?? Alts Academy: How to Invest in Short-Term Rentals
Hello everyone, and welcome to our first edition of?Alts Academy ??
Alts Academy gives you the A to Z of our favorite alternative investments.?It's your playbook for alternative investing —?how to start, what to do, where to look, how to win, etc.
Today, we're kicking things off with a look into?short-term rentals?(STRs). What are they, why do we like them, what advantages do they have over other real estate, and most importantly,?how to invest in them.
Let’s get to it! ??
The current real estate market
The real estate market is all over the place right now. Interest rates are soaring in the?United States,?Australia,?the United Kingdom, and?Canada.
Property prices are?falling?all over the?globe, and US mortgage rates are the?highest in decades. The only way people are really making money now is from?yield. And yields are likely to keep going up.
When we think of rental yield, apartment complexes, commercial warehousing, and office spaces jump to mind. But there’s another underappreciated property class that outperforms nearly all of its peers – short-term rentals.
What are STRs?
Short-term rental is just a fancy word for saying “Airbnb”.
Okay, not quite. They are vacation properties that are only occupied for small amounts of time (less than six months). STRs are usually built in tourist destinations – think a?condo in Miami?or a?penthouse in Tokyo.
For many, STRs are “holiday homes” that people rent out when they’re away.
STRs aren’t just for holidays though. The rise of “digital nomads” – people who work remotely while traveling – has led to an?influx?of +30-day Airbnb stays.
Expats who need somewhere to stay for a couple of months or renters who just want to try out an area are other potential customers.
How do STRs make money?
Short-term rentals make money like any other real estate investment. They just have different priorities.
Yield and appreciation
The primary source of income from STRs is rental yields.
Short-term rentals can rake in premiums of?over 100%?compared to their long-term counterparts.
Short-term rental investors place less emphasis on capital gains. (And in this market, seeking price appreciation might be tough).
But properties in highly sought-after locations can still see plenty of growth. Emerging tourist markets are a great place to look out for – enough traffic that the STR won’t be vacant, but not enough for the investment to be too costly.
Typical returns
Returns will vary dramatically, but?8% to 20%?is the sweet spot. Factors include:
Investors in great destinations can expect to generate revenue?2-3x?that of long-term rentals in the area when booked during the high season.
In America, the average Airbnb host?earned $13,800?in 2021. Decent, sure, but this data includes family holiday houses that likely have low occupancy rates and small premiums.
Most STR operators are amateurs.
What about an STR run by a professional that's?designed?to capitalize on the market? Let’s take a look at this STR in?Scottsdale, Arizona.
Managed by?TechVestor, it is forecast to earn over $150k in revenue per year and commands upward of $2k per night in high season. That puts it in the top 2% of STRs nationwide.
STRs in the bigger picture
The global short-term vacation market was?$100 billion?in 2021, with about?$34 billion?of that returning as revenue to Airbnb owners.
Airbnb estimates their serviceable addressable market (SAM) alone is?worth $1.2 trillion.
Worldwide, there are already?over 6 million?Airbnb listings, 4 million individual hosts, and +1 billion guests who have used the service.
London has the most Airbnbs.?Nearly 1 in every 50 homes?(2%) is an STR.
According to a 2022 study,?about 32%?of investment property owners were interested in converting their assets into STRs.
A typical drawback of this asset class is?seasonal dependency.?Not too many will want to holiday in Wisconsin's brutal winter. But COVID has changed the way people view STRs. They’re no longer just a getaway – 24% of people who book an Airbnb stay there for over a month, while 50% were longer than a week.
The popularity of long-term renting in short-term rentals led Airbnb to unveil a new product – the “monthly stay”.
How to Invest in STRs
DIY – Do it yourself
Thanks largely to Airbnb and VRBO, getting your own property into the STR market is easier than ever. The process is simple – buy the property, whack in a foosball table, and put it up on Airbnb/VRBO. And there are tons of great resources out there for getting an STR up and running quickly.
1. Find a house to buy.
The Offer Sheet?releases a daily newsletter listing Airbnb investment opportunities. The newsletter gives you all the data you need to begin narrowing things down.
Here's a recent example:
The average daily rate is $255, with an expected occupancy rate of 56% (solid, for a relatively rural location). The expected cash flow is around $849 every month — a cash-on-cash return of 10.3% — which puts it in the middle of the pack, more or less.
2. Get your numbers right.
You’ll need to analyze market data pretty closely. In particular, you’ll want to look at comparable occupancy rates in the suburb/city (for both STR and LTRs).
In addition, you need to determine a daily rate that’s on par with similar properties but will net a consistent profit over mortgage repayments.?AirDNA,?Wheelhouse, and?PriceLabs?will help you maximize your STR income.
Get help setting up a property
DIY-ing an Airbnb can be a bit of a pain. Market research, organizing maintenance, and managing tenant complaints are all pretty time-consuming. Luckily, a new STR market sector is emerging –?Airbnb property management services.
