Strategies for STR markets in varying phases of maturity

[Sean Bramble]

As I look across the US, I'm seeing that different STR markets are in different stages of maturity, and am curious which strategies investors are using to target them.

On one end of the spectrum you have mature vacation rental markets that have stood the test of time (long before Airbnb and VRBO existed). These markets typically have lots of competition, higher home values relative to earning potential (since most homes are essentially valued like hospitality assets instead of homes), and lower regulatory risk since the local areas have embraced STRs (rely on them for taxes, etc.). You'll pay a lot to invest in these markets, can earn a decent (but not incredible) return, appreciation  can be (relatively) modest, and they are generally lower risk investments. 

On the other end of the spectrum you have nascent markets that are developing before our eyes. These markets were essentially created by Airbnb and VRBO, typically have less competition, lower home values relative to earning potential (since most homes are valued as homes instead of hospitality assets), and higher regulatory risk since these municipalities may have not yet decided how to treat STRs. You'll pay less to invest in these markets, with more market and regulatory risk, but the rewards could be quite high in terms of cashflow, appreciation, and getting "grandfathered in" to a limited number of STR permits that might one day be required ... OR the town you are in could ban STRs overnight, wiping your business out completely. High risk, high reward.

... And then there are obviously markets between both of these extremes ...

Where do the markets you're investing in (or interested in investing in) fall along this continuum?

What have you seen happen over time to revenues, competition, home values, and regulation as these markets have evolved?

What do you anticipate will happen in the future?

What strategies have you used (or seen others use) given these market dynamics?

Long-winded question, I know ... would love to hear your thoughts :)

[Jerry W.]

@Sean Bramble welcome to BP. I know that current wisdom says go to massive tourist destinations to buy a vacation rental, but you would be amazed at how many folks are always going somewhere near us that we don't consider vacation areas or are passing through an area. During the middle and end of 2020 with nobody flying, I have a massive amount of people staying at my STR who traveling to Yellowstone and other national parks. They had no intention of spending time in my town, and would arrive late and leave early. I also had a fair number of fishermen who would rent for a few days to a week and would not only fish the local river but use my house as a base to fish in a 70 mile radius. We do have a fair number of tourists in the summer, but I get a lot of one night stay travelers. Don't overlook the girl next door, she might be a gem.