Let’s face it. It’s been a rough year for the economy.
Interest rates continue to rise and inflation is rampant.
Investors are growing weary of the stock market’s volatility and turning to commercial real estate. Multifamily and self storage have performed well over the last few years but as cap rates compress, many investors are looking at alternative asset classes such as short term rentals.
Now, when most people think of Short Term Rentals, they think of Airbnb or VRBO (Vacation Rentals by Owner). The majority of these properties are single assets with mom and pop operators. But the demand for these properties is growing and the stability and passive income from STRs present an excellent opportunity for investors.
But before we dig into why we like this asset class, let’s talk a bit about why Airbnbs are so popular.
Back when my kids were younger, travel was a challenge. We’d all share a single hotel room and when it was bedtime for the kids, it was bedtime for everyone! Often, that meant lights out by 8pm. No one had their own space and while it was fun to get out and see the world, I often needed a vacation from my vacation!
Short term rentals solve many of those problems by providing plenty of space plus the types of furnishings and features that travelers are used to enjoying at home. And many STRs are offering much more than just accommodations; they are redefining travel with many properties incorporating design and amenities to create a unique “experience” for guests.
Here are five reasons why you should consider investing in Short Term Rentals:
- Growth — Short Term Rentals is a growing asset class. The number of customers using STRs has increased 12x over the last seven years and there has been a 300% STR growth in the last five years
- High Yield — STRs are money makers! One STR can earn up to 4x the cash flow of a traditional long term rental (LTR).
- Recession resistant – STRs are evaluated based on revenue so their resale value is higher than traditional LTRs and rising interest rates have less of an impact on cash flow than other asset classes
- Demand Driven Pricing – In the STR space, the ability to price nights is directly tied to demand, so prices can easily be adjusted up or down as needed to ensure no potential revenue is left on the table
- Increase in Remote Work – The percentage of people working out of the office is continuing to rise, providing complete flexibility regarding the location of remote work. With the prevalence of strong WiFi, people can opt to spend a month working at the beach or in the mountains and in those cases, they are more likely to stay in a short term rental as opposed to being confined in a single hotel room.
- Less Competition – Once an asset class becomes flooded with institutional money, values tend to rise and cap rates compress. But since STRs are still in growth mode and there are less portfolios of properties, the institutional investors are sticking with traditional multifamily and haven’t jumped in yet. This leaves the field wide open for smaller investors.
- Operational efficiency – Using the same property management company for an entire portfolio of STRs saves on operational expenses. In addition, the use of automation in both booking and customer access to the properties (via keypads) keeps costs down as well.
- Additional depreciation – Unlike traditional multifamily, depreciation may be applied to the property as well as it’s contents – including furniture, textiles, dishes, etc
- Multiple Exit Strategies – Having multiple assets in a single portfolio provides a great deal of flexibility for divestiture as well. Properties may be held indefinitely for cash flow; individual properties may be sold off as turnkey STRs to one-off investors; or the entire portfolio may be sold to an institutional investor looking to get into the STR space.
Of course, there are factors to consider with regards to the location of the properties as well such as seasonality, driving distance to major metropolitan areas, close proximity to tourist attractions and purchasing property in municipalities that are friendly to STRs.
Short Term Rentals are an asset class that continues to grow so don’t sleep through this opportunity to get in early and grow your portfolio!