New Hosts: Are STR a Good Investment during a Recession?

Question

I am aware of all of the fear-mongering posts of REI on BP (especially during a recession!) so I am trying to make this post not like others. But I wanted to specifially reach out to new AirBnb Hosts (perferable within the past year) on how their new STR is treating them and whether or not they are concerned with their new purchased investment due to a recession.

To state, my wife and I have been interested in the STR business for the past year. We have read Avery Carl's book and watched a TON of AirBnb YT videos preparing us to purchase and set-up our new STR mid of 2022. We weren't too worried when rates started going up but have been a little worried about the recession and increase in prices everywhere.

Flights, car rentals, and gas prices have sky rocketed in every state which would correlate to people not vacationing as much as they did in 2021. Plus, with a recession, I could see people not taking thier lavish vacations this year and maybe waiting a year or two until prices and market stability improves.

So my question is to new STR hosts: Have you found your new STR a good investment so far and are you at all worried about future bookings to a recession? And for long-times STR hosts, how will you prepare for this recession?

Thank you!

Collin Hays · Answer

Recessions are macro events. Unless you are buying shares of a mutual fund, investments are specific events.  You can make a good buy in a good economy or a bad economy, and you can make a poor buy in a good economy or bad economy.

I made two of the best STR buys of my investing life in mid 2021.  In the real estate world, no deal is a deal unless it's a steal.  In other words, only buy something when there is no way you can lose, recession or otherwise.

Jennifer Jo McCallon · Answer

We own a few STRs - one is a duplex- the upstairs tenant is full time and covers the whole mortgage. The downstairs airbnb is all gravy. I really like this business model- this property is in Pittsburgh, PA, near stadiums & downtown  and not too far from the universities. We also own two 30-day stays in Napa/Sonoma counties and both of those are working out well thus far.

I like to- and I think it is important to- create a really great airbnb experience with fun things like games, puzzles, a record player, VCR (quirky things you don't find everywhere, throwbacks) or whatever works in your market/level of rental. Mine are all smaller, modest, reasonably priced, which keeps me in a good position regardless of the economy.

I also like smaller units to avoid the party crowd.

John Mausteller · Answer

Hi Caleb -

I have owned and managed my own STR rentals since 2013.  Starting with a foreclosure purchase in late 2012.  I am since bought (and sold) a few more STR rentals in the Outer Banks of North Carolina.   In August of 2020 I bought my first STR in the mountains of Western North Carolina - and in late 2021 I purchased two more cabins in Western NC.   I have noticed this year, as everyone was back in school, it was a little bit slower but summer is fully booked at the beach and the cabins in the mountains are doing very well still.  I do think about gas prices slowing some down, but I also think that people might just vacation closer to home which just means a lot of my renters are coming from same state or neighboring states.  Here on the Outer Banks, a lot of my renters get here and hardly drive anywhere during there whole stay so really they are just making the drive in, and then the drive home.   I am curious to see how it progresses but it does not seem to be effecting my rentals a ton at this point.

Katrina Razavi · Answer

Hey @Caleb Stevens, my experience w/ STR's has been good we have them in San Diego (bought a yr ago) and SF, both pretty touristy cities where there's a lot of demand for Airbnb's. I haven't tried to do any marketing whatsoever and have really high occupancy rates on both. I'd say so long as you're in a good location I don't foresee this trend changing all that much b/c these cities are also destinations for things like work events (i.e. traveling nurses, traveling professors), tourists and industry events (i.e. conferences and trade shows). So I think location is one variable.

One thing you should do is also run the scenario of if you had to rent it long-term. STR regulations are quickly changing and tightening, so you wanna make sure whatever investment you make can cash flow if you could no longer STR it.

Like others mentioned, you "Make money when you buy" so as long as you underwrite conservatively and the #'s make sense for either LTR or STR you should be safe. Best of luck!

Carolyn Fuller · Answer

I've experienced that people tend to scale back on their vacation plans during recessions but that can often mean a boost in vacations that are less lavish and closer to home.

