Real Estate Consultant · Colorado Springs, CO · Member since 2017 · 354 posts · 386 votes
I'll try to limit my rant here, but since the Wall Street Journal published a somewhat nasty article about Airbnb investors in late April and I represent a lot of Denver Airbnb Investors and Colorado Springs Airbnb investors, I think it's important to point out a few things, and see if my fellow BP-ers are of the same opinion or a totally different opinion.
Airbnbs (and short-term rentals) have classically been a good investment, with returns that were often 2-3 times that of traditional long-term investments. By that standard, even with the downturn, you have a 2-3 year pocket against a long-term investment
Yes, a lot of short-term investors leverage their properties to buy more properties (utilizing a HELOC), but that's not any different than what many standard long-term investors do
This situation is awful for a lot of reasons, and may keep short-term rental numbers depressed for the next year- but a lot of short-term investors already know what a depressed season is like because rentals don't do as well October-March. In that case, they get converted to medium-term rentals, and that can and has been happening here as well
We're a little vulnerable right now, but not making decisions because a once in a lifetime pandemic might show up does not seem like a wise investment strategy to me
I'll try to limit my rant here, but since the Wall Street Journal published a somewhat nasty article about Airbnb investors in late April and I represent a lot of Denver Airbnb Investors and Colorado Springs Airbnb investors, I think it's important to point out a few things, and see if my fellow BP-ers are of the same opinion or a totally different opinion.
Airbnbs (and short-term rentals) have classically been a good investment, with returns that were often 2-3 times that of traditional long-term investments. By that standard, even with the downturn, you have a 2-3 year pocket against a long-term investment
Yes, a lot of short-term investors leverage their properties to buy more properties (utilizing a HELOC), but that's not any different than what many standard long-term investors do
This situation is awful for a lot of reasons, and may keep short-term rental numbers depressed for the next year- but a lot of short-term investors already know what a depressed season is like because rentals don't do as well October-March. In that case, they get converted to medium-term rentals, and that can and has been happening here as well
We're a little vulnerable right now, but not making decisions because a once in a lifetime pandemic might show up does not seem like a wise investment strategy to me
Disclaimer: I'm not an Airbnb investor and I probably never will be.
Remember that mainstream financial journalism is not exactly pro-real estate. Most of the Main stream news was saying it was "a bad time" to invest in real estate in the early 2010s, when in reality, that was one of the best times in the last 100 years to be a net buyer of real estate. We may not see a better time to buy real estate in the rest of our lifetimes, but they kept telling people to sit out.
You're right to push back on them, but remember that internet journalism is all about getting clicks. They get the most clicks by getting people riled up enough to share it, which gets more clicks.
I just opened WSJ's real estate section, and the top stories are all on celebrities' mansions. Great, I'm very happy for them. That has nothing to do with what most people need to know about the state of the real estate investing market. Just take articles like this one in perspective.
@Erin Spradlin I still see STR as a good investment if done properly and agree with your points. It would have been nice if the pandemic happened between October and March as those are my slow months. The pain would have been a lot less.
Two of our STR are condos in 10 story buildings in Quito, Ecuador. Unlucky for us the condo committees have decided not to allow for any rentals under a month. In addition our cleaning crews can't even arrive to the condos due to strict curfews in the city. If it wasn't for those two factors we would have been able to keep our condos occupied. Not as much as before but at least 50%.
We have one more Airbnb in our basement in Alexandria, VA and we have also received a lot of interest. However, as a personal decision we have decided not to rent it out until things calm down.
With that said I don't think STR is dead and every location will have various factors until things get back to semi-normal. However, it is still better than having long term tenants not required to pay their monthly rent.
I'll try to limit my rant here, but since the Wall Street Journal published a somewhat nasty article about Airbnb investors in late April and I represent a lot of Denver Airbnb Investors and Colorado Springs Airbnb investors, I think it's important to point out a few things, and see if my fellow BP-ers are of the same opinion or a totally different opinion.
