Thoughts on Sedona, AZ area market?

10 Replies

Have recently considered purchasing a rental property in the Sedona area and wanted to know some honest opinions from others with experience in this market.  I've came across some relatively decent priced properties (compared to major city markets) but with the potential for positive cash flow from short term rentals (AirBnb, VRBO, etc).  

Any thoughts on this type of rental.  How much does exact location matter for rent-ability in this market?  In the City of Sedona vs. nearby such as VOC.  

Also, how seasonal are rentals?  I know March-May is busiest, but hoping the rest of the year wouldn't be completely dead.  

Hi Mitch. I have quite a few clients who have purchased Sedona rental properties, through me. The short answer is, you cannot buy just any property in Sedona and have a great ROI. 10% of the homes, available, are good rentals. 1% of the available listings are fantatsic rentals. If I can help, let me know.

I own 5 vacation rentals in Sedona and am under contract on a 6th. It is getting much harder to find good properties to operate as vacation rentals in the area. This is because the market is hot (the whole state is) and acquisition prices have been going up. Also the vacation rental market has become more and more saturated so nightly rental prices are not going up, but staying flat at best.

With that said the right properties in Sedona can absolutely kill it with good operations in place, I am talking 12-18% NOIs. Most of the established property management companies in Sedona are not good with less than 30 day rentals even though they claim to be. They are great for 30 day + furnished rentals and also long term rentals, but they have not kept up with the times in the less than 30 day "rental" market and will not bring you the NOI that is actually possible on these.

Operations are key to driving the highest ROI on vacation rentals and it is not nearly as easy as people assume.

Busy season in Sedona is Spring and Fall. The slow season (summer) is really not that slow if you have priced your properties correctly. I use pricing algorithms so my rates are different all the time. Different days of the week, time of year, and local events affect these rates. Also the rates are affected by how far in advance a guest is booking or how last minute a booking may be. I also use differing night stay minimums depending on how far in advance a guest is booking. Further out = longer stay mins. Last minute = shorter stay mins. (Mon - Fri last minute I allow 1 night stays, weekends always 2 not matter what to avoid parties being thrown.) I have achieved 90%+ occupancy rates in Sedona in 2017.

I focus personal investments on small units, preferably 2 bedroom units. Small units are easier to keep more fully occupied than larger houses. They are also much easier to turn over and prepare for the next set of guests. Additionally, they are less maintenance intensive. I recommend investing in updating to a modern design and dont just put old second hand furniture in your properties (many will suggest this). To stay competitive you need to have quality properties and there are just lots of dated places in Sedona that people are short term renting.

Make no mistake, short term/vacation rentals are the hospitality industry and should not be treated like long term rentals. That is if your goal is to maximize ROI, then you need to treat them like operating a hospitality business. If you just want a second house and want it "rented" sometimes then you dont have to worry that much, you can certainly drive some extra revenue fairly easily, you just wont come close to maximizing the financial performance of the property.

Be weary of what local people tell you about vacation rentals, everyone thinks they know a lot but they really dont (I am not referring to Chad, but to property managers, cleaners, and other owners that have done this in the past on VRBO). The space has changed drastically over the last 2 years and for an established property manager their systems do not integrate well with the new changes in the space.

You need to understand HOAs can ban short term rentals even though AZ passed SB 1350 Jan 1 of last year (Google SB 1350). So you need to look for properties not in HOAs or in HOAs that allow/regulate short term rentals or dont mention anything about them in their CC&Rs. Note that if an HOA does not address less than 30 day "rentals" in their CC&Rs that is possible the CC&Rs go on to be amended to ban them.

People seem to either love short term rentals or absolutely despise them, so many wont be happy with you for turning your property into one. Even if you have actually improved the property and neighborhood as a result.

I am licensed agent but not longer focus on sales or leasing. I have also managed vacation rentals for other clients in Flagstaff as well as Sedona. Mostly all I do now is operate my properties and search for new good vacation rental properties in Sedona, Flagstaff, and also now parts of the Phoenix Metro area.

Brain is your portfolio primarily vacation rentals? What is your plan/exit for when the economy slows as vacations being one of the first things folks cut during harder times? 

Great post by the way! 

