Thoughts on STR property "appreciation" in vacation markets?

Question

What do you all think of the insane "appreciation" of STR type units in popular vacation areas...think anyplace with a beach, smoky mountains etc. Crazy to look at the prices from 5-6 months ago and see a 20%+ increase in the asking price. Places that were selling for 290-350K are now asking 450k+. I have several LTRs where I live and was looking to get into the STR market. But I see some crazy price "appreciation" along with interest rates that are several points higher than what we saw 6 months ago...and it has me wondering if it makes sense right now. I'm sure deals are still out there, but a year or two ago you could've bought any STR, just about, and cashflowed it nicely (I was starting in RE about a year and a half ago - have a duplex, fourplex and 2 SFHs). I believe it's still early in the market for STR rentals overall, and these prices may go up. But at the same time I'd hate to be caught holding the bag on an "overpriced" property. What are your thoughts on the STR market and these high prices? Do you see these prices coming down in the near term or just leveling and seeing a slower appreciation?

I wouldn't mind still getting a STR but with more LTR cashflow. Although I think the risk level with STRs is much higher financially.

Ryan Moyer · Answer

They were saying the exact same thing about work from home stocks 6 months ago.  It's a new world.  Everyone is going to be riding their Peletons into Zoom meetings before they log off to watch Netflix, sign their contracts on Docusign, and their kids remote learn on Chegg while they go shopping on Shopify website and ordering dinner through Doordash.

Many of the work from home stocks are down NINETY percent.  The good ones are "only" down 50-70% as they all keep dropping earnings report after earnings report that signal that all that monster growth in and coming out of the pandemic was more temporary rather than a change in the world.

I'm not saying it will happen in the travel industry, but a lot of people took their annual vacation 4 times in 2021, they booked later than is normal, they worked on the road more often than people will put up with long-term (especially in terms of cost), etc.

Home values are not going to fall 50% but travel trends, especially in certain markets that people were forced to travel to during Covid, could.  It's more plausible than people realize.

I'm not saying people shouldn't buy, just that people need to be aware of the risk and leverage accordingly.  The euphoric "just buy anything that makes sense based on Covid numbers" we see in real estate investor groups is the EXACT same stuff I was seeing in equity investing groups last year.  Real estate always wins in the long run, but just make sure you're not going to be in severe trouble if bookings drop by 20-50% from 2021 numbers for a little while.  Again, it's a lot more plausible than people realize.

Luke Carl · Answer

You know what you’re doing. It’s all about the numbers. I just ran numbers on 2 beds in the smokys at 7% interest. I feel as long as you can find one with a purchase price under $600 (and you can. There were two just sitting on realtor.com the other day) you’ll still be well above 15% COC IF you manage it well.

That’s the catch with short term and always has been. You’ve got to willing to self manage and be good at it.

Collin Hays · Answer

We are seeing a bit softer May than last year and already have homeowner clients panicking, wanting to slash rates, etc.  2021 was a "Super Bowl Year" for a lot of things.  Vacation homes, car prices, crypto, guns, collectibles, Rolex watches, you name it.  Anything that went parabolic (meaning a sharp, dramatic turn upward and to the right) must come down, and it will often come down in a mirrored parabolic fashion that it went up.  That means there's some pain ahead for a few folks.

Carson McGee · Answer

My personal opinion is that the market is naturally correcting itself, although we may see a slow down of price appreciation with interest rates increasing. The previous appreciation of vacation rental markets is due to many factors. You have the buyers who have been couped up due to covid and are looking to buy a second home as a lifestyle asset. You also have a nationwide appreciation, which has been concentrated in places that have a location advantage. I believe the biggest factor in short-term rental market appreciation has been a natural correction of returns. Just last year, my team was investing in STRs that generated a 20%+ gross yield (annual gross revenue/purchase price). These levels of returns are extremely abnormal and now very difficult to find. STRs are just now beginning to be seen as an emerging asset class. There is no reason short-term rentals won't trade on cap rate in the coming years just as other long-term real estate assets. The primary driver for increased prices is that people are recognizing the value of an income-producing asset in vacation markets. The low inventory and ideal locations also play a huge factor. I think zoning & compliance is going to be a huge appreciation factor down the road. There is inherently more risk and work associated with short-term rentals when compared to long-term rentals. You run the risk of regulations changing or occupancy/ADR shifting. I am able to invest with more certainty due to markets with strong rental history or value add properties. Ultimately the STR/LTR decision all depends on if you are purely return-driven and how passive you want to be.

John Underwood · Answer

I see many respected people and analist say this is the new normal and not a price bubble. So if you wait house prices and interest rates will likely be higher. The demand is still heavily outweighing supply. Even if we have a slowdown as most are predicting, people will still go to popular, drivable vacation destinations.

So if the numbers work at current levels then you should be fine if you buy the right property in the right location.

Kevin Luttrell · Answer

Like Luke said, it's all about the numbers. Don't beat yourself up thinking about how it would be different if you bought last year or a few months ago - if the current numbers make sense, that's all that matters. Might not be as easy to find stellar deals as it was a few months ago but there are still plenty out there.

Ryan Moyer · Answer

Opinions vary wildly on this.  Most people say if the numbers make sense then it doesn't matter what the price was in the past.  I agree with that in principle, you just have to be careful you're confident in the numbers you're using to underwrite with.

If you're using 2021 numbers then the risk is that it could end up being a major outlier year as everyone traveled way more than normal due to pent up demand.  I'm not saying it will happen, but travel trends can pull back way closer to 2019 numbers than people expect.  Just ask all the "work from home" stock holders.

If you can find something that underwrites based on 2019 numbers, or numbers a decent clip below 2021, you mitigate your risk by a lot.

Lisa Marie · Answer

It used to be that you buy a house at a price that’s comparable to what people pay for a primary residence or a LTR, but if you can make it work as STR, you can make more money.  Now, people are buying STR eligible properties at 2 or 3 times the price of other comparable but not STR eligible properties.

I find it funny (and scary) that nobody is talking about the fact that in most of the vacation markets, the STR supply probably doubled over the last 2 years. If the demand goes back to pre-COVID norm or even lower (due to a possible recession), what happens then?

Bruce Woodruff · Answer

They sure have gone up dramatically.....I bought an STR in late 2020 that has gone up 2-1/2 times in value. I keep getting offers to buy it, but it's a little money maker and I don't know if I could do better. I'll hang onto it.

I am one of those who thinks this over-inflated market will 'correct' or crash. When? That is the question, right?

Dan Forler · Answer

@Ryan Moyer. I am glade to see people starting to talk about the reality of what is starting to happen and going to to happen with the STR market.  We travel for leisure 8-10times a year regional and domestic.  We have just pumped the breaks on trip do to travel costs.  For this summer 2 people flights and rental car for six days is $2200 we haven't even looked at places to stay yet. $ is going to get tighter people have more options close to home now that things are opening  up.  Transition costs are through the roof.  As far as the work from home that is getting less and less.  I I live 4 miles  away from  TECH  company that empyees 10000 workers called there works back to work.  The line coming and going in the AM and PM are unbelievable.  I agree with looking at 2019 numbers we will probly never see they type of numbers again. I am all for STR but be careful what #'s you use to qualify a property.

Thoughts on STR property "appreciation" in vacation markets?

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