Airbnbs (and short-term rentals) have classically been a good investment, with returns that were often 2-3 times that of traditional long-term investments. By that standard, even with the downturn, you have a 2-3 year pocket against a long-term investment
Yes, a lot of short-term investors leverage their properties to buy more properties (utilizing a HELOC), but that's not any different than what many standard long-term investors do
This situation is awful for a lot of reasons, and may keep short-term rental numbers depressed for the next year- but a lot of short-term investors already know what a depressed season is like because rentals don't do as well October-March. In that case, they get converted to medium-term rentals, and that can and has been happening here as well
We're a little vulnerable right now, but not making decisions because a once in a lifetime pandemic might show up does not seem like a wise investment strategy to me
Disclaimer: I'm not an Airbnb investor and I probably never will be.
Remember that mainstream financial journalism is not exactly pro-real estate. Most of the Main stream news was saying it was "a bad time" to invest in real estate in the early 2010s, when in reality, that was one of the best times in the last 100 years to be a net buyer of real estate. We may not see a better time to buy real estate in the rest of our lifetimes, but they kept telling people to sit out.
You're right to push back on them, but remember that internet journalism is all about getting clicks. They get the most clicks by getting people riled up enough to share it, which gets more clicks.
I just opened WSJ's real estate section, and the top stories are all on celebrities' mansions. Great, I'm very happy for them. That has nothing to do with what most people need to know about the state of the real estate investing market. Just take articles like this one in perspective.
@Erin Spradlin - I made a pretty immediate and perhaps hasty decision to switch all of my AirBnbs to long term, traditional rentals. I underwrote my properties for this situation. Obviously, not a pandemic, but a slowdown in the short-term rental market. So my properties work both ways.
I ended up with about a month of AirBnb properties during this COVID crisis and was making about $900/month on my one bedroom and $1,100 on my three-bedroom. I rented the one-bedroom out for $1,300 and the three-bedroom out for $1,550.
Could I have stayed afloat with those numbers? Most likely! But I chose the route that was more money for now and also a bit more sustainable (in my opinion).
Our STR is doing fine in Colorado Springs. We let a military couple go month to month while their move orders were on hold and now we are getting short term reservations again. I'm in the process of converting the other two units on the property to short term as well. Avoiding being highly leveraged has always been our strategy due to living through multiple housing downturns and lots of layoffs (my husband is a builder). I feel that our property will become more valuable as more people move their STR's to LTR's. I think keeping yourself in a solid financial position is the wisest course no matter what investment strategy you choose (real estate, stocks, etc.)
@Eric Teran Given that you are limited in your ability to convert your condos to a medium-long term strategy and have chosen to not do so with your VA basement, how are you faring? For now, will you be able to keep all three properties? I ask because a lot of new investors in Denver and Colorado Springs that I work with hesitate because they are afraid the sky could fall... For the most part, and for now, it feels like people are still doing okay as investors, even though the "sky is falling." That said, I want to be transparent with them so I also want to report back if it is not.
@Taylor L. To be fair, the Wall Street Journal does A LOT of questionable reporting, and is not the institution it used to be. That said, I was taken aback by their hostility directed at short-term rental investors. While I agree that recessions/depressions/etc. are the best time to invest, and that media misses the mark on that, I also feel like this time around- there were some early predictions about this being a V curve (rather than a U curve) that seemed irresponsible to me given that we've never had a situation like this. To be clear: I'm not saying this is a bad time to invest, but it was crazy to me that in late March (about 1-2 weeks after things got "serious") everyone was talking about it like business as usual when we had no idea at all which way it was going to go. I think what I'm trying to say (and not succinctly) is that when trying to gauge the market, it's definitely smarter to stick to your local media sources: Westword, The Denverite, Denver Post and various business journals to see what is going on with the economy/investing options.
