Home Blog All

Are New Short-Term Rental Hosts in For a Rude Awakening in 2023?

On The Market Podcast Presented by Fundrise
40 min read
Are New Short-Term Rental Hosts in For a Rude Awakening in 2023?

Short-term rentals have had a serious run over the past two years. As soon as interest rates dropped, everyone decided that buying a vacation rental or second home was the best move to make. This led to a surge in short-term rental investments across the US, as hosts began to almost outnumber guests. Now, vacation rentals are seeing a dramatic slowdown while a recession starts to shape, as Americans are less concerned about taking vacations and more about keeping their jobs.

So where is the vacation rental market headed? Were short-term rentals just a short-lived fad that could fade out faster than it took to be born? Or, is this a mere blip on the radar of vacation rentals, as guests still prefer hosts over hotels? We brought on Avery Carl, Jenny Yi, and Tony J. Robinson, three experienced short-term rental investors, to walk us through exactly what is happening in the market, what moves they’re making, and advice for getting through a recession.

We also talk about short-term rental regulations, which, surprisingly, many of the expert investors are in favor of. They speak on the saturation of “blue chip” vacation markets, and how some sleepier towns offer much better prospects for profit than the vacation markets most Americans know and love. If you own a vacation rental, plan on buying one, or just like staying at them, this episode gives you in-the-field opinions that most hosts won’t admit.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
Hey, what’s up everyone? Welcome to On The Market. My name’s Dave Meyer. I will be your host today, and we have a pretty cool special show for you today. If you listen to this show, we have a normal rotating cast of characters who come on and share their opinions, but we were bringing in an entirely new crew for this episode to talk about short-term rentals. You probably know this is one of the most popular, fastest growing investment asset classes in the entire industry and with a lot of regulation or recession, all this stuff going on right now, we wanted to bring in some experts to talk about this show.
So we have really good panel. We have Avery Carl on the show. She wrote the book about Short-Term Rentals for BiggerPockets. She’s been on one of our shows earlier. We have Tony Robinson, who is the host of the Real Estate Rookie Show, and we have a new newcomer on the Market, Jenny Ye, who is an incredible investor and also has a really unique business in the short-term rental space. So you’re going to want check this one out. It’s super helpful. I learned a ton and I think you will too. So stick around for this one. But first we’re going to take a quick break.
Let me quickly just introduce our panel. First, we have Tony Robinson, who it’s your first time and on the market. I can’t believe it’s been this long since you haven’t been on yet, but host of the Real Estate Rookie Show. Tony, could you just briefly introduce yourself for people who might not know you yet?

Tony:
Yeah. Absolutely, man. We’re excited to be on Dave, like you said, Tony J. Robinson co-host the Real Estate Rookie Podcast. I am an investor based out of Southern California. My wife is also my business partner, and we’ve got, I think 30 properties now across a few different states. So it’s been a busy couple years for us. But dude, I’m excited to come here to talk shop, and we got some other heavy hitters on the show here. So it’s going to be fun.

Dave:
Awesome. Well, thank you for joining. We also have Avery Carl, who you probably remember as the undisputed winner of the last Strategy Showdown. Made it through all of Jamil and David’s dad jokes and we She did so well. We invited her back. Avery, can you just remind everyone who you are if they haven’t heard from you yet?

Avery:
Yeah, absolutely. And I always appreciate you having me on. Always happy to do it. So my name’s Avery Carl. I’m a real estate investor first, I have 240 doors currently. No partners, just my husband and I am the CEO and founder of the Short-Term Shop, which is a real estate team that focuses on selling and buying short-term rentals or working with clients to sell and buy short-term rentals. I wrote the BiggerPockets book on short-term rental investing called Short-Term Rental, Long-Term Wealth, and I think that’s everything.

Dave:
Nice. Yes, wrote the book on Short-Term Rentals. It’s a good claim to fame for the show. And then our third guest today is an on the market newcomer. Jenny Ye, welcome to the show. Could you please introduce yourself to everyone?

Jenny:
Absolutely. Thank you for having me. I’m Jenny Ye, I’m a flipper, turned long-term investor. Turned short-term investor, and now my team travels the country and soon to be internationally. And we specialize in product sourcing, designing and setting up hospitality. So short-term and hotel convergence, two short-term models and helping the everyday investor figure out how to put their budget towards the best use.

Dave:
All right, great. Well, thank you all for being here. We’re going to dive into everything about term rentals. All right. Avery, I’d love to start with you being both an agent and an investor. Can you just give us an overview of what you’re seeing in the short-term rental market right now?

Avery:
Yeah. So I only focus on one type of market. I focus both in my own investing and with the short-term shop in the regional, drivable, mature vacation rental market. So it’s hard to give a state of the market in terms of short-term rentals. It’s more of a state of each market. So there’s different things going on in each market. I know in metro markets it can be pretty tough. As of late, just with regulations and the whole hurting the local economies saying vacation markets is a little bit different. What we’re seeing is the people who bought right and in the right market are continuing to do well. And the people who bought stuff that was on maybe too far out in the outskirts or maybe a weird property just because they really, really wanted to get something while interest rates are low, those are the folks that are struggling now because definitely inflation and the economy is a factor.
But I think what’s more of a factor is that last year and the year before, you could have bought basically anything and never paid attention to it again, and never decorated it and just rented it, just basically like a crock pot said it and forget it and don fine. But now that we’re moving back into what I would call more of a normal market, you do actually have to pay attention to your listing. You do have to make sure that the decor is what it needs to be and that you’re getting in there and tweaking your pricing here and there to make sure that you’re keeping up with things. So I think not only the economy, but people who bought things that and just quit paying attention and thought that that was going to continue forever, the not having to pay attention thing. Those are the ones that we’re seeing struggle.

