Get Out Now

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Get Out Now

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

I've been thinking about expressing my sentiments for several weeks on this forum. As a Property Manager and STR investor, it's a hard thing to do. I still feel like investing in vacation rentals can be an outstanding investment, but you've got to score a good deal when you buy, and you cannot be counting on a fresh buy for much, if any, positive cash flow unless you scored a crazy good buy.  

This is post is intended for 90 percent of the investors out there that bought a vacation rental in 2021 and 2022.  Most paid way too much, based on multiples that were based on weird years.  You are going to have an opportunity this spring and early summer to GET OUT.  Things are NOT going to be getting better in this space for a while.  Here is where we are:

1.  Extreme oversupply of STRs in a bunch of markets, due to irrational exuberance and massive overbuilding in 2020, 2021, and 2022.

2.  Lower volumes, retreating to 2018 and 2019 levels.

3.  Investors are in a huge squeeze right now because the "new normal" numbers aren't working.

4. High(er) interest rates are way exacerbating the problem - if the numbers aren't working for YOUR deal at 3.5% APR, they sure don't work for anyone else looking to buy your home at rates that are twice that.

5.  As the pinch hits harder, investors trying to sell are going to find themselves deep underwater - owing money at closing and a whole lot of it.

6.  Many of these houses will either be sold short, or go back to the bank, 2010-11 style.  They will eventually end up in the hands of an investor, at a price where the dollars DO work.  And that new investor is going to be able to rent his/her rental at rates way lower than the previous owner could afford to do.  This will put FURTHER pressure on the owners who paid way too much.

So...if you are NOT in a good financial position with your rental - if you are relying on it for INCOME and things have gone sideways, GET OUT THIS SPRING OR EARLY SUMMER.  Prices are going to do nothing but go south for a while.  It's going to be 2027-28 before things are sorted out.  

That's my two cents.  Sorry guys.  Just telling how it is from my view.

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Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
2y

Agree with your points, but the Smokies are different. The handful of really popular markets that got the dumb money in 2021-2022 are going to feel this more than the smaller, perhaps niche regional markets. If the climb and frenzy were a bit slower in other markets, there will be fewer owners that paid WAY too much and are stuck.

Don't get me wrong, dumb money finds its way everywhere, but a mistake on a $300k property is a lot easier to solve than on an $800k cabin in Gatlinburg (just making up numbers - don't know the market dynamics there, but you get the point).

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  • Timothy Hero
    Lender · United States · Member since 2020 · 1k+ posts · 499 votes
    2y
    Quote from @Account Closed:
    Quote from @Timothy Hero:

    I'll say this: as someone who's brokered many DSCR loans with many different lenders, 95% of the DSCR space stopped lending to STR's a year ago because Wall St. isn't buying the notes for STR's. That's not a good sign. STR's are usually higher valued properties. You don't want to be stuck with a higher value property that you can't even cash the equity out of because no one will touch it.


    While the lender pool on DSCR for STR has shrunk to cash out equity, it is for this point in time. Next year could be better or worse, but everything changes with time. Right now for most (not all) people it does not pencil out (unwise) to pull equity out at these interest rates. Also remember STR is not the only one facing a lending issues/cashout issues as commercial is too for other reasons. I with rather be stuck with a STR I can't cashout but gives a great return. Now the "great return" question really goes back to the original post. That will depend on at minimum location, marketing, economy, management (even if it is self managed), purchase price, insurance costs, property taxes, operational costs and rates financed at.


    The scary part about is STR's, at any point your local government can ban them, as we've seen in major markets.

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  • Account Closed
    Investor · FL · Member since 2016 · 332 posts · 388 votes
    2y
    Quote from @Timothy Hero:
    Quote from @Account Closed:
    Quote from @Timothy Hero:

    I'll say this: as someone who's brokered many DSCR loans with many different lenders, 95% of the DSCR space stopped lending to STR's a year ago because Wall St. isn't buying the notes for STR's. That's not a good sign. STR's are usually higher valued properties. You don't want to be stuck with a higher value property that you can't even cash the equity out of because no one will touch it.


    While the lender pool on DSCR for STR has shrunk to cash out equity, it is for this point in time. Next year could be better or worse, but everything changes with time. Right now for most (not all) people it does not pencil out (unwise) to pull equity out at these interest rates. Also remember STR is not the only one facing a lending issues/cashout issues as commercial is too for other reasons. I with rather be stuck with a STR I can't cashout but gives a great return. Now the "great return" question really goes back to the original post. That will depend on at minimum location, marketing, economy, management (even if it is self managed), purchase price, insurance costs, property taxes, operational costs and rates financed at.


