So What If Airbnb Is Crashing Right Now...

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So What If Airbnb Is Crashing Right Now...

Erin Spradlin
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 
    14Reply
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    Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y
    Originally posted by @Erin Spradlin:

    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. 

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      • Jerry W.Pro Member
        Moderator
        Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
        6y

        @Erin Spradlin, thanks for the thread. I tried an experiment on doing a STR about 3 years ago. The first year with one unit I really didn't make enough to pay utilities, but in my opinion you cannot expect a brand new business to cash flow on day one. The second year business improved and I picked a few repeat travelers and had one or 2 fishermen books severl weeks at a time which was great for income and not washing sheets and towels everyday. I made about $200 less a month than I would have if I had done a LTR. The third year I finished renovations on the other side of the duplex and I made it have a WOW factor with western decor. I killed it. Was bringing in about 4 times what a LTR did. I had a REALLY bad month in February this year in my LTRs, had 2 empty for repairs and had 6 folks move out. Massive hit as it took about 3 months to rent them out again. My STRs do bad in winter but had really good months, it really helped. Then Covid19. I lost EVERY booking for the next 2 months in 4 days. From about $4K average to zero. Had one rental for 2 days for $155 from someone moving into town but had to unpack.

        I don't know how long this will last, and neither does anyone else. You are free to gamble your money as you see fit on your vision of the future. My bet is on STRs. I am slowly getting back a few bookings for the first time a few days ago. Yet have had some August bookings cancel. I think it will be lean but work. I survived for 2 years on less. My biggest pain is having paid about $20K more for a property than I would have normally because it had very little value add, and is set up well for a STR. I quickly shifted it to a LTR and got it rented, but I will only clear my mortgage by about $260 per month. the good news is that I barely put $1K into getting it ready to rent. It will ride for 1 year to see how things shake out. I can always resell it to a home buyer and come out OK if needed. I will wait, work hard, look for deals, and keep paying down my mortgages. I could have really used not losing 20 roofs to a hailstorm last year, but I just got over the 50% mark in replacing them.

        Good luck on your units.  I know it is particularly hard when you have folks relying on you keep their finances going and that is part of your business now.  I have enjoyed your articles and remember; you didn't cause this issue, you are a good person and did nothing wrong, and you are smart and hard working and will weather this thing out.  Vaya con dios.

        4Reply
      • Marcus Johnson
        Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
        6y

        @Erin Spradlin

        That would tell me you’re purchasing properties that are in a vulnerable area. We’ve had an Airbnb in a rural lake region and have been very successful. I had a line out the door of people waiting to get in because we are so remote and everybody loves to come from Iowa South Dakota and Minnesota and Wisconsin. It sounds like if you’re having problems you purchased in an area that would be hurt by the coronavirus. I would suggest a better plan going forward. 

        1Reply
      • Account Closed
        Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
        6y

        I don't own any STR but I do use them as a customer. I think STRs come with a lot risks that long term rentals don't. Amongst them are regulatory risk where a local city just outlaws it. This applies to high rent cities where there is a basic housing affordability issue. Then if you have a condo you have HOA risks and the HOA can ban STR's overnight.You depend on a platform that can change its fees on their whim. Look at what food delivery services have done to squeeze restaurants. Then of course you have the usual economic risks but are more exposed because you have no long term contract to fall back upon. So take the good with the bad and roll with it. Or go the lower risk option with lower returns.

        0Reply
      • Joshua Myers
        Rental Property Investor · Columbus, OH · Member since 2014 · 148 posts · 177 votes
        6y
        Originally posted by @Erin Spradlin:

        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 

           What about the article is nasty or inaccurate? 

          0Reply
        • Jeff Ronningen
          Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
          6y

          @Erin Spradlin. I disagree with point #1. You say "classically" returns for AirBnB have been 2-3x. Although STR is not a new idea, it's gone to new levels with AirBnB. This is a recent phenomenon that is not tested over time, recessions, wars, interest rate and employment fluctuations, locusts, floods, you get the idea. Also the 2-3 year pocket assumption is flawed. Classically, to borrow your term, leverage involves a risk/return trade off and leverage has been the downfall of many a real estate investor. If an AirBnB invested has been conservative with leverage and if they've banked the high returns in a liquid rainy day fund they'll ride this out and survive, but there are those that haven't and won't.