Dave:
And I mean, I guess you could just say that not paying attention to any investment is bound to not do well.

Avery:
Yeah. You have to pay attention long-term.

Dave:
What about the agent side of things? Are you still seeing demand for short-term rentals? Are investors still buying?

Avery:
Yes, they are. So what we’re seeing now is because interest rates are high, there is a lot of opportunity in terms of getting discounts on deals, but that interest rate still does make that monthly payment quite a bit higher. So what we’re seeing is most of our investors pivoting out of our more blue chip markets. And by blue chip, I mean the markets that are always going to be great places to own the Smokies, Destin in Florida, et cetera. These areas that get millions and millions of tourists a year, they’re really established, always going to be great, but you’re going to pay to get into those markets. They’re more expensive.
We’re seeing people pivot out of those into cheaper markets that are also mature vacation markets like the Western North Carolina Mountains or the Forgotten Coast in Florida rather than the Panama City Beach, Destin area. So people are still buying, because there’s a lot of opportunity in terms of being able to get deals because sellers are scared too. Nobody knows what’s going to happen with the economy, if anything. So it’s a really good time to capitalize on that. But you do have to pay attention to those interest rates. So what people are doing are just pivoting from more expensive markets to get into cheaper markets to get into.

Dave:
Tony, you’re mostly in vacation hotspots?

Tony:
That’s correct, yeah.

Dave:
And how are you seeing things play out in where you own your short-term rentals?

Tony:
Yeah. I think very similar to what Avery hinted at already. So we have a few cabins out in Tennessee. We actually use [inaudible 00:07:11] seam for all those. And then we have quite a few properties out in California near Joshua Tree where branched out to Branson and some other states as well. And I think a lot of what Avery said is true is we are starting to see some of these people that were, we’re dabbling in short-term rentals, they’re probably the ones that are getting beat up the most. So when you look at all the different asset classes across real estate investing over the last couple of years, short-term rentals have been like this gold rush where everyone was making a bunch of money. All these other investors who had no desire really to be short-term rental operators, saw other people making money. So they jumped in and you’re seeing this influx of demand.
But here’s what I think will happen. And I don’t have a crystal ball, but here’s what I think will happen. The people who weren’t committed to being world class as short-term rental operators, they’re eventually going to exit the space. And I’m already seeing it happen. Investors that I know, they’re like, “Yeah, I bought an Airbnb. It was the worst experience ever. I’m never doing that again.” And I think we’ll continue to see that and you’ll eventually start to see things level out across probably most big markets.

Dave:
Yeah, that makes sense. What about on the demand side? Are you still seeing strong demand for all of your properties? Is revenue still doing pretty good?

Tony:
Yeah. So I would say 2021 was probably an anomaly in terms of revenue for a lot of markets. You had this a tremendous amount of pint up demand from COVID. And what we’ve seen in 2022 so far is that most of our properties are slightly lower than 2021. However, when you look at aggregate data, 2022 is still better than 2019, it’s still better than 2018. So there was a spike in 2021. Things are normalized in 2022. So I’d say all of our properties are still profitable, we’re still making really good returns on our money. But the first cabin that I purchased, I spent $60,000 to purchase that property. It was fully furnished, five bedroom cabin in the Smoky Mountains. I profited $84,000 in that cabin last year. I’m probably not going to hit that same number again this year, but it’s still going to be a pretty solid return.

Dave:
I think that’s super important context, not just with short-term rentals but just everything in the housing market over the last couple years is that the last two years have just been anomalous. It’s not normal data. So if you see occupancy like we were preparing for this show looking at occupancy, it is down over 2021, but it’s still well above where it was in 2019 and 2020. So it’s important to take these things in context and understand as investors in 2021, all of us across strategies probably did better than normal. And some reversion back to regular performance is not just to be expected is probably better in the long run. Jenny, can you tell me a little bit about what you’re seeing both with your own investments and your clients that you’re working with to set up their own short-term rentals?

Jenny:
Absolutely. Honestly, I’m going to reiterate what’s already been said. There’s so much talk right now, especially in the social media and in the groups where a host and owners are basically panicking and saying that there’s a shift in the market. I don’t believe that there’s a shift in the market. I think there’s a normalization of the market. So if you take the whole concept of what Airbnb and short-term rental is supposed to be is this idea of taking the bed and breakfast, which has always been around since hotels have been around because there’s always going to be that population of people who just don’t like to stay in hotels. So you take the concept of the bed and breakfast, you combine it with technology and you get easy access. That was the whole purpose of creating these apps for people to have easy access to this model.
Investors jumped on it because of great interest rates, because of COVID, because of a prime opportunity. But they thought that they could just purchase a property and literally set it and forget it. That’s not the type of set it and forget it that we want. For a while when you have this mass influx of travel, yes, it worked, but now what you see in this “shift” as you see basically competition because that’s what this is at the end of the day, is these are competitions between properties just like it is capitalism. You see the best properties, the best cultivated properties, the people who had taken to the business of hospitality, those are rising to the top. So the market itself and competition is normalizing, not necessarily in some chaos. So in order to succeed, you really have to, as an investor, assess whether or not this is the business model that you want to be in.
So for every strategy, whether it’s long-term, whether it’s short-term, buy and hold, short-term is a strategy. And in order to be successful, you have to understand the business. You can still be passive, but you have to be willing to invest the models and the people who are also willing to work on your behalf in the business of hospitality in order to be successful. And that can be in high range markets, that can be in local markets. It’s just all about who your population and who your guest experience is going to be. And if you can nail that down, those are the people that are rising to the top instead of your people that are just buying a house and listing it for the mere sake of listing it.

