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How Investor Value Is Changing in Short-Term Rentals

Short-term rental marketplaces are overgrowing and disrupting the hotel industry. This episode teaches how investors use marketplaces to manage their short-term investments, how others are using them to generate passive income, and how that reshapes the way people invest in their vacation rentals.

Rabbu is a flexible asset management platform that provides property investors higher returns on their portfolio through short, medium, and long-term tenants. Its services include: procuring the best properties, evaluating your return on investment, getting the property ready for tenants, listing and marketing the property, handling support and operations, and coordinating all financial aspects. By providing end-to-end property asset management services on your behalf, our goal is to unlock your property's potential and enable you to earn higher returns hassle-free. 

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How Investor Value Is Changing In Short-Term Rentals | Emir Dukic

People look at the residential real estate asset class either as something you live in, and the value ultimately comes down to price appreciation. There's another way of looking at it, which is cashflows. There you can apply a cap rate to a property. The traditional investor understands cashflows from long-term rentals and appreciates the long-term leases that you can have in place. As the market evolves, how are you seeing investors value short-term rentals? You generate 60% more rent to Airbnb. Are you rewarded for that when you sell the property to an investor, or is there not as much liquidity on that side?

 

Speaking from direct experience, we are in the process where we partnered with an investor group out of San Francisco. You're probably heard of them, Zain, but I can't share them yet because the deal is not official. They found a 43-unit asset portfolio for them in Charlotte, North Carolina. That's across seven buildings that have been operated as short-term rentals for the last years.

 

This group is acquiring this asset based on our connection to this asset owner, but that's selling at a pretty healthy bump because of the financials and history of financial performance as short-term rentals. They're able to sell this for a larger sum than they would add these traditional long-term rentals because of the additional revenue that they generated.

 

The real magic happens when you buy a fundamentally sound property in a good location where you feel like it will appreciate. You can also generate a yield from it and cashflow. In that way, you might be able to set a floor price in terms of what is the lowest amount you'll get for the property because you've got the cashflow coming in.

 

I own quite a bit of short-term rentals myself and have long-term rentals as well. I was quite surprised. I came up with a model for short-term furnished rentals in San Francisco. These were properties that people would usually buy as condos to live in for the long term. If anything, these were appreciation assets. Through COVID, the rents have been good, but for the experiment, we decided to list some of these properties.

 

When people give you a low-ball offer, it's very easy to turn around and say, "We're making a lot of yield by renting this on a short-term basis." Suddenly, that connects with people. They'll give you a much better offer and realize, "This is safe." What I'm trying to say is if you find a nice property that you could live in and imagine someone would like to buy, but you can rent it out, you create a lot of safety around that property. It gives you cashflow, and you have a minimum price on what the property should trade for ultimately.

 

The sellers for that portfolio are astonished by the deal and how their investment has panned out. They're selling their entire portfolio. If they're retiring, they get a golden visa and move out to Portugal. They're done. They're extremely happy. Don't get me wrong. This was great real estate, but the short-term rental revenue they generated over the past years has elevated the price to an extent. They're ecstatic about the deal.

 

Emir, I'm curious whether you agree with this statement or not. The statement I'll make is that for a property to be traded as a short-term investment asset like a short-term rental, you need history and a track record of consistent performance. Otherwise, the thing that's very difficult for investors and even brokers to appreciate and understand is how to value the assets. If you've had very lumpy revenue, and there's been some seasonality or high vacancy rates and rents all over the place, it's a lot more difficult. Do you agree with that? Are you seeing some speculation come in and people buying things without a proven track record?

 

People are buying things with a proven track record. The reason for that is honestly partially because the properties with a strong track record are commanding premiums. The cap rates aren't as attractive for those assets that are being acquired. In this instance, this cap rate makes sense because this acquirer is planning to build a large portfolio on top of this one. This is their first set of units, and then they plan to spend close to $100 million building a short-term rental portfolio.

 

Most of their additional acquisitions are going to be on properties that don't end the historical data. They're going to rely on some of the tools that we've built out to help understand the revenue potential of the property, how the market is performing, and, based on that, make pretty calculated decisions on what assets to buy.

 

Transparently speaking, a lot of them are also smart enough to acquire assets they'd know would perform well as long-term rentals if things were not to work out at an okay rate and return. Most of them are very comfortable with the revenue projections that they are able to come up and so far, they've been able to perform historically.

 

What are the criteria for a good short-term rental? To set a context for some of our readers, at Rabbu, you often send out these weekly emails with real estate opportunities throughout the country. You create a financial model where you estimate the yield that will generate if you manage it, which is a great lead generation tool for you. How would you help us understand the criteria? What makes a short-term rental a good short-term rental opportunity?

 

The real magic happens when you buy a fundamentally sound property in a good location where you feel like it will appreciate, but then you can also generate yield from it and cashflow.

