Investing in STRs with a recession coming

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Investing in STRs with a recession coming

Kurt Baltutat
Investor · Knoxville, TN · Member since 2017 · 25 posts · 8 votes

How are you Super and Angel Hosts thinking about the next 3-5 years? I follow many well-respected economists and am convinced a recession is coming (or is here) and the questions are how long and how bad. I know the smokies weathered the 2009 crisis quite well based on park visits and other data. But how do you think a recession and potential job losses, etc. will affect STRs? I have one and am planning on getting 2 more in the next year, but don't want to buy into a 30-40% occupancy market. Thanks for your advice!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
Quote from @Ken Boone:

On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)


 I think the opposite. When the market gets tight, people reduce frivolous spending. People that would normally splurge on a luxury rental may decide to downgrade to something cheaper. People that normally rent middle-of-the-road may downgrade to something cheap, stick to a hotel, or skip the vacation completely. I think the B-class properties are the ones most likely to thrive in a downturn. Luxury rentals will struggle to find renters.

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  • Chase Hoover
    Real Estate Broker · Staunton, VA · Member since 2019 · 194 posts · 216 votes
    4y

    Literally a post on this same topic every day

    4Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    4y

    I would look for markets that are "drivable" from big cities and are more in the average value range (i.e. not luxury).  People will still take vacations in recessions, but they are more likely to cut back on the super high end ($500+ per night) destinations, or places that require a flight, higher travel costs.  I.e. people in the Southeast may look to Gulf Shores, AL or Pensacola, FL instead of expensive vacations to Miami or the Keys.  Some properties may actually do better in a recessionary environment

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  • Ken Boone
    Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
    4y

    On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)

    3Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    4y
    Quote from @Ken Boone:

    On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)

    I think it’s all relative to when you bought and what you paid. Anyone who bought based on 2021 numbers (unless they secured a great deal) is going to probably be cash flow negative over the next 12 months. I’ve seen numerous cabins selling for a million 6 months ago that are struggling even now to book for $300 a night. 
    1Reply
  • Ken Boone
    Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
    4y

    @John Carbone I think the OPs question is more in terms of what are our thoughts on them purchasing another STR or two in the next year with the looming recession. It boils down to buying right. Recession or no recession.

    2Reply
  • Serena Liao
    Investor · VA · Member since 2021 · 14 posts · 1 vote
    4y
    Quote from @John Carbone:
    Quote from @Ken Boone:

    On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)

    I think it’s all relative to when you bought and what you paid. Anyone who bought based on 2021 numbers (unless they secured a great deal) is going to probably be cash flow negative over the next 12 months. I’ve seen numerous cabins selling for a million 6 months ago that are struggling even now to book for $300 a night. 
    I agree with you. But how to analyze a STR property now? 
    0Reply
  • Serena Liao
    Investor · VA · Member since 2021 · 14 posts · 1 vote
    4y
    Quote from @Chase Hoover:

    Literally a post on this same topic every day

    Hi Chase, I know you are a successful investor and a realtor, what’s your investing strategy now? And how do you analyze properties in current market? 
    0Reply
  • Kurt Baltutat
    OP
    Investor · Knoxville, TN · Member since 2017 · 25 posts · 8 votes
    4y
    Quote from @Chase Hoover:

    Literally a post on this same topic every day


     Thanks Chase. I'll dig into the forums.

    0Reply
  • Kurt Baltutat
    OP
    Investor · Knoxville, TN · Member since 2017 · 25 posts · 8 votes
    4y
    Quote from @Ken Boone:

    On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)


    Agreed. Our cabin has a bit of your strategy and Robin Simon's: Luxury and in the Smokies. I just see a ton of folks jumping into the STR market and may not be thinking about the part of the cycle we are in. Sorry to say, but anytime there is this much FOMO for something, many that didn't buy right (financing, uniqueness, etc.), could wash out in a few years. I am excited about this space, but don't want to be one of them.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y
    Quote from @Ken Boone:

    On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)


     I think the opposite. When the market gets tight, people reduce frivolous spending. People that would normally splurge on a luxury rental may decide to downgrade to something cheaper. People that normally rent middle-of-the-road may downgrade to something cheap, stick to a hotel, or skip the vacation completely. I think the B-class properties are the ones most likely to thrive in a downturn. Luxury rentals will struggle to find renters.

