The Future Of Short Term Rentals

[Cole Simpson]

It's hard to say exactly what the future will be like, but it seems likely that short-term rentals could become more popular in the years ahead. This would mean an increase in available units and lower prices for those who rent them out! How do you think the market for short-term rentals will change in the future??

[Sean Bramble]

My predictions …

- Demand will reach some sort of equilibrium in the next 5 years or so. Airbnb is still “new” to a lot of late adopters, but it’s only a matter of time until everyone is using it (remember, it didn’t take that long for grandparents to start using Facebook … Airbnb/ VRBO will be no different)

- Larger cities will continue limiting STRs due to the effect they have on neighborhoods and communities. I would expect even very pro-STR cities like Phoenix to rethink their regulations to some extent in the years to come. It's just too easy for investors to convert their housing portfolios to STRs overnight, and this is raising eyebrows across America, especially in cities. Add in the current lack of supply in the housing market plus aging millennials trying to buy their first slice of the American dream and the stage is set for more regulations

- Some early investors will make a killing in areas that limit STRs as they get grandfathered into a limited number of permits linked to properties (not people) which are transferable to new investors who will buy their properties at a significant premium. But other investors will get screwed when municipalities write laws in ways that prevent transferring permits, or that outlaw STRs altogether

- Vacation markets will tend to be more STR-friendly on average due to the income they bring to areas that depend on tourism. These markets will be particularly interesting to watch as they develop further ... Preaching to the choir on this one

- Returns will eventually settle somewhere that is fair for the level of risk STR investments represent. In the past (and even still in some markets today) it’s been relatively easy to cashflow like crazy … that’s because Airbnb lifted demand so much that it’s taken supply awhile to catch up. But supply WILL catch up eventually. I imagine yields will level out somewhere that compensates owners for 1) the cost of property management, and 2) revenue volatility (more on this below)

- We will start to see 2 things happening in vacation markets where risk adjusted yield is higher than it “should” be:

1) New entrants will pop up, increasing supply and lowering yield in markets with low barriers to entry for most investors regardless of when they purchased. This is most applicable to markets with space for lots of supply growth. Keep in mind this can happen WAY faster than it does in traditional housing markets bc new construction is not the only way to increase supply of STRs… existing homes can simply be converted.

2) Home prices will rise significantly in areas with some sort of barrier or boundary limiting supply growth (example: beachfront properties, areas surrounded by water or protected land, capped permits, prime locations close to attractions, etc). This is because these “homes” are being valued as hospitality assets. As prices rise, yields will decline for new investors (but not for those who got in early at arbitrage prices)

- Many investors will lose their shirts during the next recession in their market (or even as supply grows in their market) bc they purchased STRs at too-high prices assuming revenues would stay consistent like rents have in housing (they wont - hospitality spending is discretionary, housing is not, so hospitality demand will swing with the size of peoples wallets). Using an exclusively housing lens to make hospitality investments is shortsighted, and a lot of us are vulnerable to this oversimplification bc of our past investing history in residential RE. Profit margins simply need to be higher in hospitality to weather the storms (that, or you need larger cash reserves/ geographically diversified portfolios)

-Large, institutional investors will eventually move into the space just like they have in housing. This will put upward pressure on prices, and yields will compress further. This will be a great opportunity for those of us with portfolios to exit at a premium, but it will also make it hard for those starting out to gain traction. Get in NOW.

- Larger companies will enter the space with custom-built STRs that better serve the needs of guests. Customers will be happier with these options than with what’s on the market today, and that will lower yield for those of us who can’t compete. Remember - this whole phenomenon is just a growth in demand for GROUP LODGING. People used to buy multiple hotel rooms for their family/ friends bc they didn’t have access to better alternatives. Enter Airbnb and all of the sudden we realize there is all this underserved demand for connection-oriented hospitality experiences. But there is NO reason to believe that properties originally designed to be homes that were later converted to hospitality assets should outperform the purpose-built hospitality assets of the future.

- The most successful investors will be the ones who invested in SUSTAINABLE sources of competitive advantage. Examples: properties in areas zoned exclusively for STRs, purpose-built STRs, prime location relative to attractions, views, unique architecture, and other amenities that are time and capital intensive to replicate like indoor pools, etc… That average looking house in an average location you’re looking at on Zillow might cashflow today at an affordable price, but it is wildly vulnerable tomorrow. Side note: some of us will make a killing flipping average properties like this and selling them as turn-key investments to other investors… and it will be those sellers’ responsibility to educate buyers about the associated risks so that they can be prepared

Great interior design and photos will become way more common. Many of us can print money today with great design because it delights guests and makes our listings stand out from all of the average ones nearby. But the delighters of today will become the base expectations of tomorrow as new entrants breathe new life into an old asset class. This will be especially true of new/ fast growing vacation markets that weren't really on the map before Airbnb. Search listings in Joshua Tree and surrounding areas and you'll see what I mean (I know, I know, those markets have always "been there", but the growth you're seeing today is due to Airbnb plain and simple). On the contrary, legacy markets like beaches will lag in design since all the prime real estate is already owned by old-school STR investors who see no reason to change a formula that has been working for them

Finally, some of us who played our cards right (hopefully MANY of us) will become phenomenally wealthy. Our original SFH STR investments will be stepping stones to larger, commercially zoned "multi-family" hospitality investments like motels, hotels, etc. And the best of us will play leading roles in redefining what hospitality means to operators and guests alike

Hah, I really didn’t intend to write a novel when I started this but I guess I did. Some of these predictions are no doubt wrong … and I hope NO ONE loses their shirts … maybe I will lose my own shirt … but some of these predictions are already happening before our eyes. It all seems a bit like the Wild West, or a case study out of an economics textbook … maybe it actually will be in a textbook one day

But I can say one thing for sure: on a personal level this is all so intoxicatingly interesting to me, and I feel so undeservingly lucky to be spending my days devoting this much attention to it. And as Ive started to spend more and more time on these forums with you all I can see I am in great company :)