Do you see short term rentals as a long term investment strategy?

28 Replies

I am researching investment strategies and keep getting pulled back to STRs. I know many large tourist towns and cities have/are enacting regulations that may make STRs out of reach for a single investor or company.

Still, I can't help but to think that properly placed and finished STRs aimed and marketed to select guests could make for nice long term holds.

I.E...

Homes near schools for families during visits for athletic, arts or cultural event or graduation. Condos near military bases, or other large business concentration for short term business associates.

Where do you see your STR investment portfolio in ten or twenty years?

Originally posted by @Troy Larson :

I am researching investment strategies and keep getting pulled back to STRs. I know many large tourist towns and cities have/are enacting regulations that may make STRs out of reach for a single investor or company.

Still, I can't help but to think that properly placed and finished STRs aimed and marketed to select guests could make for nice long term holds.

I.E...

Homes near schools for families during visits for athletic, arts or cultural event or graduation. Condos near military bases, or other large business concentration for short term business associates.

Where do you see your STR investment portfolio in ten or twenty years?

It's going to sound like I'm poking holes in your strategy, but that is because I am.  

School related events:  Not a consistent money maker.  

Cultural events:  Not a consistent money maker.

Military and other short term rentals:  probably a consistent money maker.  

There is a petrochemical facility in my town.  I have 24 STRs with 82 beds.  My renters are contractors.  They are the guys you see working on the large erections of steel at a refinery.  They can stay in a motel for a month or two during the job they are working.  Or they can stay with me and save money, cook their food, do their laundry, etc.

20 years from now, I'll probably make less money but my wife and I will have zero percent of work to do with the rentals.  She cleans, I do maintenance.  20 years from now we'll outsource that.

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Originally posted by @Paul Sandhu :

It's going to sound like I'm poking holes in your strategy, but that is because I am.  

School related events:  Not a consistent money maker.  

Cultural events:  Not a consistent money maker.

Military and other short term rentals:  probably a consistent money maker.  

There is a petrochemical facility in my town.  I have 24 STRs with 82 beds.  My renters are contractors.  They are the guys you see working on the large erections of steel at a refinery.  They can stay in a motel for a month or two during the job they are working.  Or they can stay with me and save money, cook their food, do their laundry, etc.

20 years from now, I'll probably make less money but my wife and I will have zero percent of work to do with the rentals.  She cleans, I do maintenance.  20 years from now we'll outsource that.

@Paul Sandhu thanks for the reply. Those suggestion were just off the top of my head. At the moment I am in Texas doing a flip before moving to New Mexico. I live close to the Eagle Ford shale, so I can see your market.

Do you think that you might look into long distance markets to pad your retirement plan or stay with market you know. Do you see or plan to scale?

Short term rebtals arentgokby anywhere. Pick your price point, pick your market, and go. In 20 years I’ll have 10 years left on my mortgages and still cash flowing nicely.
Originally posted by @Troy Larson :

@Paul Sandhu thanks for the reply. 

Do you think that you might look into long distance markets to pad your retirement plan or stay with market you know. Do you see or plan to scale?

No way.  I'm pretty much hands on with my rentals.  The furthest one is about 7 minutes from my house.  I also meet my prospective tenants before they start their contract work at the refinery for drug screens. 

Thanks Paul and Mike. 

I will be starting in Albuquerque. I do see a few potential markets there and would be able to manage locally.

It sounds like ( if I'm correct) that both of you are close to completing your stable of properties. If I can be a bit pesky...

How long did it take to scale to your current holdings?

Are you actually complete, or will you look for more properties?

Did you begin with a concrete plan to complete your holdings?

Yes I think STR's can be a long term strategy. As Paul said you can always outsource more or all of it if needed.

The biggest problem to this strategy is changing rules and laws. They could start heavily taxing these type properties to or just outlaw them as they have in many locations.

I wouldn't advise putting all your eggs in one basket. Have a mix of long term rentals or other real estate so that if something changed you wouldn't be out of business with no income.

STRs do not need to be managed locally. Everything is done from your smart phone whether the property is down the street or in another country. Pick the market with the best returns and the least permits (Gatlinburg Pigeon Forge, Orlando, Big Bear, Kauai) and start buying. 

The question is.... can you think you can handle the customer service and the reviews and will the property make enough money to make those things worth it. The markets I suggested are about the only ones that answer Yes. 