These companies do pretty much everything for you. Want them to pitch a few properties with STR potential? Need them to hire cleaners and refurbish the house before listing? Want them to collect and chase up payments from destructive dogs?
This is all in the scope of companies like?Airkeeper, an Australian property management company.
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You can get cash flow from owning an STR without doing any of the work.
If you'd prefer to manage a property yourself, consider a platform like?Hospitable,?Lodgify, or?iGMS?to stay on top of guest communications and property management.?Good ratings?are essential in the STR space, and you don't want to let anything slip through the cracks.
Other resources to make your life easier and your investment more profitable:
Of course, buying a home to rent out isn't for everyone. Although house prices are on the way down, snapping up an investment property is?out of reach for many. Only about?7% of Americans?are exposed to rental earnings (compared to?58% who own stocks).
If you're not ready to buy a home to rent out the whole thing, check out?Homestay.
They specialize in long-term rentals of single rooms to international students and the like.
Let someone do it for you
With funds and fractional ownership, you can enter the STR market without taking on a?$400k+?mortgage, and you'll probably make more money.
1. For accredited investors.
TechVestor?lets you passively enter the short-term rental market without needing to buy, maintain, or even?think?about your property while getting better returns than you would on your own.
They project an IRR of between 14% and 17%.
How does?TechVestor?work?
They don't offer single properties to investors. Instead, there's a portfolio of STRs located in strategic areas like Arizona, Colorado, and Florida. In that sense, it’s a bit like a REIT – but in a unique and high-yielding asset class.
The STR fund targets properties valued?under $750,000?but will yield a?daily rate of more than $200.
TechVestor?can outperform most other STRs, because most of the competition is mom-and-pop operations who rent out their holiday homes without leveraging technology or optimal growth strategies.
By centralizing ops, research, and acquisition, Techvestor’s properties can return more than the average STR investment.
The fund spends up to twelve months acquiring properties, renovating them, updating design, and listing them on rental portals. Investors can expect to start seeing distributions between three and six months after finalizing their payments.
One question I had – and it was a big one – was “what happens to cash flow given rising interest rates? Surely it’s going to come down if you’re buying homes at 7%+ mortgage rates.” Luckily,?TechVestor?has already locked in fixed-rate debt finance for the fund.
Once the properties are stabilized and cash-flowing for a few years,?TechVestor?will seek out a buyer for the entire portfolio. In this case, they’re aiming to sell the homes for a 60% premium to the purchase price.
This bit is important because while the fund purchases the homes on the retail market, they’re selling them as commercial properties. Retail value is based on nearby sales. Commercial properties are entirely based on the yield they generate.
If you’re an accredited US investor, you can?get started?with $25,000.
2. For non-accredited investors.
Arrived Homes?is an emerging platform that makes STRs accessible to all.
Their?method?is simple:
Arrived Homes’ business was first off the block, and they have since funded 180+?properties, 16 of which are specifically vacation rentals.
The IPO share price for?Arrived Homes?investments is typically $10, and the holding periods are ~5-7 years. The minimum investment is low ($100 USD), but only US citizens can access their offerings at this time.
Some other options for non-accredited investors:
?? The risks
STRs are often more lucrative than the most common rental properties. But they still come with a lot of the same issues.
As a yield-focused investment, if you’re DIY-ing a vacation rental, you’ll want the property to be?positively geared. This means the rental yield is greater than the mortgage repayments, interest rate, maintenance fees, and so on.
Even if you?are?making back more than you’re spending, the real estate market isn’t exactly super appealing right now. There’s a chance the value of your property drops fairly significantly, and it might take years to recover – if it does at all.
Rising interest rates can quickly turn a once profitable investment into a money sink. So if you're not on a fixed-rate mortgage, this is a real worry.
Falling house prices will also hurt those investing in STRs through fractional marketplaces or funds. Although yields should remain tight or grow, the exit strategy becomes much less straightforward if the market doesn’t recover when it comes time to sell up.
You also need to watch out for?vacancy rates.
Without added supply, vacancies fell by the 2020s. Full chart available?here.
High vacancy rates = long timeframes without getting paid.
Low vacancy rates = a supply squeeze.
Conclusions
VRBO came first, but Airbnb was the company to change how society thinks about vacations. Never has it been easier to drop your work, pack your bags, and organize an impromptu holiday or company offsite on the other side of the country (or globe).
The change has also introduced a new way to invest in real estate. Before the 21st century, buying and renting out a holiday property was a massive pain (not to mention expensive). Now, the barrier has been lowered, and the floodgates have been opened. Almost everybody can use platforms like?TechVestor?or?Arrived Homes?to reshape how they envision property investments.
Where will the property market go in 2023?
Nobody knows for sure, but in the general, a downward direction is probably a safe bet. But remember this –?Airbnb’s biggest demographic is?millennials. And guess who America’s largest generation is?
That's all for today. Hope you found this useful.
What did we miss? What alternative investment do you want to read about next time?
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Cheers,