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    5Reply
  • Ken Boone
    Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
    4y
    Quote from @Nathan Gesner:
    Quote from @Ken Boone:

    On the other hand, differing from what @Robin Simon said, invest in the luxury instead of the average value range.  I could be dead wrong, but my theory is that the average value range is going to be what is hit the most and that is where the largest ADR drop will occur because that is where the most competition is going to be.  Whereas, the folks that rent the luxury type places, are not hurt near as much in a recession, and still take their ($500+ per night) vacations.  Don't know if I am right or not, that's just my theory ;)


     I think the opposite. When the market gets tight, people reduce frivolous spending. People that would normally splurge on a luxury rental may decide to downgrade to something cheaper. People that normally rent middle-of-the-road may downgrade to something cheap, stick to a hotel, or skip the vacation completely. I think the B-class properties are the ones most likely to thrive in a downturn. Luxury rentals will struggle to find renters.


     I don't know.  Time will tell.  I can say this.  So far this year I have heard a lot of folks in my market with average cabins saying they have noticed a pull back and that their numbers are down.  Most of my properties are on the higher end, and I am on target to meet or exceed what I did even last year which was a record year.  We will see what happens as the recession continues I guess.

    0Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    4y

    there hasn’t been a recession yet since short term rentals have become so popular. Overnight rentals obviously existed beforehand, and some of the experienced players have said that the bigger and luxury properties fell the hardest as well as generic properties with no view. That doesn’t mean go out and buy anything with a view. You could be and likely will be paying an inflated premium for that now in most cases. 

    People who bought prior to Covid didn’t need to “buy smart”, they just needed to buy. success rate of someone then relative to now is probably in the 99 percentile. With a recession looming you do need to “buy smart”, but buying smart is hard to do when there are sharks still looking that actually know what “buy smart” means. The amount of properties that fit this metric now is literally probably sub 5 percent. things can change quickly though. Try running numbers on 2019 rental data, if it can get you 5-10 percent return then you should be okay. 

    -Find properties that are grossly mismanaged. -John Underwood just did this 

    - find properties with no view, but where a view can be created at a reasonable price (on a lot where trees just weren’t removed). I bought a property that just needed 4 trees removed to open up an excellent view, and I got free fire pit wood. Obviously make sure it will be legal to do so beforehand. 

    3Reply
  • Dave R Ludolph
    Specialist · Cape Girardeau, MO · Member since 2020 · 43 posts · 9 votes
    4y

    @Kurt Baltutat I personally plan on waiting it out. I think this recession will hurt and vacation spots will get hit hard and then I will jump on those deals then.

    0Reply
  • Joshua MessingerBusiness Member
    Property Manager · Poconos, PA · Member since 2020 · 443 posts · 264 votes
    4y

    Hey @Kurt Baltutat! 

    I wouldn't focus on seasonal vacation markets coming up within the next 1-5 years due to them being higher-priced vacation markets as I see these taking the biggest toll with consumer spending decreasing. A good solution to this though is looking in markets that are within a drive between many major cities and offer affordable housing. Saying this - one area I would really like to highlight that fits this criteria is Poconos PA. Especially during covid in 2020 we had seen an occupancy increase within our units, where we were able to hold a steady 90% to 100% occupancy rate. 

    I hope this helps and if you have any more questions please don't hesitate to reach out! 

    All the best,

    Josh 

    [email protected]484-986-5012
    1Reply
  • Steven Foster Wilson
    Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
    4y
    Quote from @Kurt Baltutat:

    How are you Super and Angel Hosts thinking about the next 3-5 years? I follow many well-respected economists and am convinced a recession is coming (or is here) and the questions are how long and how bad. I know the smokies weathered the 2009 crisis quite well based on park visits and other data. But how do you think a recession and potential job losses, etc. will affect STRs? I have one and am planning on getting 2 more in the next year, but don't want to buy into a 30-40% occupancy market. Thanks for your advice!


     I think people will give up a lot of other things before they give up paying their rent. If you keep waiting and thinking there is going to be this recession then you will pass on really good deals. Even if there is one those deals will continue to appreciate over time and can still cashflow. I have only regretted things when I have thought I should better wait. Here in Columbus Ohio we have a housing shortage... I am not worried at all about loosing occupancy. Maybe you should consider checking out the market here. Let me know if you have any questions on the market here, I invest and have grown a portfolio here. 

    0Reply
  • Franky Aikens
    Wholesaler · Philadelphia, PA · Member since 2016 · 124 posts · 81 votes
    4y

    @Kurt Baltutat your STR should also work as long term rentals. I don't see demand for long term rentals decreasing so if your investments should still make sense if you buy right (price and location.

