Short-Term Rental REITs: What They Are And How You Can Invest In Them

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This article is presented by Wander. Read our editorial guidelines for more information.

Short-term rentals (STRs) are the fastest-growing segment in hospitality and have been gaining market share for years. A confluence of factors like robust travel spending from Americans, increasing consumer preference for experiences, and remote work is expected to support 11% CAGR growth in the STR market through 2030. 

Given the recent growth of STRs, vacation rental investing has become increasingly popular. Historically, however, the only way for people to invest in this asset class for a steady income and capital appreciation was resorting to the time and capital-intensive process of buying and managing a single or portfolio of vacation rental homes. In this article, we will explore the fundamentals of REIT investing, the benefits of investing in a vacation rental REIT, and Wander REIT, the first and only STR REIT that can help you reap the benefits of STR investing without the hassle. 

How REITs Work

REITs, or Real Estate Investment Trusts, were established by U.S. Congress in 1960 to create an investment vehicle that would allow investors to pool capital and facilitate a larger investment in an asset that would have otherwise been out of reach. Since then, REITs have become widely used to access real estate.

REITs are also widely used because they offer tax advantages that benefit the REIT and its investors. Unlike most corporations, REITs don’t have to pay taxes at a corporate level which generally enables REITs to reinvest more capital and make higher distributions to investors that aren’t subject to being taxed twice. 

However, REITs must meet strict standards set by the IRS to maintain their classification, including: 

• Distributing 90% or more of their taxable income in dividends each year.
• Have at least 75% of its capital invested in real estate assets or cash. 
• Derive at least 75% of its gross income from real estate assets like rent or interest.

Investing in public REITs can be a great way to get exposure to real estate, but investors aren’t limited to investing in public companies. There are also private REITs. Private and public REITs are very similar in the way that they operate, except that private REITs are not traded publicly on a major stock exchange, making them less sensitive to public market volatility. 

While private REITs offer real estate-backed stability, historically strong returns, and the ability to invest in property without the hassle of property management, private REITs may be best suited to long-term investors who don’t require immediate access to their invested capital. In other words, REIT investors need to be comfortable with the lack of liquidity.

This lack of liquidity compared to public REITs also means private REITs are generally limited to accredited investors – individuals or couples who meet income or net worth requirements or fall under a special financial employment status as defined by the SEC. 

Changing the Way Short-Term Rental Investing Works

Historically, the only way to invest or access the short-term rental market would have been to buy a home or a portfolio of homes and rent it out. However, this often comes with the time and capital-intensive responsibility of driving occupancy, managing, and maintaining properties. 

With the growth of the STR segment, there has been a growing need for alternative ways to invest in vacation rental homes, and this is where REITs come in. 

As mentioned, REITs have been around for several decades as a common way to fund various real estate types—from residential to commercial projects. Commercial REITs, for example, pool investor assets to purchase commercial real estate like hotels, office buildings, restaurants, and more in exchange for a share of profits to investors in the form of dividends and capital appreciation. 

However, REITs, as a means of funding the growth of projects in the STR segment, didn’t exist—until now. 

Wander Atlas REIT Inc. (“Wander REIT”) is pioneering a new form of ownership in a new asset category, STRs, as the first and only institutional-grade short-term vacation rental investment product. 

Wander REIT: A Pioneer in Short-Term Rental Investing

Wander REIT is the first vacation rental REIT to allow accredited investors to own a piece of high-end vacation rental homes across the U.S.

If you’re unfamiliar with Wander, it’s an industry-leading vacation rental platform that combines the quality and consistency of a luxury hotel with the privacy, comfort, and space of a vacation home. Wander’s carefully curated portfolio of modern high-end vacation homes is located in inspiring locations, appointed with designer furnishings and amenities, and equipped with smart home technology, state-of-the-art workstations and fitness equipment, and even a Tesla for guest use. By owning or controlling every link in the chain: the homes, the management, the marketing, the propriety app, booking engine, and the 24/7 text-based concierge, Wander is uniquely positioned to deliver a superior guest experience. 

This year, Wander launched Wander REIT—the first and only institutional-grade vacation rental investment product. Wander REIT is pioneering the institutionalization of the short-term rental asset class by applying institutional standards to its investment process, portfolio management, and capitalization strategies. This sophisticated approach to the industry allows Wander REIT to manage risk effectively and deliver attractive returns to investors.

Wander REIT offers accredited investors recurring tax-advantaged income and diversified exposure to the STR market with exclusive investor perks. It’s currently targeting an annual dividend of 8%, paid out on a quarterly basis, and a total annual return of 14%, inclusive of capital appreciation. 

Below are a few benefits that can help you better understand the product and investment opportunity:  

1. Potential for above-market returns vs. other established real estate asset classes. One of the key benefits of investing in a vacation rental REIT is the potential for above-market returns. Because vacation rental properties are typically rented out on a short-term basis, they can generate higher rental income than traditional long-term rentals. This means that investors in vacation rental REITs can potentially earn higher dividend yields than they would with other types of real estate investments.

2. Diversification. Another benefit of vacation rental REITs is the diversification they provide. By investing in a portfolio of properties, investors can spread their risk across different geographic locations and property types. This can help reduce the impact of any one property experiencing a downturn or vacancy. In addition, private REITs like Wander REIT typically have lower correlations to public equities. 
3. Recurring income. A third benefit of vacation rental REITs is that they are a great source of tax-advantaged passive income, so you can keep more of what you earn.
4. Capital appreciation. As the value of the properties in the portfolio increases, so does the value of the REIT. Additionally, if the management company successfully increases occupancy and rental rates, this can also lead to higher property valuations and increased returns for investors.
5. Inflation protection. Inflation isn’t just felt at the supermarket or gas station. The cost of renting real estate also tends to go up, which can make private REITs an effective way to protect the value of your money from inflation. The income and property appreciation can also help offset some of the deteriorating effects of inflation. 
6. Easy to invest. Finally, vacation rental REITs make investing in STRs easy. They eliminate the day-to-day hassle of property management by passing on marketing, maintenance, and booking responsibilities to professional management companies. This can be particularly attractive to investors who do not have the time, expertise, or desire to manage their own properties. Wander REIT takes it a step further and makes it easy to invest with just a few clicks. 

To learn more about Wander REIT, visit wander.com/reit, where you can review investment materials and see how Wander REIT can fit into your portfolio. You can also find all legal disclosures and risk factors associated with Wander REIT on our website.

Summary of Key Terms

• Structure: Private, non-traded REIT
• Target Investments: High-end single-family homes to be converted into Wander-quality vacation rentals
• Price per Share: $10
• Minimum Investment: $2,500
• Targeted Annual Dividend: 8%
• Targeted Total Return: 14%
• Distributions: Quarterly
• Management Fee: 0.65% on GAV
• Investor Suitability: Accredited investors only
• Tax Reporting: Form 1099-DIV

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