Will STRs Produce the Same Cash Flow During Recession?

Question

So I am still considering starting more AirBnBs in my town (Bloomington, IN) and was wondering what you guys think will happen to rents from AirBnBs when/if a recession was to hit. I know AirBnB was started during a recession time, 2008, and many people turn to short term rentals for cheaper/more frugal traveling already but the number of people traveling also drops significantly during depressions. My STR would probably be on the lower end of the market to begin with but do you guys think homes will still be able to pull in the same nightly rates?

Ethan Cooke · Answer

@Wes Short - Would you be buying these units? Or renting them from the homeowner and subleasing them?

I think STR's are here to stay, and the well-priced units in good locations will do okay in the next recession. I manage a portfolio of medium-term (30+ day) furnished rentals for business travelers in San Mateo County just south of San Francisco. A few things I have learned:

1. In my market for 30+ day rentals, the Studios and 1-bedroom units have the highest demand and occupancy (except in Summer, when all furnished rentals are hot).

2. Units that can be easily divided into smaller units are profitable because they offer flexibility (e.g. a single family home where 1 bedroom has a separate entrance, separate bathroom and ideally a kitchenette with sink, microwave and hot plate)

3. Each unit or "mini-unit" needs to offer easy parking, even in a place like San Francisco where public transit is good.

4. One of my mentors @Al Williamson taught me that there's a hierarchy of furnished rentals with corporate rentals at the top, AirBnB somewhere in the middle, then long-term furnished rentals (e.g. 1 year lease) and finally a traditional unfurnished rental. If an STR isn't getting high occupancy, you can always repurpose it to a long-term furnished rental or dump the furniture and do a traditional unfurnished rental.

I'm sure your market is different than mine, but hopefully some of these lessons are relevant in your area too. Good luck!

Julie McCoy · Answer

In my markets, I have mid-range properties in vacation destinations that draw travelers who are predominantly driving in.  While I think nightly rates may go down during a recession, I don't anticipate a crippling hit, for a couple of reasons - 1) these drive-able destinations are going to suffer less than destinations that require flying, and 2) luxury properties will be the first to feel the hit, because those luxury travelers will start looking for mid-range properties instead.  That's good for my mid-range properties.

A recession is almost certainly going to have an impact on the STR market, but I've selected properties that should thrive regardless, and have been careful not to stretch my debt on them so that I can still easily cover myself even if rents do fall a good bit.

Paul Sandhu · Answer

My STRs revenue is correlated with the price of crude oil.  Refinery contractors are my only renters.

When the price of crude is high, the refineries are generally showing more profit and have more revenue to pay for long term maintenance, capital projects and other expenditures.  A 2% markup of a $100 a barrel of oil makes more money than a 2% markup of $40 a barrel oil.

When crude oil prices are low, there is less money circulating to pay for the work that needs to be done.  It's normally postponed to when prices are high.

Mark Futalan · Answer

@Shannon Chavez

Hey Shannon. Feel free to reach out with any questions. Rich was my agent on a house I bought in La Quinta last year and we just closed on another one last month. Be happy to share any information I can.

Shannon Chavez · Answer

Hello everyone.  Just wanted to bump this as the last reply was about a year ago.  Wanted to see if there were any new thoughts on this?

@John D I have been in contact with Rich Tomlin and he is helping me search the Coachella Valley for possible STR's right now.  Thanks for all the insight you provide on the area in the various forums you post on.

John D. · Answer

I've been trying to find similar data, but have been unsuccessful thus far.  I can take about a 50% hit in gross rents before I go cash-flow negative, and I think in a major recession my loss in rents may be a bit greater then that.  Given I have no opportunity to change a say 8 bedroom $1mil or so house into a conventional rental I need to be prepared to weather the storm and take the loss for a few bad years, if and when they arrive.  Great question though, definitely one more people in the business should be asking.

Julia Bykhovskaia · Answer

I'm not a lawyer but I'll use their most favorite phrase: "it depends!". Depends on on where you are at.

I agree with @Julie McCoy, in drive-to vacation rental markets, mid-range properties should do reasonably well since families will trade down to drive to markets vs fly to markets. Big savings for them here.

Properties that attract a lot of foreigners should do reasonably well as well, especially if the US $$ declines.

If the property is in the expensive fly-to market, attracting mostly domestic crowd - that would probably get hit the most. Lower price point properties would generally do better during the recession.

Wendy Schultz · Answer

I think having properties that can be converted to a long term rental if need be would help during a recession or choosing a place where there will be vacationers regardless of a recession would also be beneficial.

Doug Utberg · Answer

Bear in mind that all changes happen at the margin.  A recession won't completely kill short-term rentals but will reduce the number of clients and the nightly rate until a recovery starts again.

Assuming that your STR has sufficient margins to price aggressively so that occupancy can be kept up, there isn't that much to worry about other than a temporary reduction in cash flow.

Paul Sandhu · Answer

@Ethan Cooke  Your #4 is 100% correct.

Will STRs Produce the Same Cash Flow During Recession?

Most Popular Reply