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y

    @Kurt Baltutat

    I am not an economist, but I think a recession, whatever the cause – is not usually a reason to avoid real estate. That’s because people may curb discretionary spending during these times, but they will still need a place to live.

    As long as your rental property isn’t completely neglected, you probably won’t have much trouble finding tenants – even during a recession. 

    In general, though, proper management of your properties (including helping your tenants) is key to real estate success.

    All the best!

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  • Chase Hoover
    Real Estate Broker · Staunton, VA · Member since 2019 · 194 posts · 216 votes
    4y
    Quote from @Serena Liao:
    Quote from @Chase Hoover:

    Literally a post on this same topic every day

    Hi Chase, I know you are a successful investor and a realtor, what’s your investing strategy now? And how do you analyze properties in current market? 
    Thanks for the horn toot.  

    Our strategy is the same as it has been since 2017: acquire under-utilized multi-unit hospitality properties, remodel, stablizie, and 2x+ the value through improving the property itself and boosting NOI with automated systems, modern marketing strategies, and subcontracted vendors.

    Contrary to popular belief on this forum, we much prefer smaller cabins, motels, multifamilies, etc. versus large luxury vacation homes.  Yes there are more turnovers, more guests, blah blah, but it's just a matter of building systems and processes.  

    And yes, there is plenty of demand for cool, boutique style, well-located multi-unit properties with cool amenities over single family homes.  In fact, demand is growing as travelers are looking for more budget-friendly options without sacraficing quality.  Instead of spending $300+/night on a small cabin, a couple from DC can stay in one of our awesome suites for 50%+ less.

    We're now expanding into the wedding venue business with one under contract that can sleep up to 36 people on-site across 10 private units that can be separately rented during the week and off-season for extra cash flow.

    Our deal analysis isn't overly complicated. Any new deal that comes across my desk gets a quick sniff test (can I add value, is it in a desirable location, does the price seem in the "reasonable" catgeory). For the ones that smell good, I call the agent and get the full scoop and 3+ years financials, which I dig into and clean up to determine the true current operating NOI which will be the basis of my offer.

    I'll then create a proforma to see what my team might be able to generate.  Put together a conservative remodel budget, plug in some numbers for our investor's returns and debt service (with higher-than-current interest rates), and finally calculate what price I'd need to buy it for to make my proforma work, then clearly present this with a firm offer.

    5Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    4y

    Your so on point @Chase Hoover that it's borderline man-crush how much I love what your doing. 

    0Reply
  • Chase Hoover
    Real Estate Broker · Staunton, VA · Member since 2019 · 194 posts · 216 votes
    4y

    @James Hamling hahahah thanks man

    0Reply
  • Ashley Byington
    Rental Property Investor · Victor, ID · Member since 2017 · 51 posts · 31 votes
    4y

    @John Carbone

    I was just thinking the same thing. We haven’t bought anything since April 2021 and prices skyrocketed during that time. I can’t make the numbers work anymore so I’m a little bit encouraged as I see prices dropping.

    1Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    4y
    Quote from @Ashley Byington:

    @John Carbone

    I was just thinking the same thing. We haven’t bought anything since April 2021 and prices skyrocketed during that time. I can’t make the numbers work anymore so I’m a little bit encouraged as I see prices dropping.

    I’m still looking now, but I think (assuming we get an official recession print by the fall) that there can be some really good opportunities in December and January maybe sooner. If a recession becomes a depression then it will probably be a longer waiting period.  Interest rates are already moderating now, and the markets are already starting to price in rate cuts by March 2023. What people confuse sometimes is that even though the FED has only done a few hikes, the market is forward looking and the hikes the fed is doing now through the rest of the year have already been priced into the treasury open market, which in turn has caused the mortgage rates to spike so high in a short period. 

    2Reply
  • Lucie Tighe
    Property Manager · Tampa, FL · Member since 2022 · 147 posts · 66 votes
    4y

    People will always travel. They might scale back, but there always be tourists. Plus from what I've seen, there's a lot of wealth out there. 💰

    0Reply
  • Gene HackerPro Member
    Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 969 posts · 488 votes
    4y

    I am still buying value ad properties that will work as affordable STR but can still cashflow as a LTR. These are generally off market deals. My newest project is a major rehab but it has an amazing lake view, is in a great area and is less than a mile to the regional hospital (I get a lot of interest from traveling nurses) to help fill the off season. It was a reverse mortgage that the adult son refused to move out of after his dad passed. Because it was during covid, the bank could not evict him.

    1Reply
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