Are vacation rentals still worth it?

Short-Term & Vacation Rental Discussions
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Are vacation rentals still worth it?

Collin HaysBusiness Member
Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes

As we return to the post-pandemic pace of supply and demand, investors are beginning to count the cost of operating a vacation rental, and if it is all really worth it.  Well written article here.  One huge factor not mentioned is rising interest rates:   If I finance $500,000 and have to pay 10 percent interest, I have to generate $50,000 per year just to cover the interest payment.  Two years ago, I might only need to generate $20K to pay the interest.   For all but the most exceptional deals, this is no time to be investing in anything that requires debt service.  


After an unpredictable summer, Airbnb and Vrbo operators are deciding if the headaches of hosting are worth it (msn.com)

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Zach Edelman
Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
3y

There are plenty of lending options for short-term rentals both conventional and non-conventional that are lending well under 10% interest. For example, I know for DSCR rates for short-term rentals currently, rates are typically anywhere from mid-7's to low 9's on a 30 yr note.

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  • Chad McMahan
    Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 754 posts · 504 votes
    3y
    Quote from @Bruce Woodruff:

    Great time to pay cash for a STR....

    It is always a good time to do anything in Real Estate...it's just always about location, timing and finances...

    Exactly. The fundamentals never change. We should simply always do the math and ask the experts lots of questions.
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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y
    Quote from @Chad McMahan:
    Exactly. The fundamentals never change. 

    Yep. The single biggest lesson for newbies to learn. And for seasoned investors to remember, because everyone forgets....


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  • Bretton F TrapnellBusiness Member
    Real Estate Agent · Phoenix, AZ · Member since 2021 · 18 posts · 5 votes
    3y

    It is a much different market today than it was two years ago, that is for sure. Worth it or not will depend on the exact terms, but I am still finding excellent deals on short term rentals for my clients.I think there are three points to consider when looking at this.

    • 1. Type of Financing
    1. - Paying cash your expenses and returns stay the same, this obviously is not possible for most, but important to note.
    2. - Creative finance options. These aren’t always advertised but a good agent can help negotiate subject to, lease purchase options, or traditional seller finance. They may also be able to find assumable loans occasionally. This shouldn’t be the only thing you look for but if you can find these options the interest rate goes back down to a reasonable area.
    3. - Conventional financing. Of course rates are high right now and no one has a crystal ball to know when they will come down. But historically speaking rates have gone up and back down, and it’s likely they will come back down. That extra cost sucks, but it shouldn’t be forever.
    • 2. Type of Projections - Depending on the type of projection you can determine if there is room after your mortgage expenses and other operating expenses. The type of projection you have is very important to know how to adjust for it.
    1. - Historical data for that exact property (current rental being sold). These are the very best numbers since the past is the best indicator of the future. If you have access to the books and also future bookings to see how a property has done and is slated to do then that is like finding gold. These properties are few and far between but can be found. Reach out to me if you are looking for any, I know of 5 in the phx market right now.
    2. - Historical data for nearby similar properties. Obviously not as good as real data for the exact property, but still an excellent source of data. I have a decent amount of data on properties in the Phoenix area that I help clients with.
    3. projections from sites like airdna, Rabbu, alltherooms, vacasa, mashvisor, etc. these don’t account for things like blocked days (maintainance, personal use, etc) and they count every blocked day as revenue. They also don’t account for discounts and refunds given so they are usually high on projections but still a good tool.
    • 3. Expenses and timeline. Depending on how effectively the STR can be run, and how much it costs to do so will effect if it's worth it or not. Also what is your timeline to make money or pay yourself back. If you are buying a furnished rental you may not have to pay cash for furnishings which could save you $50k right off the bat. Doesn't matter as much if you pay that 50k to debt service not because you were able to offset it from the beginning.

    Ultimately it can be worth it to pursue, but you have to have the right person to help or knowledge yourself to make the right decision.

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  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    3y

    Great content here. I sit on the sidelines from a perspective of lots of equity, low interest rate, more last minute income than a few years ago, less self-managed work but eh, maybe it’s time to pass the work on to someone else like a PM (Collin would be a fine choice) instead of riding the course. My goals are different anyway now. But it’s not about me, it’s about the different boats we are in and the different thresholds we are in. Collin has written before about the margins: when they are high we want the work to benefit ourselves but when they aren’t, let someone else manage it for us. 
    In the end, the selling price isn’t dropping because of the market, interest rates or demands, it’s where it’s at because it reflects the demand. My cabin is making the same money as last year but it’s making me money at the last minute unlike last year, where it was on my calendar months in advance. No difference. Times are changing, lead time is changing, where is proof that selling prices have changed. I really don’t know. 

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  • Yiwei Cheng
    Investor · Cincinnati, OH · Member since 2023 · 139 posts · 81 votes
    3y
    Quote from @Collin Hays:
    Quote from @Yiwei Cheng:

    For me, it comes down to the numbers and my long term goals.  

    How much cash flow will the property generate?

    If there is a slowdown, do you have enough reserves to get through it for 1 year?

    My goal is to own property but it has to cash flow and I'm okay riding out the slowdown until rates come down or just breaking even for the short term as long as my expenses are getting paid.


    How much cash flow does your 401K produce?  


     How much cash flow does my 401K retirement account produce? 

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    3y

    Short term rentals is a pretty saturated market, and getting more saturated every month that goes by

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  • Adam MaciasPro Member
    Real Estate Consultant · Fort Collins, CO · Member since 2022 · 291 posts · 178 votes
    3y

    Short terms rentals are absolutely not saturated or limited in opportunity. I know people who work for Airbnb and they need millions of STRs because of the demand. They ain't even close and anyone telling you otherwise is talking out of complete ignorance. You'd have to be a fool to think there's no opportunity in STR/MTR right now.

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  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Adam Macias:

    Short terms rentals are absolutely not saturated or limited in opportunity. I know people who work for Airbnb and they need millions of STRs because of the demand. They ain't even close and anyone telling you otherwise is talking out of complete ignorance. You'd have to be a fool to think there's no opportunity in STR/MTR right now.


    How many STR are you buying right now?

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  • Adam MaciasPro Member
    Real Estate Consultant · Fort Collins, CO · Member since 2022 · 291 posts · 178 votes
    3y
    Quote from @John Carbone:
    Quote from @Adam Macias:

    Short terms rentals are absolutely not saturated or limited in opportunity. I know people who work for Airbnb and they need millions of STRs because of the demand. They ain't even close and anyone telling you otherwise is talking out of complete ignorance. You'd have to be a fool to think there's no opportunity in STR/MTR right now.


    How many STR are you buying right now?


     As many as I can.

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  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    3y
    Quote from @Adam Macias:

    Short terms rentals are absolutely not saturated or limited in opportunity. I know people who work for Airbnb and they need millions of STRs because of the demand. They ain't even close and anyone telling you otherwise is talking out of complete ignorance. You'd have to be a fool to think there's no opportunity in STR/MTR right now.

    I've noticed that the new host referral bonus has increased from $500ish to over $700 in the last couple months. 

    Like everything it is highly local market dependent. There is no overarching STR market just like there is no broad housing market. 
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