          1Reply
        • Linzay Kelly
          Houston, TX · Member since 2017 · 10 posts · 7 votes
          6y

          @Taylor L. You’re blaming the media? Anyone can write anything. It’s up to us to sort out the truth.

          0Reply
        • Brian Ploszay
          Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
          6y

          Certain airbnb rentals might have trouble during a comeback.  Especially those that are dependent on airtravel.   Weekend getaways on the outskirts of a major metro area may have a quicker comeback.  In NYC, outskirt real estate is actually surging as residents wanted to flee the pandemic.  I've never invested in this sector;  It is a very different business model.  I'm going to watch it for distress opportunities.  Despite lower vacancies, that is not yet a given.

          0Reply
        • Bill F.
          Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
          6y

          @Erin Spradlin Mr. Buffet does have some fantastic and witty quotes. 

          However, I never said all AirBnB investors were swimming naked. I said when the tide goes out we will see who has been swimming naked. 

          In the case of STRs, we will see who has taken advantage of the high LTV loans and haven't come up with some other way to mitigate the added risks in a space that is known for cyclical earnings.

          1Reply
        • Steve Vaughan
          Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
          6y
          Originally posted by @Steve Mandelbaum:

          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.

          This is my fear for investors that overpay for a place, justifying the high price with STR income projections. Only one exit strategy, which is never a good idea. Underwrite as an LTR.

          I have an MTR (medium term rental) attached to my house as a MIL apt. Luxury househacking.   Luxury is a stretch, but its different than a duplex.  It used to be an LTR but we furnished it with nicer matching items we ended up with.  It's a different animal and has its struggles but is def more profitable when occupied. We can easily convert to an LTR if needed. 

          Our friends lower floor is a luxury STR. Think weddings and stuff. Gorgeous. Games. Grounds. Then they enjoy it when vacant and live there of course. Multiple options and not STR max performance-dependent.

          The point is, with every investment, to be able to pivot when necessary and never justify overpaying thinking you can rent something out for $big x daily.  

          4Reply
        • Taylor L.
          Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
          6y
          Originally posted by @Linzay Kelly:

          @Taylor L. You’re blaming the media? Anyone can write anything. It’s up to us to sort out the truth.

           Blame is stronger than I'm going for. I'm just saying keep these things in context. 

          1Reply
        • Shannon Chavez
          Investor · West Covina, CA · Member since 2016 · 6 posts · 6 votes
          6y

          @Jeff Ronningen

          Your point is a valid one but how is that any different than playing the long term game? Those renting long term that don’t have adequate reserves will not survive either.

          1Reply
        • Jeff Ronningen
          Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
          6y

          My point about leverage, risk, and reserves applies to both short term rentals and the long term game. The difference is, with the long term game there's much more history and experience to guide decisions about how much leverage, risk, and reserves are appropriate for investors. With AirBnB the business model is newer and less mature. There are more lessons to be learned with that business model during the next crisis or downturn, and future investors will learn from those who underestimated the tolerance levels for leverage and risk, and the need for reserves. How much is enough? How much is too much? I can give you good answers for the long game, not so much for STR. A friend who is a bookie and gambler once told me lessons aren't cheap. I try to keep my lessons on the less expensive side.

          2Reply
        • Reese Newell
          Investor · Fort Lauderdale, FL · Member since 2019 · 124 posts · 68 votes
          6y

          @Erin Spradlin

          Just my two cents to add

          1) This forum is amazing, as are the people.  It is a lot more informative for everyone to come here and post as you did to have open discussions.  Newspapers and medias have certain agendas, and lack the expertise often to provide accurate information.  A lot of it is just noise looking to grab readers' attention.

          2) A lot of the same things that are tried and proven continue to be extremely valuable in these times. You want to underwrite your STR to see their viability when things turn South and already have roadmapped potential alternative paths to take in the case of unforeseen circumstances. Be ready to pivot by having a plan ahead of time and not panicking last second.

          3) Understand all the laws of the state and local municipalities. Some areas may change laws to protect hotels or ban short term rentals if they deem it "necessary" to save their other industries. While I don't agree with this, we are the mercy of whoever is overseeing the area, so be current up to date with what is happening with the local government and knowing how friendly they are towards STR. This should have been done in the beginning of buying your place.