Dave:
So because of that, because the professionals are just as active or maybe more active, are you seeing that reflected in your business? Is business still pretty strong for people who want to put in these high end furnishings and create this luxury experience?

Jenny:
Well, and it’s funny because I would say about half of our clients are actually still in the luxury market. They’re putting in about five figures into the setups. The other half of the clients are actually investing really local. So what they’re doing is they’re seeing, for example, we just finished a property out in the middle of dangerous Tennessee, which most people have never heard of dangerous Tennessee. It’s literally an hour outside of Knoxville. You would never know but this particular lake is the go-to lake for this vast pro fishing contest that happens every year. So it is to go to for your local people to go and stay.
So there’s this shift of, “Okay. If you don’t have the ability and you don’t have the money to buy luxury, if you don’t have the thousands of dollars to dump into a property, you can still get into the game by looking local. You can still get into the game by seeing how the average person vacations,” because most people will actually never leave their state, believe it or not, when they’re traveling elsewhere. So if we look at these numbers and we look at these trends that existed pre COVID, that was the trend. People vacation in their own state. So half of my clients are only spending less than 10 grand to set up properties, but they’re capitalizing on the local scene versus trying to overextend themselves in a market that they know that they’re not willing to put their money into.

Tony:
Dave, I just want to add one comment on that. Jenny, I love that point because I do think that especially for new investors in this space, everyone does want to go towards those blue chip markets. But what we’ve seen is that the price increases in those markets over the last couple of years haven’t been met with revenue increases. So the first cabin we bought, it’s almost doubled in value, but my revenue hasn’t almost doubled in valued over that same time. So I think there are definitely a lot of opportunities in some of these secondary and tertiary markets.
So we went on a world tour of the United States this summer. I submitted offers in Cloudcroft, New Mexico, Dundee, New York, different parts of Missouri, like Arkansas. We’ve been all over the place trying to identify what are some of these up and coming more secondary markets that maybe five years from now will have some of the same amenities and attractions and things that we saw in some of these more popular blue chip markets like Avery talked about.

Dave:
All right. Tony, I have to ask you about Dundee, New York. I might be one of three people in the world who have ever been there.

Tony:
Have you really been there?

Dave:
Yeah. So yeah, I went to college in Rochester, which is not far from there. And after you graduate college, everyone’s waiting around to graduate and just getting drunk. And they arranged for us to take these chartered bus to… There’s all these wineries, near Finger Lake. And everyone was just faced, and I probably can’t curse on the podcast but just puking out the windows. It’s like the last day of pod. So that’s why I was in Dundee, New York and it was just a nightmare.

Tony:
As someone who lives in California, I had never heard of Dundee, but we stumbled across the Finger Lakes and we start looking at properties over there. And like you said, there’s a massive amount of wineries and breweries and wedding venues and there’s just this burgeoning scene of attractions drawing people in. So we said, “Man, if we can get a property here as things start developed, we could be in a really good spot.” So I think for a lot of the new investors, trying to find those upcoming markets is where we should be focusing our time right now.

Dave:
Tony, how did you identify some of these markets? You all are saying that some of these blue chip markets they’re overheated, what are the things that attracted you to some of those markets you went and looked at?

Tony:
That’s a great question, Dave. So for us, it’s part research and it’s part networking. I found another investor. I met this guy who vacationed in the Finger Lakes. He’s from New York somewhere. He was like, “Yeah, every summer we go out to the Finger Lakes.” I was like, “What is the Finger Lakes?” I’d never even heard of before. After doing my research, I saw what the draw was. So part of it is just talking to other investors, seeing where they vacation, where they’re thinking about investing, what’s like the local hotspots near them. The other piece is a more data driven approach where we’re just like, okay, what are some of the big draws in each state. If I go to Arkansas, what are people doing in Arkansas? And then, okay, where are some of the markets where the price to revenue ratio is really strong? So we use both approaches where it’s subjective talking to people. Then a little bit more objective, we’re looking at data based on price points and revenue.

Avery:
I just wanted to hit on something that Tony said. So he met a friend who gave him or introduced him to this market because it’s somewhere that he vacations. So I think that’s really important. And anybody who listens to anything that I say gets tired of me saying the market is almost more important. The market that you choose is almost more important than the property you choose. And to avoid regulation issues you always want to start with other than, I mean you could Google, but you want to start with where have I vacation or where someone I know vacation on a regular basis where they stayed in a single family home rather than a hotel pre Airbnb? So before Airbnb.
So I grew up living in Mississippi. We went to Destin, Florida every single year. My grandmother went to Destin, Florida every single year since 1937. So you start there to figure out, okay, this is an area where short-term rentals are not a new thing. They’ve been around for a while. So it’s probably, again, there are exceptions to every rule and you’re going to have to do your research, but it’s probably going to be more friendly than, “Yeah, I live in Nashville and this house down the street from me is cute. I’m going to buy that in short-term rent it.”