@Craig Curelop We did something similar with our Colorado Springs Airbnb properties, which was not that big of a jump, since we had already been forced into doing that with our Denver Airbnb properties. (Clarity on that point: we had condo investments that we used for Airbnb in Denver until the city and HOAs implemented laws, at which point we turned them into furnished medium-term rentals: 30+ days.) Since we already knew this market and client set well, it was easy enough to go after people that were not travelers but had professional or personal reasons for needing a furnished, medium term property. (Likewise, we advised all of our clients to do the same.)
This may have been hasty, but I think it's too soon to tell. Also, I am completely fine giving up a little bit of money one year to have peace of mind that the places stay occupied during the next six month stretch.
@Robin Searle My brother has also reported that after having his reservations completely canceled, his Colorado Springs Airbnb properties have come back and people are interested. Agree with you that this may end up being advantageous for people that can weather the storm (just like the new law may have been advantageous for people willing to get the license, adhere to the city.) Re responsible investing, agree on knowing your numbers and being smart about how leveraged you are. On the flip side, there is just some risks with investing and no way to predict absolutely everything that can go wrong. I think to be an investor, you have to avoid being careless, but also a certain risk tolerance.
@Erin Spradlin I am pretty regular on BP and every week I would read stories from STR owners. Every time people were talking up how insanely profitable they are. Then after a week of cancelled bookings, the same people started complaining about hardship. It can't be both ways. I feel like there is some BS being dished here. It is one of three things:
1. They were not that profitable to begin with and they didn't have reserves.
2. They are exaggerating the financial impact and have reserves. (I get not wanting to give up your profits)
3. They spent every penny of income and were treating STR like a W2 job. This is just crazy irresponsible.
I know plenty of STR owners on here are being responsible and have banked reserves, so I am not talking about them.
Any business goes through seasons of prosperity and decline. Tourism and travel is no different. This will pass. It already is in some markets. Anyone who had 6 months reserves will weather this no problem.
@Taylor L. To be fair, the Wall Street Journal does A LOT of questionable reporting, and is not the institution it used to be. That said, I was taken aback by their hostility directed at short-term rental investors. While I agree that recessions/depressions/etc. are the best time to invest, and that media misses the mark on that, I also feel like this time around- there were some early predictions about this being a V curve (rather than a U curve) that seemed irresponsible to me given that we've never had a situation like this. To be clear: I'm not saying this is a bad time to invest, but it was crazy to me that in late March (about 1-2 weeks after things got "serious") everyone was talking about it like business as usual when we had no idea at all which way it was going to go. I think what I'm trying to say (and not succinctly) is that when trying to gauge the market, it's definitely smarter to stick to your local media sources: Westword, The Denverite, Denver Post and various business journals to see what is going on with the economy/investing options.
Regarding WSJ's hostility toward Airbnb investors: keep in mind that most digital media journalists/authors have a particular political bent (read: these Airbnb investors are raising prices for the common working man). Additionally, large media conglomerates typically have some vested interest in hotels. I've definitely stayed in a few hotels that give out copies of the WSJ, and those free copies keep circulation numbers up.
Love it Erin. The hysteria is hilarious. We have 6 STRs in Colorado Springs. Yes, like everyone else, we lost $10k+ in reservations in a very short period of time in Mid-March. However, like any smart investor, we quickly pivoted, dropped our rates, gave discounts for 3-6 week stays, and ended up at 93% occupancy for March and 98% occupancy for April.
The world did not end... Yes, we rented "nightly" rates lower than we had ever done before ($45/night was our lowest we went on one of our 1 bed/1bath guesthouses for April). However, last I checked, $45*30=$1350 for the month. We would MAYBE get that as a long term rental year round, but more likely $1200/mo for that unit on a long-term lease. And this was not an everyday, common situation that everyone plans for. This was a massive, world changing and UNCOMMON pandemic.
