Coronavirus Updates

Will Airbnb Survive or Fold in 2020? (Plus, What This Means for STR Investors)

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
161 Articles Written
protect-airbnb

In my last article, I discussed my opinion on how different industries would fare due to COVID-19. The one industry I overlooked was short-term rentals.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

While I myself don't own any short-term rentals, I know this is an important topic to many real estate investors as the industry itself has grown exponentially since the '07-'09 crash. Some would attribute this growth to the Airbnb phenomenon, but in reality, short-term rentals have been around for hundreds of years in one shape or another.

The most common form of this model is the hotel industry. When you stay at a hotel, you are agreeing to stay for a fixed time period in exchange for a fixed daily rate. Usually, this daily rate is considerably higher than if you tried to rent an apartment on a typical annual lease. The reason is that the consumer is paying for the convenience of coming and going as they please with all the accommodations provided.

That’s where Airbnb and its main competitor VRBO come in (which I will refer to as the private short-term rental industry). The two companies have disrupted the short-term rental market by providing the same benefit to the consumer but with even more options. Now a consumer is not limited to the geographic location of the physical footprint of the hotel chain. They can stay almost anywhere in clean, furnished lodging and get a truly unique experience, rather than the franchise cookie-cutter model that’s found in the hotel industry.

Related: The Pros and Cons of Renting Your Place on Airbnb

Previous Growth

As the private short-term rental market demand exploded, real estate investors began to see an opportunity to arbitrage a regular long-term rental. By arbitrage, I mean the investor finds and secures an apartment, then furnishes the apartment and subleases it for a higher rate on Airbnb and VRBO. Sometimes the landlord is aware of the arbitrage, and unfortunately, sometimes they aren't (not recommended). Either way, it can be a very low-cost way of creating monthly cash flow.

Other investors saw an opportunity to purchase real estate that typically wouldn’t cash flow (or wouldn’t cash flow as well with a regular lease) but would cash flow significantly using Airbnb.

While this strategy may seem risky, the common advice was always to make sure that you had a backup plan that involved leasing the unit at market rents while maintaining the ability to pay your fixed expenses. Hint: This may be a talking point later in the article.

Some investors purchased real estate in areas where they loved to travel. They used their property to vacation and then Airbnb-ed the property while not using it. If the destination was popular enough, the Airbnb model would practically allow the investor to be paid for their vacations.

As Airbnb’s use exploded, investors found different ways of making it work. Every conceivable lodging had some kind of demand, from RVs to pool houses to tiny homes and even treehouses.

The Music Stops

A view of empty hall of hte modern airport, the interior with sun light

In late February and early March, the unthinkable happened: a health pandemic so severe that it literally shut down the country. Flights and events were canceled everywhere and travel came to a halt. Immediately, the short-term rental industry found itself facing these headwinds.

Fear of Traveling

The long-term psychological impact that COVID-19 will have on the traveler is unclear at this point. People who have traveled for work are adjusting to a virtual setting. Even in real estate, most networking conferences have been moved to a virtual setting rather than canceling outright.

From a non-work sense, families, which made up a decent percentage of Airbnb travelers because of Airbnb’s ability to accommodate larger groups, are not currently traveling. You can’t exactly do a family reunion at this time.

In addition, most tourist destinations are still closed or heavily restricted.

Government Regulations

Then a new development occurred when New York City became the epicenter of the virus. Within a short time period, other state governors began to ban visitors from the state of New York, going so far as arresting visitors. Other governors imposed mandatory quarantines of two weeks after arrival.

Some locations, even prior to COVID-19, already had short-term rentals restrictions. These restrictions are only set to get worse as local governments attempt to stop the spread of the virus.

Commercial Cleaning

The COVID-19 pandemic has spawned a new cleaning industry. The old status quo of having a cleaning person come after your guests leave won't work for the foreseeable future. My prediction is the larger hotel operators with scale on their side will be able to offer some kind of COVID-19 clean certification, whereas the smaller operators won't be able to. I already received such an offer in the mail by a third-party cleaning service for my office building.

