The Fed is hiking interest rates and that will cause interest rates to go higher and the housing bubble to burst
Bubbles are driven by irresponsible use of leverage, we are not close to that (corporate leverage is significantly healthier, when was the last time you heard about NINJA loans, etc). US government debt is another story, but that's the great benefit of having the world's reserve currency. Historically, when the Fed hikes interest rates, as soon as the process begins you tend to see interest rates move lower. What does happen is that the yield curve flattens as the market start pricing in the probability of a recession. Mortgage rates are driven by the back-end of the yield curve (30yr rates), and those tend to stay low (as they are now). While the market is pricing in 6 interest rate hikes by February of next year, I personally think they will hike only 1-2 times. Same with their balance sheet. The US economy is moving into a deflationary bust (lower growth and lower inflation). By the time the Fed looks to hike a 2nd time (May or June), they may have to stop. I could write a whole blog about this, but simply to say rates are not going to move higher, and if anything it should all support housing prices. 

My Personal Concerns

Concern #1: Struggling competitors squeezing margins to make ends meet. Operators in the area are doing a much better job than back in 2019 when I used to see hosts rent their beautiful homes for $80 a night. But still, when I see a 6+br resort house charging $150 during holidays I can't help but get frustrated. When everyone is making money, competition comes. We are seeing a lot of townhomes come online (and more will probably come soon). Some of those are highly overpriced and don't have big private pools. On the other hand, they are luxurious. I could see a lot of those operators struggle to rent and start lowering prices.

Concern #2: The cashflow is pretty good, especially for those that manage their properties well. The market is ripe for an institutional player to take over, and I don't know what will be the net effect of that. Uncertainty makes me a better investor, but also scares me. So far our market (Kissimmee) is managed mostly by mom-and-pop shops and by the owners. At some point a big institutional player looking for cashflow will join the market at scale and provide the institutional quality management that the market needs. Every day when I look at properties and see their Airbnb reviews I notice that a bulk of the people selling are because they are not making money. If you see a listing, try finding that owner's Airbnb profile, you'll probably see a bunch of guest horror stories and extremely low daily rates. 

Hopefully this wasn't too long (or boring) to read. Please feel free to share your thoughts!! Would love to hear what others are thinking. 

Serena

[Nathan W.]

I worked for a home builder in central Florida in the mid 2000s. The housing crash effected the entire US but it hit that area particularly hard. I used to drive through Davenport every day on my way to a construction site in Winter Haven and it was a ghost town. Neighborhood after neighborhood of purpose built vacation rentals and they were all empty. 
I moved away but we came back in late 2012 for a family reunion. Our entire extended family rented a HUGE home in Reunion. We were all amazed at how cheap the house was to rent.

That doesn't mean the same thing will happen and this time around, but it's worth remembering. Disney is one of the most visited places in the world but it's also expensive. Parking and Park Tickets alone are enough to price out a lot of lower and middle class visitors during an economic down turn. You also have a lot of compeition from the resort hotels.

I keep hearing that lending is in check this time around. I'm not so sure that's the case, at least not in the STR market. DSCR loans are a prime example. Investors can qualify for a loan with a quick credit check and then use AirDNA data to project the income of a property. Some of these are getting down to 15% down payment and a coverage 1.2 (I've even heard of one going down to 1.0). If a loan is given based on the income of a property vs the income of a person, what happens when the nightly rate drops during a down turn? How many of these new investors have enough reserves to keep them afloat?

And that's the point. Real estate is cyclical. Even if there isn't a bust as big as last time there will be a slow down. There comes a tipping point when occupancy goes down and people start to cut their prices. To many people are doing their numbers based on today's rates with no room for things go down. 

I'll point out that even though that sounds really doom and gloom I am currently building 3 cabins in the Smoky's. I believe in vacation rentals as an investment (really more as a business).  But I stress test all my numbers before I make an investment. I know that my nightly rates can drop to less than half the current rates and I can still make my payments. I just don't know how many others are doing the same thing. I see a lot of people throwing caution to the wind and it worries me. 

There's another conversation to be had about if this is a bubble or inflation. I think it's 50/50. I think prices will come down but not to where they were. Maybe that will be enough to keep people afloat.