Landlording & Rental Properties

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

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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.

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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.

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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.

[Editor’s Note: We are 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!

Sterling is an 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 w...
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    Rachel Luoto Rental Property Investor from Bremerton, WA
    Replied over 2 years ago
    I think the only way to screw this up is to have only STR as your exit strategy. If you buy with your numbers already working for a traditional rental, then STR is just extra gravy. If the market shifts in literally a day you can take down your listing and put your home up for rent to a traditional tenant, so long as you bought right to make your normal rental rates still produce your sought after return. (Air bnb host for one year – we keep thinking about switching to traditional but then you get a booking for $5k a month when you’d be hard pressed to get $2k on a lease in our area)
    Stephanie Hager Real Estate Agent from Minneapolis, Minnesota
    Replied over 2 years ago
    Interesting article pointing out some of the items a newbie investor may miss. I think this is a case of “don’t be impulsive/short sited and think it through.” As an investor with both long term and short term/vacation rental properties, here are my thoughts on your points: Short-term rentals depend on the tourism industry. I don’t’ disagree with this entirely and it’s a risk we take operating as a short term rental. Grinds to a halt it a bit dramatic, however. This is certainly not the end all – but our strategy is to have a lower price point of rental, in hopes that if we have a dip in tourism we will still get renters since we are the lower price point. People with money will always go on vacation, especially to a budget friendly accommodation. Perhaps if people step down a class, we still have renters. Either way, this is a risk, real estate has many. 2. Short-term rentals create artificially high rental rates. This could be true in some circumstances however you really need to look at each property individually vs a blanket statement. For example, we own cabins that would (more than likely) otherwise be owned as a second home and used infrequently. If you own real estate, you may have some affect on the market. You could argue not to fix up your long term rentals too nice because that drives out lower income tenants as well. Bottom line- think through your effect on the community. In our specific case, we lived at one of our cabins and saw every other cabin on the lake sit empty ~60-90% of the time. At least someone is utilizing our cabin! 3. Short-term rentals increase landlord competition. I have to politely disagree. Everyone can be a landlord? Everyone can, everyone won’t, many will try and fail miserably. Experienced landlords/property owners know that any real estate investment must be run like a business or you will run into serious issues. Technically there are more landlords. Let them try and see how dang hard it really is. 4. Short-term rental gain are often offset by high fees. Anyone going into a short term rental with a business mindset knows the fees and calculates those in and/or creates another marketing plan to get tenants. Just a reminder to know your costs. 5. Short-term rentals don’t support reliable, long-term tenants. Again this is a simple answer – know what you are getting into. In any property we renovate to rent we take extra precaution in renovations. Durable, sturdy, dummy-proof, etc. In a vacation rental we take that to a whole ‘nother level. We know the property may get more beat up by some renters, we see it coming and plan for it. I will also add that we’ve been thoroughly impressed with our renters. We spot check regularly (though our cleaning crew does the majority of the turnovers) and I’d venture to say that 90% of the time the cabins are clean, tidy, and everything is in order. That’s not to say you don’t have the occasional slob, but a counter argument might be: at least if you have a slob tenant, its only for a few days, you aren’t stuck with them! 6. Short-term rentals provide inconsistent cash flow. Yep. This is something you plan for. Use the information at hand (competitors, etc) to make your best educated hypothesis based on market data to estimate your rental and occupancy rates by season. This is a more complex financial model than a long term rental, admittedly, and far less predictable, that’s a risk I’m willing to take to get a potential higher reward. Start small, build with caution, and always have an exit strategy.
    Jonah Freedman Rental Property Investor from Ithaca, NY
    Replied over 2 years ago
    Hi Sterling, Thank you for the article. As some one who does both short term rentals and long term. I think there is value in both. If you property is in a good location I would highly recommend doing a at least one as a short term rental. We have more than tripled are cashflow on our short term rentals, plus you have the benefit of meeting people from all over the world. That being said I think it is good to have a back up plan, to make sure that your property would work even if the short term rental game dried up. So even if its not sustainable I would ask why leave money on the table? Ride the wave and If it does not work at some point then it will be the time to adjust. Cheers Jonah
    Kim Becker from Lake City, Florida
    Replied almost 2 years ago
    Hey Sterling, as short term rental host and long term landlord, I agree with some of what you say and disagree with other points. My STR has far less wear and tear then my long-term rental. If you do it right, you can mitigate a lot of the risk of bad STR guests. This is an assumption that I see so often and it just simply is not true, generally. Folks read a few horror stories and assume that it’s the rule, when it’s actually the exception (at least for those who are smart about hosting). I agree that to invest in a short term rental without the flexibility to transition to long-term with that property would be foolish, for all of the reasons that you list. As for me, I’m riding the wave for now, making a handsome ROI on our STR property, much better than if we had done long-term rental . If the market becomes too saturated, regulations become prohibitive, etc., we will transition to long-term rental. Our property attracts so many travelers who would travel despite a downturn in tourism: family reunions, weddings, business, softball tournaments etc. I think that is the case with plenty of STR’s too. I agree with you that it is a roll of the dice to put all eggs in the tourism basket, but if you understand the STR market, you will realize tourism is not the only gig going. Your article covers the bases in general terms, but also makes assumptions that definitely do not pertain to many STR venues.
