For several years, investors found Airbnb’s promise too irresistible to pass up. They were attracted by high gross nightly prices and the potential to rent out units on a short-term basis for two to four times the monthly rent. This has resulted in dramatic increases in property prices and rents in some areas.
Then the lockdowns of 2020 came and shook what these investors thought they knew. What’s next in this sector?
The COVID-19 Effect on Hospitality and Short Term Rentals
When everything started to close and people stopped traveling, these travel-reliant investment models were hit hard. Think of offices, restaurants, hotels, and Airbnb properties – and their owners and investors.
Initially, the municipalities prohibited hotels and short-term rentals from accepting guests. When some states opened up, owners had to maintain idle time between guests, limit the percentage of units occupied, and follow new disinfection protocols.
At the same time, many of these owners were hit by other factors that weighed on their finances, including higher taxes and newly proposed regulations.
This has exacerbated the risks that the Airbnb model already carries. Years ago I warned that people were overpaying for real estate because of the speculation that short-term rental platforms could bring them much higher rents. This was the only way they could justify their numbers and offers.
Many inexperienced investors have ignored the high daily maintenance and administration costs associated with this hotel-like model. You need to tidy up, manage ongoing communication with potential guests, and check guests in almost daily like a hotel, as opposed to the passive income you’d get from an annual rental. Between platform commissions and high vacancy rates, the net income is then often much lower than these investors imagined – and at the same time a lot more work.
Put simply, the pandemic and its halo effect have resulted in below average income and returns on over-indebted properties, for which some have paid far more than true market value.
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The outlook for short term rentals
Some business and leisure trips will return, but probably never as much as they did before 2020. At least not for years.
I expect these properties to be sold at discounted prices. Most amateur landlords may not be able to afford to hang on. Or it just becomes such a source of stress that they want to get rid of these traits. Professional investors in this market, who may have had more reserves to weather a storm, may also simply tire of underperforming investments and negative cash flow and decide to restructure their portfolios.
Some will have enough equity to sell at a discount and take the loss. Others may be able to negotiate short sales with lenders to sell less than they paid for. Then it seems almost inevitable that there will be others who default on payments and will be foreclosed, leading to distressed real estate opportunities through other channels.
Shrewd investors, who expected this to happen, have great opportunities to help these owners take their burdens off while creating value at the same time. You can return these properties to more stable annual rents, which means a noticeable added value and an increase in performance. Or, in the case of apartment buildings or hotels, condominium conversions to sell units for lump sums.
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