          4) Leverage can provide higher returns, but with that comes higher risks.  I do not see anyone talk about Kelly Criterion on Biggerpockets, but it is really good to play around with building some simple models with it to grasp what growth rate you want coupled with the risk that you are comfortable with this.  Scenarios where recessions hit expose those that do not understand how much risk their leverage is actually causing them.  By simple taking on a lot of leverage without this knowledge, you are not fully understanding your business and just hoping it continues to go well.

          Best of luck to everyone in this situation, and thanks again for this thread!

          1Reply
        • Erin Spradlin
          OP
          Real Estate Consultant · Colorado Springs, CO · Member since 2017 · 354 posts · 386 votes
          6y

          @Jerry W. Thanks for the nice comments. I'm glad you are holding on in Thermopolis (I went there about 10 years ago. That is a rural vacation rental if there was one.)

          @Marcus Johnson Hilarious. Thank you for explaining to me that I need to do more research. Please send me the book and materials you relied on to make a responsible decision when investing during a pandemic. 

          @Account Closed - is the saying not "fortune favors the bold"? I'm not saying take dumb risks, but taking risks does usually pay off in investing strategies. I would argue men's ability to absorb risk is actually why you see more male investors and younger male investors than you see female investors... so I don't ascribe to not entering because there could be an element of risk. I think that's backwards from everything else we hear. 

          4Reply
        • Shannon Chavez
          Investor · West Covina, CA · Member since 2016 · 6 posts · 6 votes
          6y

          @Jeff Ronningen

          Thank you for the thoughtful response and I agree with the sentiments of most on this forum in that this is a great conversation we’re having. I really appreciate the fact that there isn’t side taking and defensive remarks which tends to happen in these forums.

          Jeff, I don’t disagree with anything you said. Short term rentals as investments in today’s day and age (AirBnB) is fairly new even though vacation rentals are not. No one knows how all this will shake out for short term rentals but also for long term rental investors. I think the fundamentals remain the same, have reserves, know your market (laws, seasonality), costs to operate (vary greatly between long and short term) and have a multiple back up plans you can pivot to if needed. Oh, and DONT BE OVER LEVERAGED!! :)

          I think STRs are here to stay and provide hosts and guests numerous benefits over traditional hotels. With that said I also don't want to put all my eggs in the STR basket, i would like to acquire a couple more but think the safer play is long term, multi family etc. Just like anything else, diversify, have some STRs and some long term investments but that's a personal choice that each individual investor must make for themselves as everyone's risk appetite is different.

          1Reply
        • Jeff Conn
          Member since 2019 · 3 posts · 1 vote
          6y

          @Erin Spradlin - Agreed! STR's get a bad rap for some reason. I have 48 vacation rentals and we're sold out all weekend and are back up to 85% occupancy for the month of May. I'm in a rural vacation market, so the bounce back was pretty quick.

          1Reply
        • Jeff Ronningen
          Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
          6y

          @erin spradlin  I'm all for taking some risk and I've considered taking a swing at AirBnB.  My point is, go in with your eyes wide open.  It's a different business model with different risks.

          0Reply
        • Account Closed
          Real Estate Investor · Dallas, TX · Member since 2016 · 38 posts · 17 votes
          6y
          Originally posted by @Taylor L.:
          Originally posted by @Erin Spradlin:

          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. 

             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. 

             Concur wholeheartedly - most articles on business and investing are not written by entrepreneurs or investors - they are written by professional journalists. Journalism is a noble profession, but often when writers are covering complicated, multifaceted subjects like real estate investing, they come across as authorities on the subject by virtue of the context - It's printed in the WSJ afterall- but the writers are covering the topic as "tourists", writing about a subject that they have very little first hand experience with. 

            I am reminded of the old adage about teachers (another noble profession!) - those who can do, etc. 

            When consuming financial media (print journalism, talking heads on CNBC et al) I never forget that no one has a crystal ball, and do my best to look for objective facts (which are useful provided they are accurate and in proper context), and take any opinions / projections with a very big grain of salt. 