Now, we sit here in Mid-May getting nonstop bookings from people dying to get out of their home (most seem to be coming from the mid-west and want to come out and hike in our lovely mountains). We are back up to getting $75-125/night depending on the time of the week. I feel bad for those STR investors who went into full panic mode in Mid-March and converted all their STRs into year-long leases. At least in our area of Colorado (Colorado Springs), the summer is where we make approximately 80% of our net income for the year. We didn't want to miss out on that upside IF the rona had a chance of subduing and life went back to somewhat normal at any point during the summer. There was risk that it could have lasted way longer and it would've hurt us more than if we had just converted to LTR early on, but we calculated that the upside was worth the risk. It was also pleasantly surprising how quickly we were booked in 5 of our units for 3-6 week stays THROUGH the Airbnb app. I guess I forget how many people STILL need a place to stay in-between houses or traveling work. Two couples had sold their house faster than they thought, and their new house wasn't done being built yet. Another guy was trying to buy a place out here but was from out-of-state and so he wanted to come out for a 4 weeks as he looked for another place. There are a lot of these people out there.
Low barrier for entry:
Yes, STRs lowered the bar for everyday folks with limited capital to get into the real estate game/biz. Lots of people got in and everything was honky-dory. A lot of people got hooked on the massive cash-flow and then went super leveraged to get all they could and grow fast. I'll admit, my wife and I totally did the same. Instead of stock-piling our reserve accounts, we got more units via house-hacking and 5% down every year. And honestly, we don't regret it at all and are very excited for what the future brings. Even with big hits to the economy, we could take close to a 50% reduction in revenue for the year and still come out better than if we just switched to LTRs. Yes, STRs take way more work and is definitely more of a side-gig than a "passive" investment, but with systems in place and a great cleaning staff, most of it is automated and cruises on down the road with limited interaction.
One thing that we "knew" but didn't prepare for is just having more reserves - which everyone probably could admit that they "should" have more.
Anyways, Thanks Erin for the conversation starter and I hope those who are interested in just starting out with a house-hack AND STRs will still give it a shot because the upside is so awesome and the downside is you sell the furniture and convert to a LTR. Just make sure the numbers work both ways and you'll be golden. Shoot me a message if you ever want to chat into more details! I could talk about STRs all day long.
@Joe Splitrock Thank you for your measured and thoughtful response. I agree that you can't have it both ways. That said, I think for the past 8-10 years, Denver and Colorado Springs have been solid investments and barring corona, people had every reason to think the appreciation trend might continue. I'm not denying that they may have stepped outside of what they should have responsibly been doing with reserves, but I do understand why they got excited and went for it. Full confession, inspired by @Michael Vialpando's remarks- we also were not totally responsible. (We're fine and advocate other people being bold- but I can't say we followed every rule of investing to a T.)
Perhaps because Airbnb was a new form of investing and/or because it immediately did so well, I think there has always been skepticism and paranoia around it. From the left, there is an argument that it drives up neighborhood prices (I happen to believe this/worry about it for certain zip codes) and for the right, there's a reticence to embrace change and, consequent, fear of pot smokers and partiers. Anyway, anyone invested in the community knows that it can be an education play trying to get others to embrace it. Looks like that is to continue during corona times.
@Michael Vialpando - (Clap, clap, clap) for your candidness on being aggressive with your investments and being leveraged. We are in the same boat, and like yourself- I'm not looking to change anything, nor am I kicking myself for doing it. First, I happen to believe the saying that "fortune favors the bold" and in real estate that means go for it (responsibly) but go for it. Second, Airbnb helped us learn how to run a business which led to us quitting our jobs which led to starting two other successful businesses, so I consider the extra cash and experience liberating.
It's hard to get through to new investors sometimes that things can go sideways (things ARE going sideways) and we are still holding on/have investments/feel solid. I'm not making a promise this will last forever or that tough times are not ahead, but it is just not beneficial to let fear hold oneself back. Things shake out. They get figured out. There's almost nothing so bad you can't overcome.
