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
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.