I have 5 log cabins in the mountains that are booked every night year round. I live 3 hours each way which is no different than living 30 hours each way. I manage them from my phone with a day job, a family, 3 dogs, I've run 22 full marathons, I eat lightning and crap thunder. 

To answer your question... I plan to keep them. I sometimes think about getting rid of them but can't find anything that will cash flow nearly as much! 

I don't think anyone can answer this. Most of the vacation rental sites have been around for less than 10 years and the market really exploded during that time. Cities are starting to regulate and tax vacation rentals. Competition is increasing. Hotels (often owned by large corporations) will find ways to fight back.

It could remain strong or they could be driven into extinction. I also like to point out they are typically not as lucrative as others claim. When you consider all the fees included, and the value of your time spent, a vacation rental will often produce less income than a long-term rental. I suspect that will get worse as regulations, taxes, and fees increase.

@Nathan Brooks I agree that is the case with many markets, but going into one that already had a history of private rentals, like many beach towns or the Smoky Mountain area, as just 2 examples, can be really lucrative. In the Gatlinburg/Pigeon Forge/Sevierville area rentals have been around and regulated for more than 40 years. There are more private rental HOMES than there are hotel ROOMS. We have permits, collect lodging and sales taxes, and also pay gross tax. Our returns are significantly better than the long-term rentals we have in the portfolio. 

As with an RE decision, it is about researching the market. In the Smoky's, there has NEVER been a drop in annual visitors, even with the devastating wildfires in late 2016. We are within a 12 hr drive of 78% of the US population and are very family friendly. In the last 2 years, the area has attracted 100's of million in investments from big companies. All this helps reinforce the market as a good investment.

@Troy Larson it is true that laws and changing market could affect short term rentals over time, but that is true of every business. 

The key with any business is watching for trends and being able to adapt. New laws may require additional taxes, inspections or may limit the number of STR. In most cases there is a simple way to adapt your business. Those who move with the trends are successful and often find new opportunity.

Of course with a STR, there is always the option to convert to a regular rental or to sell the property. If you buy in good locations, there is always an exit strategy.

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Originally posted by @Nathan G. :

.....I also like to point out they are typically not as lucrative as others claim. When you consider all the fees included, and the value of your time spent, a vacation rental will often produce less income than a long-term rental. I suspect that will get worse as regulations, taxes, and fees increase.

This may be true sometimes, but the key word is "typically". My mountain vacation rental cabins are taking more of my time than I expected, but they are generating fabulous returns.

But.... I have no exit strategy because you can't really convert a mountain cabin into a LTR. I am OK with this because this is one of those areas where STR's are not going anywhere.

Someone asked about long term plan -- Mine is to invest every earned penny in more properties until I generate enough cash flow to quit my soul-killing cubicle job. Then I can do this full-time in a semi-retired manner, perhaps flip a property or two per year. I am open to LTRs but what I don't like about them is how they eat up capital and don't return enough cash flow to live on.

@Lucas Carl Do you or anyone else on this chain have experience working with Evolve as a ‘property manager’ for vacation rentals? They handle all the booking and customer service front end and only charge 10% and they’ve been growing like crazy on Kauai. I’d love to get some more personal feedback from owners before I point more clients in their direction.

I think there really is two main type of STR. One being vacation houses and the other being @Paul Sandhu does with local in-town rentals. They are similar but really target two different types of people. Yes there will be some cross over but the vast majority of people will stick to one or the other. I'm trying to figure out which one I would want to invest in. 

For me vacation rentals will be for inconstant in rents but are less likely to get regulated out of existence because of politics. Now location really does play a huge part in this and you need to figure out your local area and see where the best places are. For me its basically out side city limits and I want to focus in the county. The two large vacation spots near me are already regulated in the city. One has straight up outlawed STR in the city limits while the other allows it but is heavily regulated. Even the counties now are starting to take concern with them and wanting regulation, though it could be as simple as a yearly permit fee and inspection. If its as simple as that I'm not concerned. 

The other type, like Paul does, is much more consistent IF you can find a market like his that has consistent flow of new tenants. A popular market to target is traveling nurses and doctors for example. BUT most of these are going to be in or around large cities. Paul has a nice niche market for himself but its not common. These cities are much more likely to enforce bans or heavy restrictions on STR in the near future. STR is still new and is disrupting the hotel business so there is a lot of money pushing back and we all know how money and politics plays out. Denver and a couple surrounding cities have already taken steps in regulating/restricting STR. I would look into those and see how they have handled it. I'm sure other cities are sure to follow suite if they have not already. 