Dave:
That’s a really good point. I love that way of finding it. Actually, I only own one short-term rental. I’m just a baby. But I did it because there’s this place I love skiing and I would go up there and there’s just no hotels. There was nowhere you could stay and you would have to just take day trips. And I did it selfishly so that I could go ski. But I was like, there’s going to be huge demand for this because there’s not anywhere you can stay. And they have refrain from regulating don’t. That’s just one data point. But that brings up a great point, Avery, that I wanted to talk about, which is regulation. Because a lot of major metros right now are starting to regulate STR or outright ban them.
I think Dallas just put in something pretty strict. Atlanta was doing it’s all over the country. But there has been this prevailing thought process that these markets that are more vacation centric that need the short-term rentals economically. But at the same time, we’re seeing these housing affordability problems in these markets. So you do see a lot of local… I wouldn’t say backlash, but concern about the role that short-term rentals are playing in housing affordability and availability in some of these housing markets. So I’m curious if you’re seeing that play out in some of the markets where you operate.

Avery:
Yeah. So again, it goes back to you really have to choose your market well. Like in Destin, where I live, their short-term rentals have been so woven into the local economy for so long that we couldn’t live without them. There are not really any hotels and say something came along in short-term, you couldn’t rent anything in Destin anymore. There aren’t enough locals to fill all of what those would be open long-term rentals. So it’s not a situation where it’s taking housing away from people who would be living here locally, because there’s just so many and it’s always been that way. And then also the way the regulations work. So there’s a highway that runs through the entire Emerald Coast called Highway 98 all the way from Destin to Panama City. It goes further than that, but we’re stopping at the Emerald Coast.
So in Destin, one of the main cities there, you’re only allowed to short-term rent south of Highway 98, not north of Highway 98. So south is where you would want to be as a short-term rental owner anyway because south is walkable to the beach. That’s where the tourists are going. North is more, I mean you’ve got every level of housing from really affordable to 10 million houses up north. So there’s plenty of different types of housing for whatever you might want to have. But there is that limit as to where the short-term rentals can be. So it can never just be all short-term rentals and nobody can live here.
So regulations are important. I don’t want people to take away from this conversation that regulations are bad. Regulations are really good. You need to have regulations. So where I live in Walton County, just east of Destin, the 38 area, there are no regulations, but it operates very similar to Destin. And there’s actually a bunch of stuff with the city council right now where they want to add some regulations to Walton County, which I vote yes on every time because right now it’s the wild west and nobody knows who to call if there’s a problem or if something’s on fire. They need to know who it’s registered to, who they’re calling if there’s a problem.
So it’s good to have regulations, but there’s a fine line. You don’t want to go over the top to where you’re buying in a market that they don’t want you there. That’s where you have to deal with a lot of fighting back. But as long as you’re buying in markets where you’re not necessarily taking housing away from locals, because there just wouldn’t be enough locals to fill all of that housing, then you’re going to be in good shape.

Tony:
Avery, you make so many good points. And I just want to piggyback off of that there, there’s really two things that I think of when it comes to regulations. The first thing, and this is I think a really important fact for new investors to understand, is that demand and regulations are no way correlated with one another. So if you think about a super popular market like Destin. If the local government said short-term rentals are no longer allowed in Destin, does that mean that as soon as that policy passes that all the people who have been vacationing in Destin every year for their entire lives no longer want to go to Destin? It doesn’t.
So if we understand that the demand and policies are not necessarily connected to one another, just because a market is highly regulated doesn’t mean that it’s a bad place for you to invest in. As long as you can understand what those regulations are, abide by them, then you actually might benefit from that increased regulation because it means supply might stay low and if supply stays low while demand goes high, basic of economic means, we can charge most host in those cities.
So as an example, we invest near Joshua Tree National Park, and there are three cities that’s around that national park. One of them is 29 Palms and 29 Palms recently revamped their regulations to where they put a hard cap on the number of permits that they’ll issue. Now, most people will look at that and say, “Man, that’s a terrible thing,” but what happens if you’re one of the people that is admitted under that cap and we have three properties in 29 palms that now doesn’t matter how popular that market gets, demand is going to be held at a certain level. So it’s great for us because we play by the rules we got and it’s working for us.
So that’s the first thing. And the second piece, you touched on this too, Avery, was the economic dependency. We really do try and focus on markets that are primarily driven by vacation and tourism. I live close to Los Angeles, you mentioned Atlanta, Dave. LA and Atlanta, some of the biggest markets in the country, they have every single type of industry business you can think of. There’s film, there’s television, there’s radio, there’s business headquarters, universities, port, every economic driver exists within those two cities. So what incentive do they have to protect short-term rentals? So every market that we go into, we want to make sure that there’s a strong economic dependency on short-term rentals because it doesn’t necessarily mean that there won’t be regulations, but it means that those regulations will still allow you to operate profitably in those markets

Dave:
In some ways, I mean, I totally get the idea of trying to make more affordable housing. It’s just not affordable for many people. And that’s just a nationwide problem. That is not necessarily a short-term rental problem. And I get the instinct to blame short-term rentals. But just for people knowing the total supply of short-term rentals in the United States makes up about 1% of the housing stock in the entire country. So there are places where it’s more concentrated. So there are communities where it is more impactful.
This is just my opinion, if you turn to every short-term rental into a long-term rental, it probably wouldn’t have that big of an impact on prices in that neighborhood. There are more structural fundamental problems, mainly really unaffordable housing, a supply shortage that goes across the entire country that are contributing to that. But I do think there is going to continue be this instinct by governments who are probably just trying to do right by their constituents to regulate, even though it might not necessarily work.

