I am currently in the search for my first vacation rental. The question I have in my mind is what will happen to the occupancy rate and ADR if there is an economic downturn in the near future? Obviously it will drop off, but how drastic?
Does anyone have this experience in STR/ Vacation Rentals during the 2008-2013 years or sometime similar?
I guess I am trying to determine if rates the past couple years are high because the economy is high or if this is the norm.
Thanks for any experience you may have!
This is an interesting topic. I think there will be some areas of the market in 08-13 that will translate to the next downturn... but I also believe that as a whole, the sharing economy is changing the way the next generation is living and investing. With the arrival of Airbnb, and other like platforms, people are finding it cheaper to travel. I wouldn't say this will make the industry bulletproof. But I do think it will make a downturn a little more tolerable.
I feel this depends on the type of destination & how people travel to it.
If it's a place that most visitors travel to via plane you'll get hit pretty hard during a downturn. If it's within driving distance of a large metro then you won't see too much of a hit.
If it's an activity like skiing that also requires a $600/yr ski pass + gear rental you'll probably see a bigger downturn than if it's an area people go backpacking/camping for nearly no $$. For "budget activity" destinations you might even see an increase in traffic as people cut down on more expensive trips.
I'd expect my ski condo in Summit County (near Denver) to get hit 15-25% by a 2008-like crash.
@Brandyn Kemp - I would consider a property that has a different appeal to different people. Something close to hospitals, business district, tourist areas, natural beauty. A lot of the time this will be close to the urban center. Point being, if there are multiple reasons people might seek your property out, you will be less affected by a downturn because (hopefully) your property has protected itself with diversity.
Think of retail. You have high end stores like Macy's and the like. Middle of the road is Walmart. On the low end you have the dollar stores.
When economic times are normal, all three types of retailers do well.
When there is a downturn in the economy, the Macy's people switch to Walmart, and some of the Walmart people go to the dollar stores.
When the economy is good. Some Walmart shoppers may switch to Macy's, and some of the dollar store people will switch to Walmart.
So try to position your rental like WalMart is positioned in the retail market. It will have its customers regardless of economic conditions. It's just that the type of customer it has will change depending on economic conditions.
Once again @Erin Spradlin hit the nail on the head. I personally do STR's instead of VR's. I personally call VR's places in vacation destinations and STR's places in urban areas and lots of traffic year around. I know most people turn their VR's into corporate rentals during the down season. I'd rather have an STR and have no down turn at all. There are plenty of cities like this.
Great feedback so far guys, good perspectives.
The location I am considering is in driving distance of large populations and multiple states, and it is in the mountains. However, I'm currently considering a larger property with 5-6+ bedrooms; mainly because more rent per night with only a small increase in expenses compared to a 1-2 room property. This specific property will be a $400-500 ADR; my logic says that larger groups, 2-3 families can share rental cost so the property is more affordable for them, plus they stay together. Its not the highest end out there, but I wouldn't consider it the "wal-mart" of properties either. My thinking is to not buy a 2-3 bed because there are 100's of those types in this area, but to differentiate or buy something more unique.
I had the same thoughts as you about 6 years ago. We had some 2 BR and 3 BR 1 bath STRs and realized something. It's not the number of bedrooms in a house that determines how many people can stay there. It's the number of bathrooms with toilets and showers.
So we bought 2 houses on the same block, a 2 story and a 3 story. 15 real beds, 2 sofa beds, 6 bathrooms with showers and toilets, 4 washers, 5 dryers, 4 full refrigerators, 2 dorm fridges, 2 poker tables, 1 kegerator, 13 cable televisions, you get the idea.
The above 2 houses rent out, but not that often. When they do it's between $600 and $1200 a week. That kind of rent pays for the house in 6 months. It's hard to find a group of 5, 6 or 7 guys that will stay under the same roof in a STR. Each of the 2 houses make as much money as our 2 and 3 bedroom houses do in a year. If I could do it all over I would buy several 2 or 3 bedroom houses next door to each other or on the same block. Vacationing families can each have their own residence but still be next door or very close to the other vacationing family they are travelling with.
After we bought those houses, we bought 4 more that were on another same block. They were all 2 or 3 bedroom. They bring in as much each year as those first two houses, but the purchase price was about 40% less.
@Paul Sandhu You made an interesting point when you mentioned the # of bathrooms. Not sure about your market but here in Tampa the average party size is 4.8 people and guests shop on the perspective platform by beds predominantly.
The bests investment will be the one that works not only as a STR but a LTR if had to. One of the keys here is to look at the cost of ownership on a 3br/2bth vs 2br/1bth. Here in Tampa that could be 75-100K price difference in those two homes. 4.8 ppl can comfortably fit into a 2br/1bth home, the cost to acquire is significantly cheaper, and the difference in yearly earnings is so insignificant that it doesn't make sense to splurge on the larger units unless the investor is riding an equity wave and plans to BRVRRR.
One thing to consider when purchasing a vacation rental is to look at the amount of domestic tourism, or stay-cationers that visit the area. If the vacation rental is in or near a metropolitan area, your chances of high vacancies during an economic downturn are far likely to be lower. An example would be a VRBO in Miami vs a VRBO in Hilton Head.
One more factor to consider would be the amount of international tourism the subject area has.
Originally posted by @Brandyn Kemp :
The location I am considering is in driving distance of large populations and multiple states, and it is in the mountains. However, I'm currently considering a larger property with 5-6+ bedrooms; mainly because more rent per night with only a small increase in expenses compared to a 1-2 room property.
Properties of that sort definitely get higher nightly rental amounts, but be sure you consider what your vacancy rate is likely to be, since there's going to be a significantly smaller number of families traveling together than traveling separately. Also, consider the impact that school will have on a property that is geared towards families. Yes, groups of adults travel also, but carefully consider how much demand you're likely to get in each season. (I'm running into this with my 3/2 STR outside a national park - booked solid all summer, but once school started back up, demand for that many beds dropped off, and I had to figure out how to attract more couples to fill the gaps)
Once you've got a decent idea of vacancy, crunch the numbers to see what kind of ROI you can expect on a big house like that vs. something smaller. In the market where I'm currently shopping, I got stars in my eyes about some of the annual gross rents for bigger houses... but when I looked closer, I realized that I'd be paying twice as much for a house that wasn't yielding twice as much gross rents (not even factoring in higher operating costs). My $ has a higher yield with a smaller house, in my market.
For my 5 BR property at Lake Tahoe, CA I really didn't notice a downturn during the recession. I also didn't raise my rates during that time.
I read @Paul Sandhu reply before I saw who wrote it then I read who wrote it and I should have known. Paul does it again. He’s spot on.
If you’re looking at something for 800k with a huge note that’s $500 per night per couple for 8 bedrooms.... you’ll get spanked. If you’ve got a beautiful private home for the same price as a crappy hotel.... you’ll live.
Not psyched about all the downturn talks things are too expensive it’s true.
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