Short and Sweet: The New Post-COVID Asset Class With The Best Risk/Reward in Real Estate
Airbnb’s 2008 launch set the stage for short-term stay. Now, through the unforeseen market forces that came with COVID-19, the short term rental (STR) market has evolved into its own asset class. Established real estate investors everywhere are finding that short term rentals offer the best risk-reward proposition in real estate, an already lower-risk space with reliably higher-than-average returns.
STRs boast more frequent payments at higher-than-average rates, with a demand stream that’s creating predictable pricing outcomes across the sector. A great way to boost an existing property’s cash flow, any investor with an address can have an STR asset. Here are a few guiding principles to consider for those who are up for the ride:
Choose your location wisely
Location is still king in the STR domain. Choosing locations near tourist destinations and close to public transportation, shopping or other amenities is always a smart move. Proximity to local sights, hiking trails, great restaurants or otherwise immersive experiences give the stay a competitive edge. The best rule of thumb during the property acquisition stage is to choose an area in a market you’d love to be in yourself.
Make sure local regulations allow short term rentals
The STR market has skyrocketed faster than the rules and regulations have been able to keep up. Generally, STR activity is great for everyone involved; the local economy, the host, and the guest alike. But certain areas have rules and regulations in place from an earlier time when STR activity was less understood. Aimed to prevent increased traffic, noise, tenant turnover or perceived disruption, some neighborhoods have made it harder to own and operate a property as an STR. While those rules are subject to change (as many markets have in recent months), investors will want to prioritize the many markets that make it easy to hit the ground running.
Tailor the accommodations to the area
The type and size of the short-term rental can have a big impact on your overall profitability. One- and two-bedroom units tend to fare better in urban areas, while larger units will do well in suburban or vacation spots. During the pandemic, most families wanted space—outdoor offerings will continue to be valuable as our habits outlast the threat of viral transmission.
Online ratings are critical to the success of any short-term rental. Think about what touches you can add to your short-term rental to evoke a certain emotion or experience you’d like your guests to have. Reviews become one of the top metrics on which future guests place their bet. Small and thoughtful touches throughout a guest’s stay makes the likelihood of those thoughtful reviews increase manifold.
Understand the financials
Many people start out believing that they want to invest in traditional long-term rentals but can’t find properties that will have cash flow. Understanding the competitive landscape--for both short-term rentals and long-term rentals--will help you find properties that may be better suited as short-term rentals. And with new-to-market tools, investors can now forecast the potential performance of a property using real-data from comparable properties nearby. This three-tiered analysis marks the beginning of real STR due diligence—investors can do the math they would want to have done in any other asset class.
Assess the specific needs of your rental
Not all rentals cater to the same type of guests. Short-term renters have done well with:
- Business travelers/conference attendees
- Visiting nurses
- Military personnel
- College students
Which will be drawn to your property? With that audience in mind, you can tailor your listing and name the amenities and offerings that will be desirable for that specific cohort. Listing on multiple booking platforms ensures that the property will get in front of more of its viable audience.
Take note of shifting migration and growth patterns
There’s an ebb and flow to any geography. Neighborhoods and cities are in constant fluctuation. The COVID-19 pandemic has created an entire generation of nomadic workers whose remote, ‘work from home’ status has allowed them to call anywhere home and bring work with them. Secondary and tertiary markets saw a resulting influx of interest, with more favorable living conditions and less population density. Pre-pandemic, the average length of stay for a short-term rental was 2 ½ days, while now, that average is 44 days; when travelers come, they’re there to stay.
Hire a virtual assistant
One of the most time intensive aspects of the short-term rental asset class is handling the day-to-day communications with renters. Hiring a virtual assistant can be very cost-effective. Give your assistant a ‘playbook’ on how to address common issues that arise; this will free up significant time and ensure a consistency of experience across all guest bookings.
Make sure you have trustworthy maintenance staff in place
Maintenance is the biggest issue with short-term rentals, so don’t cut corners when it comes to hiring. Pay cleaners at a competitive rate in your area; it’s a worthwhile investment for your property. Adaptive staffing—having a property’s maintenance assessed after each guest’s stay—can help the host care for the property even from a distance.
Note: TurnoverBnB has a marketplace for cleaners and maintenance staff that you may be able to tap into for your property’s needs.
Once an investor sees how successful they can be with short-term rentals, it’s hard not to catch the STR bug. One successful property usually leads to other property investments. In order to maximize your human resources, focus your investment opportunities on properties within a 5-mile radius. Reputation will help direct past guests and new traveler interest to the next acquisition within your portfolio.
View your property manager as your partner
As you expand, you’ll probably hire a property manager to handle the day-to-day minutia of your property. Realize that these are vital team members, who should be incentivized in a manner consistent with your revenue goals.
A property manager can charge anywhere from 10% to 40% of the rent for their efforts, typically more in vacation areas and less if done digitally. The fee they charge pales in comparison to the value they are creating. The property management partnership is no place to cut corners. If they have a good handle on the marketplace and can develop the proper daily or monthly strategy to optimize occupancy for your rental, reward them for that skill and watch your Net Operating Income grow regardless of the cost of the investment.
Automate as much as possible
From contact-free check-in, automatic marketing, streamlined payments, and instant data analysis, automation has already changed the STR investment landscape. Hosts will be advantaged to embrace the technologies that are enabling more remote property management. Without them, it’s a hands-on project that can feel like a second job. But with the right automation in place, STRs feel like any other investment that accrues value without the investor’s presence needed.
Hosts who can implement and follow these guidelines could be along for one of the most exciting and substantive market tidal waves we’ve seen in a while. The future of real estate has long been approaching, but COVID-19 brought it closer than it’s ever been. Plan, invest, and automate—the only thing left to do will be to watch, profit, and enjoy the ride!