Frank, yes my portfolio is primarily vacation rentals. I did complete one successful residential flip last year in Flagstaff though. I am now interested in getting into larger multi family properties and/or mixed use real estate that will have at least a portion of a building converted to short term rentals.

The travel and hospitality industry is booming currently. Hotels are achieving record success along side vacation/short stay residential properties as well currently. Yes, this will likely decline down the road as business cycles are repeated. However even in the down turn, our area still had many tourists. I am a strong competitor. In vacation rentals there is plenty of opportunity to just simply out compete other properties/owners.

There are many nuances, long story short it comes down to your marketing, reputation, customer service, RE improvements/design, and pricing. The worst vacation rentals will be the first to take the hit, the best ones in their respective category I believe will still do at least fairly well. You have to have the best run properties in their respective category (example: my properties are the best bang for travelers traveling in groups of 1-5 people in our area. My guests get a good value compared to their other options overall. I view them as being the best budget properties available).

You can have the most amazing property in the world and not be successful because the Real Estate is only the beginning of what makes for a successful vacation/short stay property.

There are a few exit paths from my properties. Here are a few possibilities:

1. After having a couple years of proven financials, sell the properties as turn key vacation rental investment properties. This is a value add play by later valuing the properties according to market cap rates for commercial and investment property in our area. For example if my properties are achieving 13 CAPs and our market CAP rates currently are a 7 then I have substantially added value. It means the properties are worth more than market rates for similar residential properties on the MLS that are not operated as vacation rentals. The properties would be sold with management agreements in place with either my management company, or a new company I have done a deal with that has proven to me they actually know how to optimally operate these properties. So there is further potential on the management side here to keep operating and flip the property.

2. They can always be converted to furnished 30+ day rentals or unfurnished long term rentals. Not optimal in my opinion but would not be the end of the world. They would at least break even or come close it if fully leveraged.

3. They can simply be sold on the MLS as residential properties. So far just being valued in this basic way they have all appreciated as our residential real estate prices have been steadily rising the last few years here in AZ.

4. I have bought a few of these with cash. The capital came from other successful investments. On the others I have a partner that has put up cash to buy these properties. 

The plan has been to leverage some of these properties to buy more, or go into another RE venture. There a few different ways I think this can happen. One is standard residential cash out refis or lines of credit. 

Another possible better alternative is business financing or a portfolio loan with these properties as collateral. In this scenario the properties should be worth more than the real estate value based off the residential MLS, since they can be valued off the income they generate.

Thank you for this thoughtful discussion. I've also thought about investing in Sedona. This was a good evaluation. 

I was just out in Sedona in May. People everywhere. Took the side roads up there from Phoenix. Surrounding towns are building out. I did the numbers on my TripAdvisor rental. Pretty good.

From what I can see, the numbers keep getting better in Sedona. I hear concerns of saturation, but I'm not seeing it- Based on demand and the trend of increasing demand VS rental supply. My clients are seeing a strong ROI with high occupancy rates.

I do flips (4 in process), vacation rental (had 5, down to 2 now), new multi family/student rental (2 in process), and new SFR. All of this is just up the road from Sedona in Flagstaff. The docs who bought my last flip had just bought a vacation rental in Sedona. They were rolling out of all of their vacation rentals in Florida, Mexico, Hawaii.. mainly due our market and the fact that the Arizona senate just acted to protect vacation rentals from local city/county regulation. Sedona is partially in Coconino which had just passed vacation rental regulations when the legislature preempted and forbade such (A CITY OR TOWN MAY NOT PROHIBIT VACATION RENTALS ...) To say the effect was positive in its appreciating non-HOA property around here is and understatement in my experience.

I furnished, staged, and vacation rented one recent flip as a vacation rental before selling it, just to prove the income potential. What Brian G. said about selling CAP is dead-on. Whether its student rental, new SFRs, new multi-family, or vacation rental, nearly all my buyers are buying CAP rates. One foreclosure I picked up for 100K, sold for 360K mainly due to CAP rate. SO, is vacation rental strong? Absolutely. And not just due to AZ laws. Northern Arizona gets nearly 5 million visitors to the Grand Canyon every year, the vast majority cruising near or through Flagstaff / Sedona. We sit on the cross roads of 2 national arteries (I-40 and I-17). We have a major state university which fills us during the winter. We have a ski resort in Arizona. Flagstaff and Sedona are basically landlocked by federal forests so very little expansion possible. Add to all this an influx of California 1031 money and 5 million people baking in the deserts of PHX (the next closest place to cool off adds almost an hour to the drive from PHX). You have a real estate market uniquely insulated to downturns by numerous sources of housing pressure.

