Vacation Rentals: Transforming the Hospitality Business

This is part four of a series of posts about changes in the vacation rental market and what they mean for investors.

Previously, I discussed similarities and differences in the skill sets, team members, and support services needed by single family rental investors compared to vacation rental investors.

In this installment, I’ll talk about how vacation rentals are changing the hospitality business and creating opportunities for investors.

Staggering Rate of Growth

Because short-term rentals are gaining in popularity at a staggering rate, it’s safe to call them “big business” at this point. So, of course, investor interest in them at all levels is also at an all-time high.

From the mom-and-pops to the small home investor, through regional brands and on up into large-scale resort operations, it seems like everybody is looking at them and hoping to get in on the action.

This series of articles has traced the early changes that brought us to this point, highlighted the effect these changes have had on real estate market trends, covered the basics of how vacation rentals can provide high returns, and discussed the different skill sets, team members, and support companies that are needed and available to investors looking for opportunities.

The massive growth in the short-term rental market has led to big changes in lodging preferences amongst travelers. While so far only 10 percent of travelers have tried using vacation rentals when they travel, of those that have tried, 50 percent now prefer vacation rentals to hotels when they travel.

Significantly, millennials, whose travel budgets are the highest out of generational groups, have an even higher preference for vacation rentals than other groups of travelers. These market dynamics tells us a couple of important things as investors.

What Do These Numbers Mean?

Both the supply of short-term rental properties and demand for them have been growing at compound double-digit rates for the past decade—but still, only 10 percent of travelers have tried them. That means we are just at the beginning of the huge changes coming for the lodging market; hence, opportunities await us as investors.
There are industry pundits now declaring the end of hotels. While this kind of prediction is a logical follow-on from No. 1, it’s not going to happen. Hotels, after all, are professionally managed. Their teams will adapt, and the first big change has already come. Many hotels are already listing their rooms on vacation rental marketing channel sites like Airbnb. And formerly hotel-only channel sites like TripAdvisor and Booking.com are now hip-deep in vacation rental listings side by side with the hotels.
The number of people who will prefer vacation rentals over hotels will grow exponentially over the next few years. This is mind-boggling. It means the demand for vacation rental properties will grow faster in the future than it has up to now. Competition for real estate in the right places will heat up. Values of these properties will be driven upward by this movement.
The demographics of travelers who want to make use of vacation rentals is currently biased toward a younger cohort than those who prefer hotels. This has implications for the kinds of properties and kinds of amenities that will be of most interest.

What Are the Takeaways?

What can you take away from all this? First, the market is growing and still young. This is when there are awesome opportunities.

Second, like any market opportunity, as the pool grows, so do the sharks. You must do your homework and due diligence. Learn the differences between this kind of investment and the other sorts you may have worked on before.

Homework and research are essential—really essential. Why do I stress this so much? There are too many competing voices, all saying different things.

One says this is the best time to be flipping homes. Another says single family rentals are bid up too high, and you can’t make money flipping today.

Some say you should be cautious of short-term rentals for a variety of reasons. Some say you should go all-in on them.

In this series of articles, I’ve made points on both sides of that argument. For some people, short-term rentals aren’t a good investment. For some people, they are great.

Understanding how they work, why they work that way, and how to operate them is required if you want to have an investment pay off profitably—just like any other type of investment. So if you like the advantages of short-term rentals, like the idea of also being involved in the hospitality industry, and are willing to learn the ropes, short-term rentals offer high returns and another way to build passive income in your portfolio.

How Are People Capitalizing on Short-Term Rentals?

One of the wonderful things about real estate is that there are nearly as many ways to make money with it as there are people looking to make money with it. The amazing variety of investment possibilities is mirrored in the vacation rental market.

I’ll illustrate the point this way. At one end of the spectrum are people who own a vacation home and defray the cost of it by renting it sometimes. Moving along the line, you’ll find people who have a single home, and never use it—it’s purely a way to make money. They rent it out as often as they can.

Keep going in this direction and you find regional brands which have multiple properties serving a particular part of the traveling public, with a particular kind of offering. Then there are those investing in whole condo or apartment buildings in the right locations and running them like Airbnb hotels. Heck, I know people who are building one of those from scratch. These are all in that part of the spectrum where people own the properties.

There are also people who participate in the market by running specialized businesses, like a vacation rental-focused property management company. There are internet startups based on big data analytics and AI, which partner up with some specialized property managers to control the pricing and marketing of your vacation rentals for a fee.

Some will actually guarantee you an amount of revenue if you use their system. If they don’t deliver, they’ll settle up and pay you the difference at the end of the year!

Another set of participants is engaging in vacation rental arbitrage. They operate by choosing full-time rental properties they think are in the right places and in the right condition and negotiate a full-time lease that includes permission for them to sublet the space as a vacation rental. They believe they can sell enough nights at the property that they can make money just like vacation rental owners, except they pay rent instead of a mortgage.

Of course, they don’t enjoy capital appreciation, and they don’t enjoy the benefits of depreciation for tax purposes. For them, it’s a pure cash-flow play.

The bottom line here is the vacation rental business is already large and is growing extremely fast. It’s changing the hospitality landscape, changing the dynamics of real estate market cycles, and offering investors a slew of opportunities.

Thinking of getting into vacation rentals? Can I answer any questions you might have about it?

Ask me in the comment section below.

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