When people do start traveling again, I believe seeing some kind of cleaning certification will play a role in deciding where to stay, leaving the small mom-and-pop operator at a disadvantage. If you are able to get some kind of certification, make sure you’re marketing that fact!

What Can You Do?

Couple walking in front door of vacation rental with suitcases

Arbitrage

First, let’s start off with an investor who doesn’t own the actual property and is arbitrating the rental. If you were upfront with your landlord from the beginning, your landlord may allow you to leave your lease due to the circumstances. They may prefer to do so now, as it’s still the heart of the leasing season.

However, if the place was cash flowing nicely prior to COVID-19, you may want to hold on to that property. The best way to do so is to try to sublease the apartment to a longer-term tenant for a slight spread on what you're paying for the apartment. Remember, it's not about trying to make the same amount of money as before, it's about surviving the current storm.

Ownership

If you own the property, you can try to negotiate a semi-long contract. A great venue for this is professionals who have been hired on contracts. The contracts are usually a few months to a year and the professionals are usually paid a premium while on these contracts. They also tend to work a lot of hours while on contract, which is great because it leaves very little time to damage your rental. There are websites out there like Furnished Finder that specialize in this type of rental.

You can also try to connect with Realtors to find people who are in transition from one house to another. For example, my sister sold her house and had all her belongings in storage. She needed a furnished house for the short period between when she sold and when she closed on her new home.

The last option is a familiar strategy, and that’s just to rent it out long-term. This is why the golden rule in buying a rental for Airbnb purposes is to at least be able to break even with market rents. You may have to store your furniture or even sell the furniture for the time being, but it’s worth it.

Related: 6 Reasons Short-Term Rentals Aren’t a Sustainable Investment Strategy

Conclusion

There is light at the end of the tunnel. Airbnb is not going away, but there’s no doubt that this will be a difficult time for investors whose primary focus is short-term rentals. In the long run, you guys are ahead of the curve. I just hope my article can help you weather the storm.

How have you adjusted your short-term rental strategy in the wake of COVID-19?

Share your experiences in the comments.

