A trend I’ve been following for a while is something that’s been termed the “Airbnbust.” It generally refers to:
- A crash in the market for short term rentals (for various reasons)
- A crash in housing prices due to panic selling by owners of short term rentals (for various reasons)
- A combination of 1 and 2
It feels like I’ve seen tweets and articles about this almost weekly for most of the last year. A couple of prominent real estate accounts on Twitter have been particularly aggressive with sharing any individual data points or anecdotes they can find to support the theory.
So naturally, I’ve spent a good amount of time researching the arguments both for and against an Airbnbust. And like so many economic theories with a catchy and foreboding name, reality is a little truth mixed with a lot of hyperbole.
What is a short-term rental anyway?
Short-term rentals (STRs) are furnished properties that are rented out for short periods, typically less than 30 days, even as short as a single night. Platforms like Airbnb, Vrbo, and Booking.com brought STRs mainstream over the last decade.
They’re appealing from an investment standpoint because the per-night pricing provides significantly higher income potential as compared to a monthly rental, often 2-3x more.
The tradeoff to this higher income is increased expenses and operational overhead. STRs involve more frequent cleaning, restocking of supplies, and maintenance between guests. And managing access between guests can be a hassle (you can’t physically change the locks every single day).
But even though the expenses are higher, a well-managed STR can produce net cash flow that’s still much greater (in absolute dollars) than if it were ran as a monthly rental. And good STR operators and managers are able to drive expenses down by leveraging technology, automation, and other efficiencies to reduce the operational burden.
STRs boomed in the immediate aftermath of COVID
A desire to not be around strangers coupled with “revenge travel” once lockdowns and other restrictions were lifted led to record demand for STRs. Supply was short, people were flush with stimulus money, and it was burning a hole in their pocket. Existing owners banked record profits on their units.
Naturally, this brought a lot of investor attention to the space. Many new investors (or even just homeowners with an extra bedroom or “mother-in-law suite” in the backyard) became STR operators. Dollar signs filled their eyes when they realized the income potential. And they assumed that the STR-level rents would continue forever, which justified overpaying for properties.
2023 was a rough year for STRs
A combination of factors made 2023 challenging in the STR space. A return to pre-COVID demand levels coupled with all the new STR units that hit the market in 2020-2022 created a supply/demand imbalance. Vacancies increased and cash flow decreased, especially in markets where leisure travel had been the primary demand driver.
Negative PR played a factor too - inexperienced operators charged ridiculous fees, pestered guests, and generally ran their units very poorly, leading to countless social media posts decrying STRs.
But is it really an Airbnbust or just post-COVID normalization flushing out investors who shouldn’t have been there in the first place?
I believe it’s the latter.
The situation today
Now, I’m not delusional and saying the STR market hasn’t changed. It absolutely has softened. I’ve seen this personally with my business partners in Florida - the decreased demand has led us to transition almost all short-term units to monthly rentals.
However, all of those units were underwritten to both short-term and monthly rates prior to acquisition, to help ensure they could produce cash flow either way. This is what a lot of the late entrants to the STR space didn’t do, and are now in trouble because of it. These folks also tend to be the examples amplified by the Airbnbust proponents.
STRs do ebb and flow, but the market and operator/manager matter a lot. Saying that STRs are dead is like the blanket statement that commercial real estate is “in trouble” right now - sure, it’s true in places, but not everywhere and not in every asset class.
Where STRs make sense
So are short-term rentals a good investment in 2024? I think so, but as mentioned above, the market and operator matter more than ever.
Here’s what I would be looking for in an STR investment:
- Strong cash flow
- Market not driven by leisure travel
- Proven operator/manager with strong track record
- Underwritten to cash flow (or break even) as a monthly rental
- Light value-add opportunities (increase property value through minor repairs/renovations)