            1Reply
          • John Teachout
            Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
            6y

            Airbnb for us is house hacking. We have 3 different spaces in our home as it's just me and my wife now with way more space than we need. Renting out rooms has helped us rationalize staying in a home that is oversized for our present situation. Our home is located in a rural area with no broadband internet and isn't really near anything. In fact, the names of our spaces are "Middle of Nowhere", "Middle of Nowhere Too" and "Middle of Nowhere 3"
            We do get bookings from traveling medical personnel, movie industry people, local events like people attending weddings, craft shows, athletic events, visiting family, etc. Like someone else mentioned above, if we rent our rooms, great! If not, oh well. We don't get push back from the motel industry as there aren't any in our county. So we fill a need and just treat the revenue like one of our other rentals. It pays our electric bill at least. Around here, things are quickly returning to normal.

            0Reply
          • Jerry W.Pro Member
            Moderator
            Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
            6y

            @Erin Spradlin, I am very interested in hearing if things have changed for you.  I know Colorado has been pretty slow in opening up, but there has been a lot of push to do so.  My state has all ready opened up a bit and I am pleased to say that I am nearly at  70% of last year, but I am only getting reservations a week or 2 in advance.  July has very few bookings, but June is nearly 66%.  that is much better than say 2 days rented in May.  I don't know how this will shake out, but I am back in the black for now.  In a funny way the pick up caught me with my pants down if you will.  I had no bookings and so decided to replace my roof that was damaged by a hailstorm last year.  By the time I had wrap on it I had multiple bookings.  it is a duplex and while one side is much slower than the other I have not had a single day of both sides being empty to get up on it and pound nails.  I assuredly don't want to be hammering nails in with guests here, so it is a happy problem.  Eventually I will need to finish the roof, but for now I am grateful to have guests again.

            0Reply
          • Steve Mandelbaum
            Developer · Jacksonville Florida · Member since 2015 · 57 posts · 39 votes
            6y

            The sharing economy is not going away, UBER, Lift, AIRBNB, etc, the companies are not terribly important in the big picture.  What does matter is technology has made the sharing economy more available.  A decade ago if you wanted to go on a beach vacation on the opposite coast, it was difficult to find a rental, unless you knew someone or wanted to do a lot of research.  It was just easy to call the Hilton 800 number.  What does travel look like post this mess?  Will people want to go back to travel at previous levels?  I expect they will, the other unknown is will people feel more comfortable staying with a corporate entity or an AIRBNB?  

            0Reply
          • Justin Thorpe
            Member since 2020 · 437 posts · 675 votes
            6y

            Airbnb is making a solid comeback. Might even go IPO this year.

            0Reply
          • Erin Spradlin
            OP
            Real Estate Consultant · Colorado Springs, CO · Member since 2017 · 354 posts · 386 votes
            6y

            @Justin Thorpe @Steve Mandelbaum @Jerry W.

            https://www.bloomberg.com/news/articles/2020-06-07/airbnb-joins-vacation-rental-sites-seeing-surge-in-summer-demand?srnd=premium

            Airbnb saw more nights booked for U.S. listings between May 17 and June 3 than the same period in 2019, and a similar boost in domestic travel globally. 

            0Reply
          • Justin Thorpe
            Member since 2020 · 437 posts · 675 votes
            6y

            @Erin Spradlin

            Yes predicted that on May 13, same thread. Too bad AirBnB is not a publicly traded company. It would have been a deal of a lifetime to buy stock when their chips were down. This one comes back faster and better and bigger than we can imagine.

            1Reply
          • Juan Pardo
            Member since 2020 · 201 posts · 118 votes
            6y

            For me the main risks associated to STR through Airbnb are (i) the possibility of legislation restricting how owners can rent and (ii) paying too much for a property just because the yield during tourist season is high.

            I am not familiar with US law in this respect, but in my country, and in Europe in general, this is a big risk. A government may decide to regulate, restrict or ban short term rentals, and the value of the properties affected could plummet. 

            This risk could be mitigated by buying in markets that are appropriate for short and long term rentals. However, some markets are really polarized and properties that rent for top money during tourist season perform poorly for the rest of the year, and are hard to rent long term, unless the price is dropped a lot.

            1Reply
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