Oh and dont forget HOA get to control things as well. One reason I stay away from HOAs.

@Troy Larson

I'm in ABQ and have both STR and LTR. I would be happy to discuss my experience with you if you want to send me a PM.

The STR market appears to be strong, and it also appears at this point that ABQ gov is not going to shut them down. We don't have a lack of housing here so STRs are not impacting rental rates.

ABQ has required us to collect lodging tax recently, and AirBnb does collect it for you.  

For all STRs, remember it is active business income, not passive rental income, so depending on your tax bracket plan to pay 25-30% of income for your self-employment federal and state income taxes, which is a significant reduction of earnings.  NM taxation is a PITA to work with by the way.  

I'm also noting a saturation of STR in the popular areas, and a resultant drop in nightly rates to stay competitive. We have a very inexpensive studio unit which stays booked, if you had a full house I think you might have lower occupancy. Many travelers are singles or couples.

My strategy is to always be able to turn a STR back into a LTR if needed, and still be profitable. That just makes the most sense, and gives you the most options.

I would make sure you buy properties that also make sense when you run the numbers for a long term rental so when the city changes the laws on you, you can convert it into a profitable long term rental.

Also I wouldn't buy a condo to AirBNB since most condo associations are going to pass HOA restrictions faster than the city will.

Take advantage of AirBNB while you can but eventually the city, your condo association, and "Big Hotel" will force you to stop doing short term rentals.

I expect my rental portfolio to still be cash flowing wonderfully for me in 10-20 years, because I've bought in markets that have had consistent tourism and a long-term reliance on vacation rentals as part of the local economy, which long predates VRBO and AirBNB.  The county taxes me, I pay my taxes, I house tourists who spend lots of money in the local town, everybody's happy.

The one thing I'll want to move on from is the day-to-day time/attention that they take.  It's not much, but at some point soon I want to be able to - oh, travel internationally and not worry about replying to guest messages promptly.  However, my solution will be outsourcing the work - not getting rid of my properties.

I'll probably start diversifying into other forms of investment soon, ones that are more passive - but right now I'm fine with the workload, and REALLY happy about the returns. (@Lucas Carl is right, it can all be done from your phone - though I personally prefer my laptop - and I do it from 2000 miles away)

The other thing is, I get a lot of personal satisfaction out of my properties.  They're not just investments, they're places I personally enjoy and find appealing, and I've spent time in each one of them making sure they're comfortable and attractive.  This is something I enjoy doing, and feels a lot more personal than just buying a house for a LTR where the renter gets to put their stamp on it, not the owner.  And ultimately, that's why I expect to stay in this niche.

Wow. Great discussion.

I understand the local government and lodging industry push back against STRs. With the advent of the one stop shopping sites and the rise in popularity of STRs, the big boys are waking up.

As far as governmental regulation, I think STRs owners and operators will have to build expenses into their fees and call it " the new norm". Hopefully they wont try to choke STRs out of their markets. I think STRs serve a niche in any market.

As far as lodging, I think after the shock of another player and the realization that STRs don't serious effect their room nights, they may back off a bit. A savvy Investor would possibly have G.M. s stay free for a weekend to try to draw off the hotels tight nights to fill empty beds.

Has anyone built a business around STRs? Does anyone have experience with a syndicate or LLC based around STRs?

I started in this business 15 years ago renting out Miami and NYC homes and apartments for others. Made a ton of $ on commissions, and had no problem getting booked (even before Airbnb and HomeAway!). However, both those markets now BAN all short term rentals, with a few exceptions. So I wouldn't invest in an area where that may happen again. 

We now own 7 vacation rental properties in my childhood vacation area of the Adirondack Mts. They do get booked year round as we are within 4 hr drive of NYC. There will never be a ban on VR's as our area needs and encourages the tourism. 

The longer we own them, less $ is spent on renovation/upkeep and more $ is made via good reviews and repeat guests. We also have more equity in the property. So yes, long term is the goal. We also hope to sell them as an established business, not just a vacation home. 

The sharing economy is the way of the future. The data shows more and more that people care less about ownership, it's all about access. I plan to continue building my portfolio of short-term rentals. 

The question to ask yourself is who do you want to serve? Find a location that suits your ideal customer and create a UNIQUE experience for them, whether its the location, the property, the amenities, the decor, the extras you offer, i.e. bottle of wine & chocolates, etc.