@Erin Spradlin we will definitely be able to keep all the properties. For the two condos in Ecuador, we are searching for long term tenants as their tourism industry is going to take a while to recover. Luckily the monthly costs to maintain both of them are only around $600 so we can afford to pay that until things turn around. As for our basement unit, it was always considered extra income that was nice to have but not necessary to survive. The same goes for the condos. Luckily I have my own Architecture firm and we are still keeping busy and that is our main source of income.
We are one of those responsible (semi-responsible) investors that @Joe Splitrockmentions that we can weather this storm.
Thanks for your comments @Erin Sprandlin and @Michael Viapando. My wife and I purchased our first STR in Colorado Springs last summer and had to spend the latter part of the busy season remodeling it. So going into this summer we only had a projection on what our revenue would look like. We utilized furnished finder and placed a traveling nurse in the property from Jan 20-May 1. This gave us a slightly higher monthly rent than if we rented out on Airbnb given our assumed vacancy during those months. We had less than 10% vacancy on Airbnb for the month of May. When all of this started all of our bookings cancelled. We dropped our prices and decided to stay the course and starting in the middle of April we started booking up for May again. As of now we are at 15% vacancy for the month. Our prices are still slightly lower than what we projected but we are still making more than we could at our medium term rental rate.
6 of my 28 units are vacation rentals. Did March and April suck? Yes. But we had a few social distancer bookings in each place to get us to break even. Had this gone on longer we would have had to dip into cash reserves (which we have for a reason and is a topic for another post), but our markets are swinging back around and the bookings have started rolling back in.
Will covid keep me from buying more STR's one day? No. This situation is a 0.00001% (I made this number up, before the data police come for me) of the time occurrence. My VR's give me fantastic returns 99.9999% of the time. So people just have to decide whether they want to base their investment decisions on what happens 0.00001% of the time, or base them off what happens 99.9999% of the time and keep some cash reserves for that pesky 0.00001%. Neither is a wrong decision.
- what made you pick 1yr as a timeline? Why not 1 decade, or 1 week?
- anyone over leveraged and cash poor right now is feeling the pain. Regardless of approach or even asset class. This is the reason for such broad reaching government programs.
- again, over leveraged and cash poor businesses are feeling the pain. Regardless of timeframe. Hopefully this will educate more people on the perils of having every dollar “working” and no dollars on days off. To steal Kevin O’Leary’s analogy of $’s being soldiers and sending them out to find reinforcements... many a war was lost at home whilst the army was invading someone else’s homeland...
- decisions need to be made now, yes. And using the argument “don’t wait for all the lights to be green to embark on your journey” is sound. However, would you leave when all the lights are red? Likely not. Use your cash to wait, when improvement comes, pack the kids and get after the journey. Just don’t jump the light. Red light tickets are expensive!
Our vacation rentals are starting to bounce back. We lowered rates 30-50% and received enough bookings to at least break even. We considered flipping several of our properties to student rentals but decided to be patient.
I look at it as high risk, high reward. We get hurricanes, red tide, and now COVID down here so you have to have some risk tolerance.
My opinion is as long as you have reserves, do the analysis before buying, and aren’t over-leveraged vacation/short term rentals are no different than any other real estate investment.
@Erin Spradlin I have no regrets having invested in my STR in the Smoky Mountains some 4 years ago and I'm actually now dealing with our 2nd natural disaster in the area with my first being the horrible wildfires a few years ago in the area that squashed almost all of a holiday season with significant expenditure on smoke damage. I'm sure @Avery Carl remembers that time too.
We recovered, and like everything it seems in society today, people have short memories, although no one is going to forget Covid anytime soon. Human nature seeks out normalcy and normalcy is vacationing with loved ones. “People will come Ray, ooooh people will come!”
