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.
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.
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
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.
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.
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?
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.
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.
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.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.