Jenny:
Well, and that’s also a good point too, because we have to understand that a lot of these regulations that are coming out are in response to the boom that we just had in all these purchases. So it doesn’t mean that they’re here to stay. They are experimenting with the balance just as much as investors are experimenting with the balance. So it’s going to be ever changing. So just because there’s a regulation in the market, just like Avery and Tony said, doesn’t necessarily mean that you don’t invest there. It acts as a filter quite honestly for you to determine as an investor how much you’re willing to be in this game. Are you willing to be in the hospitality game?
So this regulation is now acting as a filter, which you are willing to play by the rules, which you are willing to put up the capital time wise, not just monetarily to put the right systems in place so that you can be part of a successful area that’s regulated? Or do you want to play in a market that’s completely different? Both of them are very different strategies. Both of them have their plus and minuses, but just because there’s regulation doesn’t mean that there’s going to be regulation a year from now. It’s ever changing. And that’s something that we have to monitor as investors and both as people helping our clients.

Dave:
Okay. That’s a great question, Jenny, and it’s something I want bring up because a lot of times when I hear these conversations about short-term rentals, someone’s like, “Well, they’ve only regulated… I used to live in and invest in Denver. And they put in a regulation that you can only short-term rental your primary residence. So if you have an ADU or for me, I moved out of the country, still have primary residence, I could short-term rental that but no one else can. So people are like, “I’m going to buy everything that’s just outside Denver because that’s going to be the perfect spot.” But I’m always like, “But that city could just add a regulation a couple weeks from now.” Or they’re like, “You can only do it more than seven days. So we’re only letting people for eight days.” So now my strategy is fail proof. I’m like, “Yeah, but the city council could just change it to nine days.” They could always keep changing it. So Jenny, how do you plan a business when you’re constantly in this risk of changing environment and regulations?

Jenny:
Absolutely, and it’s a fair question and it goes back to how much skin do you want in the game? So when my clients come to me, most of the clients that I have, have already purchased a property, but I do have some clients who are like, “I don’t know where to purchase a property. I don’t know where to begin.” And a question I often get is the regulations piece. So for example, I’m normally based out of Austin whenever I’m home. Austin is a regulated city when it comes STR and it’s known, but that hasn’t necessarily affected demand. People who do STR here are really successful because the mere fact that Austin is also a hub for everything. The number of music festivals here, the number of business professionals that come here, the number of extras, it’s the assessment of your return based on the market that’s coming in and how much you want to put into that.
So the clients who choose and who have been very successful in Austin are willing to take that trade off because they know there’s so many reasons to invest in Austin. Now there are other clients who are like, “I don’t want to deal with regulations. I don’t want to have to predict changes. I don’t want to have to make changes or even up my licenses or take care of the legal end and make sure that I’m checking the boxes.” That’s just not something that they want to be invested in.
So then we start to look at different markets, we start to look at outside colleges, we start to look at outside military bases where we know there’s going to be a high influx and transitions of populations, things that we know that we can basically guarantee turnovers and that are stable and always there with less concerns about actual regulation. And again, it goes back to your passive participation versus how much you really want to be invested in the hospitality aspect of the market.

Tony:
Dave, can I just share one anecdote? So I mentioned we were in Dundee, New York over the summer and Ithaca New York is a place that’s not too far from Dundee and we’re just trying to do research around other cities around the Finger Lakes. And Ithaca instituted new short-term rental ordinances over the summer. Before you could rent your property out, all 365 days out of the year. After this ordinance passed, and I just looked it up, the new limitation was that you could only rent your property for 29 nights out of the year if you were non lakefront and you got 245 if you were actually on the lake.
So could you imagine the people who purchased in Ithaca that were renting their properties out 365 days out of the year to now only be able to do that for one month. 29 nights out of the entire years. So that’s why my focus on there, being that economic driver, that economic impact of short-term rentals is so important because even if it was the Wild West before, once that regulation comes down, it’s hard to know where it’s going to land.

Dave:
Man, the people on the city council must own all those lakefront properties. Yeah, we’re just going to take this for ourselves.
All right. So I want to switch gears a little bit because there’s obviously a lot of fear about recession and economic downturn right now. And just over the last couple of weeks we’ve gotten a lot of conflicting weird economic data. GDP grew in Q3, job market was strong, but just the last week really, we’re starting to see a lot of layoffs in the job market. Big companies like Meta and Stripe and Twitter all laying off people. And there is fear, I think rightfully, that we’re entering… We don’t know if we’re in a recession right now, maybe not whatever that will be for the Economist to decide.
But we might be entering this job loss phase where unemployment might start to come up. And I think there is some fear, and I believe this, that demand could start to falter and people might be taking less vacation. And I was googling around to try and understand this, and I actually found research you did Tony about this, about how and I was like, “Perfect, I could ask him about it on the show.” So I was curious, could you just tell everyone who’s listening about the research you did about vacation spending during a recession?

Tony:
Yeah. You’re putting me on the spot here, man. I wish I had those numbers memorized off the top of my head. But here’s what I remember. I did a bunch of research and we posted this on our YouTube channel because I was having these same questions as the economy was starting to shift. And I looked back at every recession going back to the mid 1900s and it was like six months, 16 months, nine months, eight months. And obviously 2008 was the big one, it was a year and a half. But every single recession lasted excluded in 2008, between six and 14 months, somewhere around there. And what I saw was that even during these recessions, vacation spending didn’t go to zero. People were still spending money going on vacations. The amount of money they were spending obviously decreased, and the number of people who were taking vacations decreased.
But it wasn’t like Hilton and Marriott’s occupancy just went to zero because of a recession. And when I saw that data, it was comforting for me for a few reasons. One, it let me know that even if we hit some really turbulent times in the middle of a recession, we will still have people come into places like Joshua Tree and the Smoky Mountains, these are places that people will probably continue to travel to.
Second, can my property sustain a six to 14, 16 month slowdown and then recover afterwards? And my thought was like, “Yeah.” Our properties have enough wiggle room between what we typically generate in revenue and what those expenses are. So even if we just break even for 12 months, I can live with that because I know on the other side, the economy always continues to grow on the other side of a recession. So when I looked at all these different factors, Dave, it was reassuring to me to say, “I’m investing for the long-term and I can weather a six month to 12 month to 14 month storm in my business.”