I bring a different perspective regarding the size of vacation rental.  Consider that really large vacation rentals are far more scarce than the medium/small ones.  Yes, there are more small and medium parties looking for a VR but the vacation rental economics of scale really kick in for bigger parties compared to booking hotel rooms.   My 8bed/8bath stays slammed even though the number of VR listings have tripled here in the last 4 years.  I just don't have the increased competition that the 2/1 and 3/2's have picked up over the past couple years.

Lastly, the vacation rentals take work. Communicating with guests and coordinating cleaning constantly need attention (if your place is doing well.) My wife refuses to manage any more of them! So we are now focusing on high density residential/multi family in the town/university center while working with the same passive investors looking for CAP rate.

I am in a Real Estate Investing meetup group here in the Phoenix area. Some of the guys in the group are now buying in Sedona as everything has become overpriced in the valley. They seem to be pretty excited about it. 

I think Jason R has a good point about the saturation of the 1 and 2 bedroom type properties. Also especially about the value proposition to your guests because a large groups saves more money per person for their travel accommodations. Just know that if you plan to invest in small units you need to make them competitive in the STR market place. Try to make them best in the market so that you always get a high percentage of bookings. Make improvements, invest in design, and most definitely use a professional photographer for listings at a minimum. Consider using a company like Evolve vacation rentals, or implement software like Guesty and push your listings to multiple market places (This admittedly takes a ton of work to do right and learn the systems)

Although I have not implemented this idea quite yet, several of my units are now in the same condo complex. So another angle is to make one listing for groups that includes multiple units. Then it may be possible to get a little bit of the best of both worlds because you can still get groups to book. Ill have to report back if I eventually experiment with that.

I did operate one large house in Flagstaff, very close to the ski mountain road and incredible mountain views. It had 5 bedrooms, 2 living rooms, huge backyard, huge kitchen, etc. This property was just an amazing value for guests no question. The thing I did not like about it was how long it took to turn over and clean. Even more especially was the risk of large groups throwing parties in the property. With my 2 bedroom 1 bathroom small units, parties are just unlikely. I never allow one night stays on weekends either to also combat this risk. 

I also operated a standard 3 bedroom 2 bathroom house in a family neighborhood in Flagstaff. I also have operated another completely remodeled high end and modern house downtown that has 2 bedrooms and 1 bathroom in Flagstaff. The party issue or just noisy groups that annoy sensitive neighbors was a fairly routine problem with the medium and large house.

I think it kind of comes down to operational style also. I have been looking at group home, hostel style properties, and 4-12 unit multi family properties in the Phoenix area market lately. I have looked with the idea of getting more economies of scale with operations and strong ROIs, adding value by using the STR model. Honestly, the way I operate my units, I see myself potentially getting in boutique hotel and or hostel like style of properties/business down the road. Most people are not trying to go this far in depth with this activity as I would like to.

I also think there may be some unique opportunities to condominiumizing apartment complexes. In my theory I could create CC&Rs for a new HOA that kind of specializes in STR operations in addition to the normal HOA management stuff for the complex. Never done this but have been thinking about it for a long time as I have gotten more exposure to HOA operations and issues with condo properties. You could have more exit opportunities this way as individual units could be sold off also. Four of my units (soon to be 5) are in a building that used to be apartments and now all units are condos. The HOA CC&Rs allows STRs, but the HOA management company has no experience operating short term rentals. Would be amazing to create and set up an HOA exactly how you want it for a specific activity! Then again this may be kind of like how timeshares are run.

My interest originally was all real estate deals and numbers. Because of that I ended up going down the STR path in my area. I just could not get over the potential for abnormally high ROIs and the fact that there was opportunity to think outside of the box. I thought there would be a lot of value add opportunities by improving income using a STR model. However, I have learned as Jason mentioned that the work required is intense. I have spent more time on management and operations than putting together real estate deals by far.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here