What’s the Short-Term Rental Outlook After COVID-19?

What’s the Short-Term Rental Outlook After COVID-19?

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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For several years, investors found the promise of Airbnb too irresistible to pass up. They were lured in by high gross nightly rates and the potential to rent out units on short-term services for as much as two to four times what monthly tenants would pay. This dramatically boosted property prices in some areas, as well as rents.

Then came the lockdowns of 2020, shaking up what these investors thought they knew. So, what’s next in this sector?

The COVID-19 effect on hospitality and short-term rentals

When everything started to close down, and people weren’t traveling, those investment models reliant on travel were heavily affected. Think offices, restaurants, hotels, and Airbnb properties—and their owners and investors.

At first, municipalities banned hotels and short-term rentals from accepting guests. As some states began to open up, owners had to maintain vacancy periods between guests, limit the percentage of occupied units, and adhere to new sanitization protocols.

At the same time, many of these owners have been hit with other factors that have pinched their finances, including higher taxes and newly proposed regulations.

This has compounded the risks that the Airbnb model already held. Years ago, I warned that people were overpaying for properties on the speculation that they could get much higher rents through short-term rental platforms. It was the only way they could justify their numbers and offers.

Many inexperienced investors did not account for the high daily maintenance and management costs associated with this hotel-like model. You have to clean, handle ongoing communication with prospective guests, and check guests in like a hotel on an almost daily basis, versus the passive income you’d get from an annual rental. Then between platform commissions and high vacancy rates, the net income is often far lower than these investors imagined—while being a lot more work.

Put simply, the pandemic and its halo effect have meant underperforming income and returns on overleveraged properties that some paid well more than true market value for.


More on short-term rentals from BiggerPockets

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The outlook for short-term rentals

While some business and vacation travel will return, it will likely never be to the extent seen before 2020. At least not for years.

I expect to see these properties sold off at discounted rates. Most amateur landlords may not be able to afford to hold on. Or it will just become such a source of stress that they’ll want to get rid of those properties. Professional investors in this market who may have had more reserves to ride out a storm may also simply become weary of low-performing 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 for less than they paid. Then it seems almost inevitable that there will be others who fall into default and foreclosure, creating distressed property acquisition opportunities through other channels.

Savvier investors who saw this coming have great opportunities to help these owners shed their burdens while creating value. They can return these properties to more stable annual rentals, adding tangible value and boosting performance. Or, in the case of apartment buildings or hotels, condo conversions to sell off units for lump sums.


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