With Government Crackdowns, Are Short-Term Vacation Rentals a Doomed Investment Niche?

With Government Crackdowns, Are Short-Term Vacation Rentals a Doomed Investment Niche?

2 min read
Sterling White

Sterling White is a multifamily investor, specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded, Sonder Investment Group, he owns just under 400 units.

Experience
Sterling is a seasoned real estate investor, philanthropist, speaker, host, mentor, and former world record attemptee, who was born and raised in Indianapolis. He is the author of the renowned book From Zero to 400 Units and the host of a phenomenal podcast, which hit the No. 1 spot on The Real Estate Experience Podcast‘s list of best shows in the investing category.

Living and breathing real estate since 2009, Sterling currently owns multiple businesses related to real estate, including Sterling White Enterprises, Sonder Investment Group, and other investment partnerships. Throughout the span of a decade, he has contributed to helping others become successful in the real estate industry. In addition, he has been directly involved with both buying and selling over 100 single family homes.

Sterling’s primary specialities include sales, marketing, crowdfunding, buy and hold investing, investment properties, and many more.

He was featured on the BiggerPockets Podcast episode #308 and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to mindset and scaling a business online. He has been featured on multiple other podcasts, too.

When he isn’t immersed in the real world, Sterling likes reading motivational books, including Maverick Mindset by Doug Hall, As a Man Thinketh by James Allen, and Sell or Be Sold by Grant Cardone.

As a thrill-seeker with an evident fear of heights, he somehow managed to jump off of a 65-foot cliff into deep water without flinching. (Okay, maybe a little bit…) Sterling is also an avid kale-eating traveller, but nothing is more important to him than family. His unusual habit is bird-watching, which he discovered he truly enjoyed during an Ornithology class from his college days.

Education
Sterling attended the University of Indianapolis.

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Vacation rentals are hot, but are they a good investment?

Summer is coming, and I expect that real estate agents and various platforms will once again be pushing the opportunity to buy into vacation rentals as a form of real estate investment.

I love going on vacation. I love the idea of owning a beautiful property in all my favorite places to visit, like Miami and California. However, I am getting a little concerned about the numbers — specifically, whether real estate investors are setting themselves up for financial disaster when buying into overpriced properties that they may not be able to afford to keep.

You have to give Airbnb a huge round of applause. They have fast tracked to churning millions in revenue, all without owning any properties. They’ve even helped many homebuyers afford their own places by renting out rooms. They’ve allowed some investors achieve pretty high rental rates.

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The Downside of Short-Term Vacation Rentals

The downside for many of those living in these destinations, of course, is that “The Airbnb Effect is pricing out locals. When landlords can get two to four times the rent by advertising as a short-term rental versus serving families on annual leases, it becomes a temptation almost too appetizing to resist. But what if those rates are not sustainable?

Related: The Top 10 Do’s and Don’ts for Airbnb Short-Stay Landlords

Recently, I published this piece on where the real estate market is headed. It’s no secret that when the economy fluctuates, it can drive down vacation activity. That impacts airlines, hotel vacancy ratios, and how much can be charged for short-term rentals. If you’ve got a mortgage and payments on an investment property based on 90% occupancy and renting for $4,500 a month and then the market turns and you are sitting at 60% occupancy and can only rent it for $1,000 a month, how long can you keep it up?

Government Crackdown on Airbnb

Perhaps even more significant is the trend in local governments effectively outlawing or limiting the number of short-term rentals in their jurisdictions. In some cases, this law prohibits short-term rents. In other cases, it is achieved covertly by requiring permits and denying their issuance or putting a cap on the number of rentals in a given neighborhood.

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Related: 3 Easy Steps to Discovering Your Airbnb Income Potential

Check out some of these recent news stories:

Of course, the opposite is true, too. At least one state governor has pre-empted cities from banning Airbnb rentals.

The point here is that while regular annual rentals in bread and butter cities aren’t going anywhere, investors need to be cautious about jumping on fads that could leave them in the lurch and on the edge of a financial precipice.

Where are you investing? Have you run into issues with vacation rentals? How are you building sustainability into your portfolio?

Let me know your thoughts with a comment!