    The scary part about is STR's, at any point your local government can ban them, as we've seen in major markets.


    That is part of the location part. On MFR in the years ahead local governments might put in rent control. Due diligence on local/state government is required when buying any real estate.

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  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    2y
    Quote from @Timothy Hero:

    I'm genuinely interested -- is this a legitimate risk?

    I know governments are banning STRs. But ... Have you (or anyone else) seen a municipality where they had a permit process allowing non-owner occupied STRs, then they changed course, prohibited STRs and did not grandfather in existing licences?

    In every case here in Colorado, where a city switched from allowing short-term rentals to not allowing them, they grandfathered in those were operating legally with a permit.

    Littleton, outside of Denver, is an example. They changed to ban investment Airbnb after allowing it. So did Colorado Springs. 

    Breckenridge and Summit County didn't ban vacation rentals, but they did put a really low cap on the number allowed, but still allow existing Airbnb properties to operate (even though the existing number is WAY over the new cap).

    I differentiate between towns that allow STRs through an active permit process and those that allow STRs through a lack of law banning it. The latter seems problematic, but once you're permitted, I'm not seeing in Colorado anyone try to take that away.


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  • Cliff H.Pro Member
    Rental Property Investor · Nashua, NH · Member since 2014 · 587 posts · 477 votes
    2y

    @James Carlson well there's always NYC, Hawaii, and some of the largest vacation rental communities on the planet. 

    Outside of that in smaller municipalities that are closer to me in New England we're seeing a delayed tax and ordinance response to what's largely viewed as a negative impact to neighborhoods and community. 

    For example, Vermont's recently proposed a 10% surcharge specifically targeted to STRs and not hotels, while other proposals have sought an outright ban on non-occupied short term rentals. New Hampshire has fought off municipal bans on STRs, but did not go so far as "banning the ban" given the state history of local control, which is illustrated by Laconia NH's ban on STRs outside of designated zones and others. 

    More regionally, Boston's STR regulations have gotten more stringent, moving from earlier proposals that would have allowed out of state rentals, to its current form allowing only home share or owner-adjacent rentals. 

    As many of us have said all along, outside of the designated rental communities with a long history of permitting and licensing STRs, no city, state, or region should consider itself free from the threat of future municipal regulation. 

    Moreover, as we see happening in Vermont, you might see legislatures aware that pursuing aggressive measure less from the perspective of outright bans that de facto bans through excessive, targeted state and municipal taxes. Ex: combined with VT's already high 9% M&R tax, 1% local options tax, and (pending) 9% STR tax you're looking at a 20% rental tax atop an already limited 4-6 months of real world vacancy based on longer spring/fall shoulder seasons.

    TL;DR: the threat is real, be aware. 

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    2y

    All the hotel brands are coming to market with new franchises that have full kitchens, large rooms, pools, laundry, gym, outdoor courtyards and kitchens, are located directly in the dining, entertainment, and shopping districts and adjacant to transportation corridors and have on site staff. Hilton LiveSmart, Choice EverHome, stayAPT suites (500 SQFT rooms with separate bedroom and living area), etc. These are not competitors for larger STR but they are efficient alternatives and competitors to smaller STR. The average length of stay of some of these is near 1 month.

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  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y
    Quote from @Mike Dymski:

    All the hotel brands are coming to market with new franchises that have full kitchens, large rooms, pools, laundry, gym, outdoor courtyards and kitchens, are located directly in the dining, entertainment, and shopping districts and adjacant to transportation corridors and have on site staff. Hilton LiveSmart, Choice EverHome, stayAPT suites (500 SQFT rooms with separate bedroom and living area), etc. These are not competitors for larger STR but they are efficient alternatives and competitors to smaller STR. The average length of stay of some of these is near 1 month.

    The hotels are entering that area making it even more pertinent STR owners create a really good atmosphere, experience, and an all inclusive environment. It's hard to really compete, and as I travel more for stuff I use AirBnBs less and hotels more. I think there are still some markets that do not have that hotel market share or it'd be hard for them to get it at this point. Not impossible, but hard. These are more mid-higher levels spots, or extremely elite spots. Anything that's upper high level the hotels will pounce on and kick you out. 
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