 

It was like most things in real estate, which is location-based. First of all, you have to make sure that there are no regulations against that type of asset type in the city. You always have to start there. That's the number one piece. Location is always number two. It varies from market to market. The more attracted the asset, the better it will perform as a short-term rental.

 

The more update it has, the better furnished it is. The more of an experience in emotion that invokes out of an individual, the better it will perform. One of the rules that we have, for example, is in a market like Charlotte, which is big into breweries. If you're within walking distance of a brewery, even if it's a transitioning area, that's a good Airbnb because people want to be around transitioning growing areas.

 

It's very low location-specific. The type and size also vary by location. We've seen some locations in more urban center city locations. 1 and 2 bedrooms have performed better. For the odd that you get from center cities, the more bedrooms you want this asset to have because you appeal more to families and groups traveling together. There are no magic bullets that if you meet X, Y, and Z criteria, it's a great short-term rental. A lot of it is around how you set it up and manage it.

 

With location, it should be close to points of interest. Make sure it's legal. Do your research on the data. If the long-term markets are performing well there, it might not be the best fit like Miami, for example, where I'm in. Our house that we're moving out of, the owner is getting ready to list it for rent close to $10,000 after we vacated.

 

We're nowhere near that, but it's a market that long-term rentals demand in Miami because of the influx of people coming down here. This is probably a better long-term rental than a short-term rental. It depends. That's why we tried to make the data available to investors and operators so they can make that decision based on data that are available to them that's in the marketplace.

 

You can also look at the types of short-term renters that come and go in densely populated areas where there are large office buildings. In pre-pandemic mostly, you would have a lot of activity during conferences and events. You'd have corporations as well who would be happy to sign up even for a long-term lease and short-term rates, furnishing, and everything else ready to go in the service.

 

You also have other types of an employee as you have in the military. You have visiting nurses who are close to hospitals and also students. What do you think about the different types of tenants there and the employee basis? Is that something that you factor in when you're looking at the short-term rentals you manage?

 

We also factor in migration to a city and the growth rate of the city. It's interesting that across a portfolio, the average length of stay is 44 days. In pre-COVID, it was about two and a half. What we're seeing is a lot of people are living more than a nomadic lifestyle. They might be living in New York during the summer because New York is great in the summer. During the fall months, they'll go down to Nashville. During the winter month, they'll come down to Miami. It's a new lifestyle that COVID in the remote culture accelerated.

 

We're following those trends from the help identifying markets where we believe investors should invest, but we're seeing a migration of people coming and wanting to spend time. That's created some interesting opportunities. It's less business than traditional corporate business travel. The more business travel is, "I can work from anywhere, so I'm going to spend a month in Nashville and then a month in Austin and check it out while working from that home."

 

Emir, a lot of people end up running their property management firm sometimes accidentally by making an investment, taking calls, and then making another investment. Before they know it, they've got a portfolio of rentals. This could be long-term or short-term. At what point does it make sense for someone to hire a professional third-party fee manager versus doing it themselves? Is there a point you've noticed where someone needs to go on a higher infrastructure, or it becomes too occupying, and you need to outsource it? Is there a certain number or rule you have?

 

Transparently, I can't speak as much on the long-term rental side because we don't manage long-term rentals actively. On the short-term rental side, what we've seen a lot is people will want to manage themselves because they believe they can reduce costs, which is fair. If you think about it from a cost perspective, there's some upside that you're leaving on the table but not being as actively managing things like revenue, especially with a short-term rental.

 

They're okay with 1, 2, and 3. Once you get to that 3 to 5 property, the range in the short-term rentals, you're running a small hospitality business. You need to be at the beck and call of your tenants, who are coming more often with your long-term tenants. It's much more hospitality than management. Once you get to that 3 to 5-unit count, you've seen people say, "I either have to do this full-time or pass this off." That's the magic number we've seen so far.

 

A good property manager will more than pay for the fee that they charge you.

 

Tell me about the fee structures that exist on what's standard in the industry.

 

It depends. We've seen in vacation markets some of the larger vacation managers will charge upwards of a 40% management fee to manage these high-end luxury rentals. The average management fee in your vacation short-term rental market is 25% or so of rental revenue. Some groups have some interesting models like Evolve, for example. They charge 10%, but they're much less hands-free. What I mean by that group like Evolve is they help you create the listing to help do the pricing for you to do the distribution. They find tenants for you. Once the tenant has booked, they hand it off to you for you, too, as the owner, to manage the experience that the guest has on the property.

 

There's a hand out there that did charge 10% for that. It's anywhere from 10% to 40%. For us, the fee is not as important as the value that the property manager creates. Everybody always talks about time like, "We'll save you time," but is the property manager utilizing the appropriate revenue management strategies to get you the best and highest revenue for your property?

 

Are they utilizing it appropriately during different periods? During slower months, it's probably better to make it a monthly rental. During the peak season, it's probably smarter to utilize daily strategies to drive revenue. A good property manager will more than pay for the fee they charge you. The key piece there is revenue management.

 

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