Dave:
Well, I’ll bail you out because I read this today. So you said that the worst one was about a 9% decrease in vacation spending. So yeah, it could be… But most businesses you should be able to weather a five to 8% drop in revenue if you buy correctly and have a solid investment. Avery, did you want to jump in on that?

Avery:
Yeah, I do. Again, Tony and I have a lot of the same philosophies on investing in short-term rentals. So I’m going to use the word piggyback again, but to piggyback off what Tony said, so I think in times of recession, that’s when those blue chip markets that we talked about earlier come back into play. So I took a quick look at my price labs and all of my… I have eight short-term rentals, all of them except for one are in what I would call blue chip markets. And my revenue this year is actually up 5% from last year. So it’s not like a banner year or anything, but a little fluctuation.
But I think that you can have a lot of success in right now if you’re choosing to buy right now and maybe looking for value add opportunities in the blue chip market. So you’re not paying those turnkey prices necessarily, but finding some force appreciation because in downturns, those blue chip markets, they’re blue chip for a reason. They’ve been through every economic cycle, they’ve been through multiple natural disasters, they’ve seen it all, and there’s still millions and millions of people coming every year. So again, I’m say it again, why choosing the market is really important, buying in the right market.

Jenny:
Well, to play off that, I think there’s also the concept of what we think of blue chip, because again, this goes back to earlier in our conversation about the buy-in price point for those blue chip markets that everybody also needs to understand, and this does tend to come out in a recession, is that every state has their own version of a blue chip market and that caters to the people that never leave the state. And that caters to the people that are most likely to be affected by a recession because they can’t actually afford to leave outside the state.
So even though we talk about places like Joshua Tree and we talk about places like Gatlinburg, again, those have survived millennia and they will continue to survive millennia. But if your price point isn’t there, this is the perfect time to start looking and finding your blue chip market in your state where your locality is going to continue to go even in a recession.

Dave:
That’s such a good point. Yeah. I think as Tony showed, the total amount of spending goes down but it might just be shifting to a different spending. If you look at inflation data, for example, one of the things that has been driving inflation the most is airline costs, super expensive to fly right now. It’s gone up 20 or 30% year over year. So you can really imagine a scenario where people might just, instead of flying to another state or internationally, just decide to drive to that local blue chip market that you’re talking about, Jenny.
I tend to agree people still do spend money, but there is, I think, risk in the market and certain markets might see a decline in occupancy or revenue because we’re also seeing an increase of supply still. There are more Airbnb listings coming online. That is slowing down a little bit but I think there is a risk over the next couple of years. So Jenny, I’m curious, do you have any advice for anyone listening to who is currently operating a short-term rental? If they start to see revenue decline, maybe a few less bookings, what are some tricks that they could think about or strategies that they can use to survive a potential downturn?

Jenny:
Absolutely. I think the reality is that this day and age. So if we talk about what COVID did to the market aspect of STR, we need to also talk about what it did to our societal aspect in general. So people during COVID, we were inundated with HGTV, most people just sat there and literally they could probably watch every single show that was on HGTV or A&E and people that were investing in. So we have this perception of what is pretty, what is attractive, and that’s the baseline now. So if you’re going into the short-term market and you think the mere fact of just putting a property out just for the sake of putting a property out is going to get you your nightly rate, it’s not. And now we are even at the point where the expectation is your HGTV staged home.
So that no longer in itself is even good enough to be the competition. So instead what I tell my clients is that assume that Airbnb, assume that VRBO assume that all these apps are basically a gigantic magazine rack. What’s going to catch their eyes, the most attractive one, they’re going to look at it. And then people want experiences nowadays. They don’t just want to go to some pretty house, they don’t just want to go to some place. They’re looking for a new way of being, a new way of interacting with people, a new way of interacting with locals, a new way of experiencing wherever it is that they’re going.
So from the get go curated design, not just pretty, but design that is meant to make a person feel like they’ve escaped wherever they’ve gone is going to get your nightly rate up. And then from there, you don’t have to dump in millions of dollars or thousands of dollars or even just tons of money to be in this game. You just have to spend your money. Well, so people are spending their money to create these stage homes that again, are beautiful, but they’re not booking the same way that someone who has spent less, that has spent the money on hosting, who has spent the money on the experience, who has sourced local artists, who has curated localities and examples and suggestions of where to go and what to be.
And if your bottom line is, if you places looks like a dorm room, but you’ve spent the money to put a wall mural on it, people aren’t going to book your place just because it’s a wall mural. They’re wanting the entire experience of everything. So it’s all about the whole thing and it’s all about looking at it from a hospitality standpoint, not just in mere investment standpoint.