Pre-pandemic, a slight majority of my guests were international travelers. I've had one international guest this season but I'm still fully booked, just with domestic travelers instead of international travelers. Prior to this year, I had only 1 guest who was here on work and not vacation. This year, a third of my guests are here for work related activities. Pre-pandemic, I got less than 1 cancellation per season. This season, I have gotten 8 cancellations - most of them from the work related visitors. One of the cancellations happened 24 hours before checkin. Within 40 minutes it was re-booked. If I allowed one night bookings, every single night this season would have been booked. As it is, I will end up with less than 5 vacant days for the entire calendar year.

Recessions impact my rentals but not necessarily the revenue from my rentals.

Sean Bramble · Answer

I’m hearing more and more folks are underwriting their deals with a blend of 2019, 2020, and 2021 revenue from Airdna to adjust for the spike in travel during the pandemic years (I.e., don’t just look at the trailing 12 mos figures Airdna spits out). Find actual comps rather than using rentalizer. That’s one suggestion

Beyond that, a key metric I look at in is debt service coverage ratio (DSCR). Many lenders look at this to gauge risk, and you should too. A DSCR of 2.0 means you can cut your rates by 50% and still break even, 1.5 means you can cut your rates 33%, and so on. Many of us get infatuated with cash on cash for obvious reasons, but DSCR is a necessary addition for STR underwriting. Remember, STRs are hospitality/ discretionary spending, not housing, so revenues will swing with the ebbs and flows of peoples’ wallets. You want to be able to cut rates when you need to to maximize revenue in a down market, and a higher DSCR will allow you to do this … I.e., more “meat on the bone” is safer (meat = profit margin). Reserves achieve the same outcome, but a lot of folks are bad at actually hanging on to them (but yes, you do need them).

I also expect there to be some good deals on the horizon with anxious sellers over the next 6-24 months … so be patient and buy great deals, they are coming

Good luck!

Ryan Moyer · Answer

Within the last year is not a good measuring stick.  I bought 2 STRs a year ago and they have both literally doubled in value, all while I got to enjoy the greatest 10 month run in short term rentals in history by a huge margin.  Of course anyone that bought a year ago or 6 months ago is happy.  If I could go back in time a year I'd buy 20 of these properties.  If I could go back in time a month, not so much.

Connor Cushman · Answer

I personally don't take profits year 1 and put everything into reserves and/or reinvest into my properties to make them stand out. Cash in the bank allows you to sleep at night as an STR owner.

John Underwood · Answer

It comes down to buying the right property in the right location.

You have to do your research.

Michael Porche · Answer

Hey @Caleb Stevens! I sent you over a message... but to answer your question. This is definitely a hot topic.

• For my new investments. Yes, I have found them to be good deals so far. We just refinanced on one with very high-interest rates which was a very hard pill to swallow, but there is room on the bone still for projections and people are still traveling. We have seen a slight slow down in bookings and occupancies which lower projections but that still doesn't cause me for concern.
• For long-term STR host, I think the same still applies. In fact, they are typically positioned better than others due to having lower interest rates and having recovered some of their upfront costs.

Now the interest rates aren't as much of a concern due to you being able to calculate them into the deal. You can analyze a property with high-interest rates and if it still cash flows with great numbers, then grab it! because it's going to do even better if interest rates go down. Also if we are heading into a recession which should be official here in the next 1-2 months I believe (going by the definition of having the GDP falling for 2 consecutive quarters.)  history tells us that interest rates will be lowered as to combat recession. Happens every one. Now to address higher gas costs and inflation. Those contributors definitely affect the travel industry. To what degree this year.. I don't know. The good thing is we can look at data going back quite a few years in certain markets and see how it affected each of those markets during a recession and even better, during a pandemic like Covid. That has given me a lot of confidence to continue to invest in STR's in certain locations because I can see the data before investing and I can plan accordingly. I hope that helps

New Hosts: Are STR a Good Investment during a Recession?

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