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
Read more
    John Underwood Investor from Greer, South Carolina
    Replied 3 months ago
    Vacation rentals were shutdown in April. We still had people who wanted to come to our lake house but we refused due to stay at home orders from the Governor. Since then, we have had more demand than ever. I get calls almost every day, but I have to tell them we are booked till mid August. I think there is a huge difference between a true vacation rental/destination and a suburban location.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied 3 months ago
    Hey John and Dave, glad to hear you guys are booked! i agree the more "destination" rentals are surging right now. If the economy stays up, that will likely continue. Let's hope things stay up! Either way, AirBnb and STR are here to stay for the long term.
    David M Trapani Rental Property Investor from Franklin, TN
    Replied 3 months ago
    Hi John, We are also booked into August. Thanks for sharing!
    David M Trapani Rental Property Investor from Franklin, TN
    Replied 3 months ago
    Hi Matt, Thanks for your article. Some very good points here. Perhaps though, the market isn’t quite so bleak in high demand places ( : We were closed for short term rentals in the Palm Springs, CA area due to government restrictions behind Covid. That lasted from around March 15 - May 20. Since restrictions were lifted we have been inundated with guests and bookings. It appears there’s huge pent-up demand. Families, couples, business owners etc have flocked en masse to get out of being cooped up in their homes. Time to enjoy some fun & relaxation poolside in the desert sun. Many trekking from Southern Calif (about 2.5 hr drive) where their day-to-day living restrictions are Draconian. Appears we are back on track with upgraded cleaning protocols and many satisfied guests enjoying fun & pleasant get-aways!
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied 3 months ago
    Thanks Dave! I had read that sites that were within a 2.5 hour drive from major cities, and also on water or in the woods were doing very well. People itching to get out in the fresh air! Congrats on your success!
    Melissa Wesling Investor from Chicago, IL
    Replied 3 months ago
    I agree with this! Our STRs are within 2.5 hour drive from Chicago and near the lake. As soon as the Michigan governor lifted the rental restrictions, we were good to go! We also saw bookings increase when we changed our calendar from our usual summer weekly rentals to two night minimum rentals. It seemed people felt better about committing to a shorter stay at this time.
    Serena Kim Real Estate Agent from Orlando, FL
    Replied 3 months ago
    Great article Matt, thank you for sharing. Once thing I've noticed in Central Florida were I own two short-term rentals is that the demand decreased temporarily, but now it has been picking up again, with my houses cash-flowing the same amount as pre-COVID. My view is that going forward people who can choose between a hotel and a private short-term rental will probably select the short-term rental as long as the host has a high review (especially for cleanliness), comparable price, and privacy. Families will value the privacy and not having to share elevator, lobby, pools, etc. If you own a short-term rental that has high HOA fees (vacation communities, hotel-like rentals) with community pool and amenities I'm guessing it will be hard to generate high cash-flows, but we'll see.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied 3 months ago
    Great points Serena, thanks!
    Larry Dowde Rental Property Investor from Colorado
    Replied 3 months ago
    We have an AirB&B in Colorado. It was shut down a couple months but now all booked up. It is remote and beautiful, even in the winter. I think we will be good going forward.
    Ado Shemesh Rental Property Investor from Columbus, OH (columbus oh)
    Replied 3 months ago
    Thanks for the great content, Matt! we bought a duplex a few months ago, moved into one of the units and turned our other house into a short term/Airbnb property here in Columbus, OH. Its going pretty well and we are currently fully booked until August with great family guests from different cities (mainly east coast). Just to mention we started on Airbnb about a week or two before the virus hit and still the numbers are still positive. I think you are spot on that this is "the future" of real estate leasing and that people are wanting to "use" things more efficiently (Uber, Netflix, Airbnb etc.) Its going to be very interesting to see how things will play out in the next year or two.
    Jayne Pattison
    Replied 3 months ago
    I agree with the comments on this thread. We own STR’s in Kauai and Whistler and at first the bookings were dropping like flies and Airbnb letting full refunds happen . I was concerned back then, but ...bookings are increasing again and people definitely want to and need to travel to places they adore. In BC, travel is starting to be encouraged for residents of B.C. and so they will flock to Whistler and other areas of BC - as someone mentioned similar in Palm Springs area. So I am feeling optimistic. Also, my cleaners are doing enhanced protocols following CDC so that’s able to be promoted on Airbnb and VRBO. Thanks for the article; definitely of interest.
    Michael Baum from Olympia, Washington
    Replied 3 months ago
    Our lakehouse is pretty much full for the summer and into the bumper months. We had 3 cancellations due to COVID19 and someone grabbed the dates within a week. As for the commercial cleaning, we are using a single cleaner as always. We have always used antimicrobial disinfectants and the like so we didn't really have to change anything. The problems with STR's are definitely regional. Our home is in rural north Idaho.
    Jerry W. Investor from Thermopolis, Wyoming
    Replied 2 months ago
    Matt, for about 2 months I only had 2 days of rental from 2 units. However June was my best month ever with only 1 empty day in best unit and the other one did very well too. Last year was my third year and it went very well. I have many bookings of folks traveling to the national parks in their cars, and just stopping for the night, or an extra day to see local sights. I think drive to destinations are doing very well, fly to destinations not so well. I will probably add another VR next year. I was poised to this year, but Covid19 scared me off and I did a year lease on the house. These times are so strange that predictions are just wild guesses. Our local housing and house sales should be VERY depressed. We depend heavily on the price of oil which is horrible, yet house sales have gone absolutely crazy. It defies logic. They are mostly out of state buyers. This is the best for housing sales for nearly 30 years, yet we should be in a depression here. I am now in do the best you can at the moment and stick to fundamentals. Time will tell.
    Justin K. from East Texas
    Replied 15 days ago
    From talking very breifly with my realtors in the "vacation" areas, they all said that if everyone wanted to be in lockdown, might as well be in a nicer place than home.