Dave:
That’s so true. I’m going with my partner Jane, to stay at an Airbnb starting to tomorrow, and our host sent us this beautiful welcome kit and I personally just don’t even read this stuff, but Jane’s like eyes lit up. She’s like, “Oh my god. They’re so thoughtful. They love us.” It’s one of those things, it really is a whole experience and you do really feel like you’re going to be cared for. I know going into that now that it’s going to be a positive experience. I haven’t even set foot in it yet, so Totally agree. Tony or Avery, either of you have some advice on how to mitigate or navigate a potential downturn that might come next year?

Avery:
Yeah. So I don’t want to state the obvious here, but cash reserves are as important as they have ever been. And what’s the saying about when the tide goes out, you see who’s been swimming naked, you really have to make sure… I think a lot of people over the past few years jumped into short-term rentals because it was the new sexy thing to do. And apartment buildings are boring and they have leveraged themselves. Here locking one thing to finance another thing without any space or any margin in between so that if one property goes under, then all the properties are going under.
So I think just your whole classic managing your money well and having enough cash reserves to weather any potential storm, because it’s unlikely that something’s going to come along. If anything was going to do it was going to be COVID, but something’s going to come along and make you have no bookings for months at a time. You should be able to have enough to break even. But if not, those cash reserves should be in place to get you through and to the end of that recession.

Tony:
Yeah. All fantastic points. I think design, cash reserves, those are incredibly important things you should all be focusing on. But when I think about the things that might help someone weather this storm that may or may not be coming, three things really. It’s location, amenities and price. Location is something that you can’t really fix what you’ve purchased the property. But I think that every market probably has a spot where if you’re in that zone, you’re going to do well almost no matter what the first property that we purchased, it’s literally a two minute drive from the main drag in the Smoky Mountains and people rave about that location. It’s a cool cabin, but I’ve seen cooler cabins that don’t do as well as ours, but for us it’s that location. So I think location’s one of the most important things you should be focusing on, especially if you’re sourcing new properties.
The second thing, and this touches what Jenny was speaking about, is the amenity standpoint. Every market has almost a baseline of what guests expect when they book in that market. So for example, if you’re in the Smoky Mountains, you need to have a hot tub. Every big cabin has a hot tub. Additionally, most big cabins have either a game room over or a movie theater room. That’s just the barrier to entry in that market. So if you really want to stand out, you have to find a way to go above and beyond.
Now in some other markets, for example, in Joshua Tree, when we first started investing there, almost no one had a hot tub. And since we came from the Smoky Mountains, we’re like, “Why is no one else doing this?”

Dave:
You get dehydrated. Yeah, it’s too damn hot.

Tony:
But now a lot of these listings now have the water features. So it’s like you want start identifying what are some of the amenities that will allow you to be competitive in your market. And sometimes maybe instead of going out and buying another property, maybe you reinvest those funds into your existing properties to increase your ADR, to increase your amenities and to increase your return. And then the last thing you can do is obviously focus on price. And our portfolio, we try and compete on price last. Because I think that’s a slippery slope for all of us. If I start undercutting people in my market, they start undercutting me. Now we’re all charging less and at the end of the day, none of us are winning.
So we want to try and compete on price last. But I do think there is a way to, I don’t know, to use price in a way that’s still smart. If you have an opening over the next seven days, maybe get a little bit more aggressive with that price. If you’re seeing that the booking lead time for your other properties are at like 21 days and you’re at 12, it means that you’re overpricing. So there are some data points you can look at to try and adjust your price and to be a little bit more competitive. But overall, location, amenities and price are the three things you really look at.

Avery:
Brilliant.

Dave:
All right. Yeah. That is excellent advice. I totally agree about the amenities thing. It’s just like you have to think if you don’t have those key things like a hot tub that you mentioned or a movie theater, people click those filters on Airbnb and yours just don’t even wind up showing up in the results. So you have to be competitive. I think generally just in real estate, you have to think of your properties as a product and you have to compete against the people who are offering better products than you, and you need to make sure that you’re positioning yourself accordingly.
All right. The last thing I want to talk about before we get out of here today is I have a theory and I’d like to tell it to you and you can tell me if I’m an idiot or if you agree. Pull no punches. So my theory, I’ve talked about this on the show and it’s not really that radical, is that the vacation rentals hotspots, some of the stuff that we’ve been talking about over the course of the show are going to see the largest decline in property prices over the next year or two in this housing market correction.
My theory is not necessarily even driven entirely by short-term rentals, but we saw this huge spike in second home demand during the pandemic where wealthy people were just buying these second homes. And it’s often in a market that overlaps with short-term rentals. We’ve now seen that demand not just come back to normal, but is below pre pandemic levels. At the same time, there are some of these headwinds for just investors in general. So I think demand is falling off across all asset classes.
So I don’t necessarily think this will impact existing short-term rentals. I actually think it means that there might be really good opportunity, and I’m always skeptical the time the market, but this is one or of really tempted to time the market. I think that prices in these really very expensive, really great vacation rental properties might come down 10 or 20% over the next couple of years. So I’m just curious what you all think of this theory.

Avery:
I’m ready to buy them if and when they do. I don’t know what to think about if they will actually. I think they’ll come down some, I don’t know if they’ll come down 20% but it’s hard to say because at the end of the day, short-term rentals are still what I would call an emerging asset class. I don’t think that they’re finished growing yet. The vacation industry as a whole is continuing to grow. And I don’t know if I agree that it’ll come down that much. I think there’s no question things are going to come down some, but I mean I’m waiting for when they do, I’ll buy some more.

Dave:
Yeah, me too. Maybe this is just wishful thinking on my part.

Tony:
Yeah. I mean Dave, I think you’re bring up a good point, but here, here’s… I’m going to try and be as articulate with this idea as I can.