    James Williams from Denver, Colorado
    Replied over 1 year ago
    Interesting read. But more differentiation into market specific driving forces could make for more impact. For example, talking about most cities in America I see your points. Take into accounts areas that are towns but thrive on tourism (ski resort towns) and offer year round activities, changes the perspective. We have had a VRBO in Breckenridge, Colorado for 4 years. What I am working on right now is building a valuation on our property that takes a more commercial approach, since lets face it, you are selling a business not just a piece of real estate. Thanks for the article.
    Scott Huggins Rental Property Investor from Charleston, SC
    Replied over 1 year ago
    Great article and topic, Sterling! Just curious if have you owned any STR’s before? ? Sterling, I think your concerns are valid to a point but not the whole story so just wanted to add something to the conversation. 1) Our STR’s do support tourism but we also have lots of large corporate clients, travel clients, movie and theater clients, families here to visit love ones in hospitals or graduating, weddings, events, visiting family and many more. That supports the local community and also the local businesses in many different ways. ? 2) STR cost are higher and for a reason. We are furnishing, paying all utilities, paying higher insurance, paying more taxes, have higher vacancy, paying for more maintenance, landscaping and higher PM cost. Thus the higher revenue is need to offset that. 3) I would say yes. It creates more competition but competition is a good thing usually for the renter or guest as it drives down prices and also means we, host, have to step up our game to innovate and stay competitive. I thrive on that. 4) Yes, they can cost more to operate depending on how hands on you want to be or not. If you want someone like us to Co Host or manager it for you, then yes you will pay 25-30%. However, online systems like Airbnb and HomeAway don’t charge 30% to manage. It is more like 5-8% and they handle most of the booking for you. You would need to handle the guest and property. There are also a whole bunch of systems you can implement to make it about 90% hands off if you choose without using a PM and paying 25-30%. 5) The people looking for STR’s aren’t the same people usually looking for long term rentals. We have found they actually tend to take better care of your property than long term renters. One thing I have noticed is they don’t cook as much and seeing as how most house fires?are started in the kitchen that is a double plus! We also charge deposits just like you do with longer term renters just in case. Long term renters would not be any more vested in taking care of the home any more than a shorter renter if you think about it. 6) Cash flow on a STR is more inconsistent than in long term renters. On the flip side, you do have more control over your rates and property and income. I am free to charge more during the busy season or events etc. You cant do that with long term renters. You also underwrite at a higher occupancy rate of course to account for that fluctuation in cash flow similar to like we do in apartments. STR’s as whole are incorrectly demonized and an easy scape goat right now for many cities and counties. It takes blame off them and points the finger elsewhere while making taxpayers feel like their elected officials have done something for them. Just as a real life example and I am sure this applies to many other places as well. In the Charleston, SC area I pay about 2-3 times the property tax on a rental property that a normal home owner pays here in Charleston, SC area. Even classified as a 6% investment property they want to select my tenant base as well by telling me I can’t rent for less than 30 days. Doesn’t hardly seem like a fair deal when you get to charge me triple and tell me who to rent to. That higher property tax tends to make long term rentals unaffordable for landlords as renters can’t afford what the rent would need to be to cash flow. That also pushes renters to the ever dwindling less desirable areas to rent. That is the state and county killing the affordable rental housing markets and pushing landlords to the STR’s route in order to turn a profit. I will also mention that we pay the state and county and city occupancy taxes and contribute to the tax base again on top of the 6% property rate.? There are also lots of good things that STR’s bring also that no one talks about. As mentioned above we also provide a lot of corporate housing that support local businesses also. As far as our properties themselves, I just spent yesterday with an Airbnb rep at one of our properties getting it AirPlus compliant. Looking around it is better maintained and taken care of than other long term rentals on the same street. If you aren’t landlord material begin with then doing STR’s regardless of the income isn’t going to change that or make it better. STR’s are great asset to the community if you can put in the work.
    Joel Lazar
    Replied 10 months ago
    I don't know if I ever read an article that is so far off. You seem like an intelligent guy. So the only thing I can think of is you have another agenda. Painting short term rental with a broad brush is your first mistake. Assuming its either a primary renter or a pure investor is your second mistake. There is a entire segment of the industry that caters to the affluent who use short term rental zoned vacation homes for vacations. Then they offset their cost or increase their profits by short term rentals. Many only need to break event. In the two top tourism markets in the USA, Orlando and Las Vegas, there are 40 million to over 70 million visitors per year. Let's agree on this, short term rental product is not for everyone and nobody ever said it was. Thank you.
    Grant Hammond from Nashville, TN
    Replied 8 months ago
    In his defense, this was written 2 years ago before many cities decided how to handle regulation. If you bought a 4/4 NOO STR in Nashville, TN 2 years ago and sold it today, your property would have appreciated approx 40%.
    Mukhtar Ali Investor from Lewisville, TX
    Replied 7 months ago
    @sterlingwhite, has your position shifted in the intervening 2 years?
    Mukhtar Ali Investor from Lewisville, TX
    Replied 7 months ago
    @Sterling White has your position shifted in the intervening 2 years?
    Wes Emert from Grand Rapids, Michigan
    Replied 5 months ago
    STR is and will contine to be a viable investment strategy, avoid it to your own detriment as the long at short term rental demographics contine to converge year over year. Do the research, you will find the STR component viable.