We have some C-class 6-plex buildings in a pod in Fargo ND. Definitely not a vacation destination (aside from checking out the wood chipper at the visitors center). These buildings are composed of two large 2BR units on one side and four studio units on the other side. As you can imagine, studio units in a C building are difficult to fill with desirable residents. I wanted to briefly touch on a few things that I didn't see specifically addressed so far in the discussion:
1. Quality of residents: As addressed above, we make more money using a short-term model (primarily through Air BnB). It is definitely more labor intensive. You lose the power of the lease and are effectively subject to a yelp review from strangers with wildly differing perspectives on amenities, level of finishes, etc. That said, in our situation with a building that is turning in an area that is turning with a small one bedroom or efficiency unit, you can attract a resident of much higher quality in a short-term rental. Our holy grail is the contract nurse as mentioned in other posts. There are few options for them in our area and their agency may offer them an extended stay hotel for 2K/month. We can come in at $800/month and offer them an excellent value, full kitchen and secure building. They are thrilled and after all expenses (we built our own short-term management) we still come out significantly ahead on the cash-flow side with a great resident.
2. Hybrid: You don't have to be one or the other. We maintain our 2BR units as traditional rentals. They are actually happy with the short-term situation because of the quality of the residents in the studios. They also have taken advantage of our constant need for good cleaners of both the units and the common areas and several of our residents who stay home with kids during the day pick up a few hours cleaning.
3. Numbers: I know for most of us this goes without saying, but the numbers have to be right. We make a lot more with short-term rentals than we would with traditional rentals. However, the property has to meet all your criteria and cash flow with a traditional rental model. Municipalities are changing regulations all the time. Something could happen with our short-term manager (they are hard to find/train). A whole bevy of issues could arise that would impact our ability to offer short-term rentals. Our buildings cash flow well using traditional market rent numbers or we wouldn't have bought them.
4. Banks: Banks in my area aren't sure what to do with Air BnB income yet. With regard to multifamily value, you're definitely not going to get them to count it dollar for dollar toward your NOI as it is variable from month to month and they see that as a vulnerability. We are buy-and-hold investors, but if you're planning to force appreciation and refi or force appreciation and sell to 1031 into something else, just know that your projections may not pan out with banks or appraisers.