Dave:
You could tell me it’s stupid straight up.

Tony:
No. I mean, there’s one thing that I think is the lunch pin. And if this continues to develop, I don’t think you’ll be right. And I think it is the loan products surrounding the short-term rental space. So if you think about every other asset class excluding single family long-term rentals, they all trade or they all sell based off of their NOI. If you look at an apartment complex, if you look at self storage, mobile home parks, like all of these other big non single family type properties, they all trade based off their NOI. And typically when you go get debt for those kinds of properties, they’re basing it off of their NOI. So the ability to get approved for a loan on something like a self storage facility or a small apartment complex is based on how much revenue that property generates.
In the short-term rental space, we don’t quite have those same abundance of loan products. I think we’re now starting to see more of the DSCR based options where they are looking at the revenue that the property generates. But I think the bigger constraint to pricing in these markets right now isn’t necessarily that people aren’t willing to pay those prices. It’s that they can’t get approved for the debt to buy those things. And we saw, especially last year where a lot of properties were going way over asking, people were paying all kinds of crazy money to bridge that gap between the appraised value and the purchase price. And I think we’re starting to run out of those people that have those deep pockets to do that. But if we continue to see the evolving of the loan products for short-term rentals where it’s based on what those properties can generate, then I think you’re going to be wrong. But you’re the numbers guy. I’m just a podcast host that talks about short-term rentals.

Dave:
No way more about this than I do. Honestly, it’s not a super data driven, a lot of speculation on my part and it’s pure theory. Jenny, what do you think?

Jenny:
I think just in general, going to see, and we have been seeing a shift back to again, the normalization of the market. So in that aspect, do I think that that is not going to affect the vacation rental markets? Absolutely not. Because at the end of the day, these are also properties so they will be affected. Do I think it’s going to be this drastic decrease? Not necessarily. And I do think that Tony brings up a good point in the fact that if a particular market, especially these blue chip markets that we’re talking about, where 80, 90% of the properties that are in a specific area are only used for short-term rentals or only used for vacation properties and that’s the only amount of loans that are going into it, then of course they’re in an isolated bubble that I don’t think is affected by the general market. But if you start to talk about the markets that are a good mix of both short-term rentals, vacations, and your regular properties, then by default they’re going to see the decrease just because the market, again is normalizing itself.

Dave:
All right. Well, thank you. I appreciate your feedback. We’ll see. We’ll have to do this again a year from now and we’ll see what happened. I’ll probably be wrong.

Avery:
Yeah. So I think that Tony makes a really, really good point about the loans, because right now, short-term rentals sit in this weird middle ground of, are they residential or are they commercial? So they get appraised like a residential house. So your short-term rental that makes $100,000 a year for appraisal purposes with a bank is worth the same amount as the house next door that makes $0 a year. That’s not a rental. So what’s a commercial short-term rental? It’s a hotel. Well, there’s lots of commercial banks out there doing financing for hotels. It’s just that one of them has to figure out how to step into the single family game and treat a single family short-term rental as a hotel. And then I think that will actually drive prices up in a lot of markets because the markets where the income is higher, will drive that up. But somebody’s going to have to figure out how to do that before it can get there.

Dave:
All right. Great. Well, thank you all so much. This has been super helpful. We do have to wrap this up though. Where can people find all of you, Avery, if they want to connect with you or should people do that?

Avery:
You can do that on our website, www.theshorttermshop.com or on Instagram @theshorttermshop.

Dave:
All right. Tony, I know we have a friendly rivalry about our podcast, but I will give you some space to talk about your own podcast.

Tony:
All right. But I will admit that we are officially the number two podcast behind you guys. So no-

Dave:
No way.

Tony:
So you guys can find me on the other BiggerPockets Podcast, Real Estate Rookie. We drop episodes every Wednesday and Saturday. My wife and I have a YouTube channel called The Real Estate Robinsons. We talk all things short-term rentals. So if you guys want to check us out there, it’s the Real Estate Robinsons. Instagram, Tony J. Robinson. And if you guys want to learn more about our investment company, it’s alphageekcapital.com.

Dave:
Awesome. What about you, Jenny?

Jenny:
You can find us on social media, Jenny, J-E-N-N-Y. Look for our tip Tuesdays with BiggerPockets on Instagram, where we give all our recommendations for how to set up your STRs. And then Instagram is Jenny Designs and websites, jennydesigns.com.

Dave:
All right, great. And I am @thedatadeli on Instagram if you have any questions for me. Thank you all so much for joining. This was a lot of fun. We’ll have to do this regularly since short-term rentals are so popular. And despite my doomsday predictions are probably going to be… Now they’re going to be growing 20% next year, so we’ll have to keep you all updated. Thank you all for listening. If you enjoyed the show, please make sure to give us a great review on either Apple or Spotify and subscribe on YouTube. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Research by Pusher Janedoll and thanks to the entire BiggerPockets team. The content on the show, on the market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

Watch the Podcast Here

In This Episode We Cover

  • Who’s hurting and who’s thriving as the short-term rental market starts to lag
  • How to identify new markets that have low competition and high tourism potential
  • Short-term rental regulations and why it isn’t all bad news for hosts
  • How a 2023 recession could affect vacation rentals and vacation spending
  • Advice for new hosts as bookings and revenue starts to decline during a downturn
  • Vacation home price drops and whether or not this type of real estate is more vulnerable than the rest
  • And So Much More!

Links from the Show

Book Mentioned in the Show

Connect with Avery, Tony, & Jenny:

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page!

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