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

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

3 min read
Sterling White

Sterling White is a multifamily investor, specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded, Sonder Investment Group, he owns just under 400 units.

Experience
Sterling is a seasoned real estate investor, philanthropist, speaker, host, mentor, and former world record attemptee, who was born and raised in Indianapolis. He is the author of the renowned book From Zero to 400 Units and the host of a phenomenal podcast, which hit the No. 1 spot on The Real Estate Experience Podcast‘s list of best shows in the investing category.

Living and breathing real estate since 2009, Sterling currently owns multiple businesses related to real estate, including Sterling White Enterprises, Sonder Investment Group, and other investment partnerships. Throughout the span of a decade, he has contributed to helping others become successful in the real estate industry. In addition, he has been directly involved with both buying and selling over 100 single family homes.

Sterling’s primary specialities include sales, marketing, crowdfunding, buy and hold investing, investment properties, and many more.

He was featured on the BiggerPockets Podcast episode #308 and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to mindset and scaling a business online. He has been featured on multiple other podcasts, too.

When he isn’t immersed in the real world, Sterling likes reading motivational books, including Maverick Mindset by Doug Hall, As a Man Thinketh by James Allen, and Sell or Be Sold by Grant Cardone.

As a thrill-seeker with an evident fear of heights, he somehow managed to jump off of a 65-foot cliff into deep water without flinching. (Okay, maybe a little bit…) Sterling is also an avid kale-eating traveller, but nothing is more important to him than family. His unusual habit is bird-watching, which he discovered he truly enjoyed during an Ornithology class from his college days.

Education
Sterling attended the University of Indianapolis.

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Short term, Airbnb-style rentals may be popular, but that doesn’t make them a sustainable real estate investment strategy.

Airbnb may wind up winning the legal battle for short-term rental landlords in many areas. Still, that won’t ensure the sustainability of this strategy for buy and hold or retirement investing. The high rents may be alluring to investors, and the destinations can be attractive. However, I see at least six flaws that could cause Airbnb investors a lot of pain down the road.

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

1. Short-term rentals depend on the tourism industry.

These rentals and their high rates rely on tourists and some business travelers. We’ve been through plenty of fluctuations before, where when the economy winces, tourism grinds to a halt. This could be due to terrorism, a natural disaster like a hurricane, or simply the economy tightening. That can evaporate demand for these units fast.

Related: How to Use Airbnb to Travel & Live for Free in Retirement

2. Short-term rentals create artificially high rental rates.

These types of rentals are often marketed at two to three times annual rental rates. Those rates simply aren’t affordable for local workers. This causes two issues. First, it drives out key workers like good teachers, law enforcement, service workers, and entrepreneurs, who just can’t afford to live there. This can have a long-term negative impact on a location. Secondly, these rates cause buyers and sellers to trade properties based on these artificial and often temporarily inflated incomes. When that income dries up or pauses, many landlords will find themselves underwater and in negative cash flow on an asset that is far overpriced.

vacation-seasonal

3. Short-term rentals increase landlord competition.

Now that everyone can be a landlord, many are. That’s an enormous amount of competition. When things get tougher, it will be a race to the bottom of who can charge the least.

4. Short-term rental gain are often offset by high fees.

Higher rents on short-term rentals are often offset by higher management fees as well. Airbnb, VRBO (to learn more about how to rent your place and list for free on VRBO, click here), and HomeAway (click here to list your place for free on HomeAway—only pay when you get a booking) all charge fees. Professional managers can sometimes charge as much as 30% on short-term rentals.

5. Short-term rentals don’t support reliable, long-term tenants.

Savvy buy and hold investors prize long-term tenants. Investors who have tenants who stay for years save money on marketing, screening, cleanup, and turnover costs. When you rent to people only staying for a week or a month at a time, who have no vested interest in taking care of your property, that can lead to high costs for cleanup and repairs between tenants.

return-visit-vacation-rental

Related: With the First Airbnb Landlord Conviction, Should Vacation Owners Be Worried?

6. Short-term rentals provide inconsistent cash flow.

In some popular vacation destinations, it is possible to have your unit booked out for 12 to 18 months in advance. However, most landlords will struggle to piece together the occupancy puzzle—with some tenants staying for days, others for weeks, and a few for months. Will you still be profitable if you only manage 30% occupancy for the year?

Summary

Short-term rentals are alluring. Having one in your favorite vacation destination that you may go and use for 3-6 months of the year yourself may not be a terrible idea. You’ll enjoy using it. Those can be your best returns. However, those looking for long-term, consistent passive income and optimal returns may be best served sticking with annual rentals.

We’re republishing this article to help out our newer readers.

What do you think? Would you use Airbnb as a primary investment strategy? Why or why not?

Leave your thoughts below!