As for the WSJ, I agree it’s lost it’s way. It no longer is shy about promoting big government involvement in the financial aspects of society as long as it results in an increasing market, without concern of the consequences.
Where I will disagree with some is that, yes we’ve had to significantly lower our rates for the current period as bookings are just beginning to trickle in, but we refuse to chase every last dollar by giving our place away. We own in a resort and we have a group of close knit owners and we know that’s in everyone’s best interest. As the saying goes, you get what you pay for.
I don't have a dog in the STR fight and haven't read the WSJ article because it's paywalled. I think STR are great and use them a lot, but a lot of STR investors have had misaligned product market and financial strategies for some time, which are coming home to roost.
STRs fall in this weird no man's land of traditional RE and hospitality. You can get your traditional 80% LTV resi loan while owning what amounts to a one room hotel all while relying on lead generation from a source you kinda can't fire.
Lets say I go buy a hotel tomorrow. No bank would give me an 80% LTV loan, or a 70% loan, maybe a 60% loan. Why? Banks know that, among other things, hotels can have very lumpy earnings and want to leave themselves plenty of cushion. Hotels are more risky than a traditional owner occ home or SFRs. We have over a hundred years of data to prove this out. Enter stage left AirBnb and suddenly I can use a product meant for a lower risk asset for a higher risk asset?
In the business world, every CFOs job is to find a financial strategy that dovetails nicely with the company's product market strategy, not double down on risks. If you are a pharmaceutical company who spends lots of $$ on R&D you keep debt low so if a drug flops you can limp along until the next drug hits the market. Yet somehow in the AirBnb space its accepted, even encouraged to have a financing strategy that exacerbates a well documented risk of the hospitality industry.
It isn't the entirely the fault of the investor to take advantage of this option to juice returns. The banks haven't quite caught up/ had a reason to care about this. STR returns have been other worldly for a long time so it was only a matter of time before something like this happened to revert things to the mean.
As Warren Buffet says "When the tide goes out, you can see who has been swimming naked." Going forward, the problem will self correct. Banks may add an AirBnB rider if enough foreclosures happen or investors may self regulate away from the high leverage loans.
No bone in this STR debate but I think STRs are here to stay! Before Covid, As a business traveler I was often running 50 -50 on my choice of stay between a hotel and an STR. They will in my opinion bounce back faster and stronger than any other hospitality segment. Of course let's not ignore how it had become a very lucrative (and over leveraged) stream of business for many people. Some of them unfortunately won't survive this crisis and get out of the business completely. For the ones remaining, they will have to raise their game in terms of hygiene, cleanliness, potentially invest a ton more in reusable's like linen or towels. Tossing out poor guest experience will have very low tolerance from the consumer.
There is a lot of controversy around AIRBNB. Are you a hotel or a rental? Hotels reside business districts, while rentals can reside anywhere. Municipalities generally have not figured it out. There are arguments on both sides, but I think it is clear this model is on pause. Will AirBNB as a company continue is anyone’s venture capital guess. The concept of the sharing economy is not going anywhere.
I know of a company in Jacksonville Beach that offers premium short term rentals and they have since put a number of their properties on the market. The numbers don't work to rent these properties long term.
There are a few reasons why STR (Airbnb, VRBO, etc.) will bounce back and will do so before hotels.
1. In a hotel, there is a lot more contact with people. Social distancing will be harder to maintain. In an STR there usually is no contact with anyone else (unless they are renting rooms and not the entire place).
2. In an STR there is a kitchen so meals can be made. There is no need to go looking for a restaurant.
3. Businesses have figured out how Zoom works. Traveling for work will be limited as the new normal will be video conferences. STR reliant on businesses may hurt for a while but the vacation STR will bounce back as everyone is going to want to go to the lake for a weekend and get out of the city.
4. STR has the option to become long term rentals. The profit may not be as much or just breaking even but it is better than nothing. There is a housing crisis in the USA and that is not going away.