Rising inflation effects on STR?

Question

I am in the final stages of acquiring a down payment for my next investment. I was initially planning on using the money to purchase a property in Palm Springs for an STR, but with todays announcement of higher inflation bringing us closer to the panic that comes with a recession I am second guessing. My next option would be a medical office building cash flowing less but a safer investment for sure. I know that there isn't anyone who can predict what will happen, but I am curious what the general population is thinking about the immediate to mid term future of the STR market. I also don't believe I have the reserves to weather the recession storm for more than 8 months.

Dan Maciejewski · Answer

I love this question!  I've been getting it daily.  My take:

1. This will be market dependent.  Markets that have recovered (Tampa Bay area, Phoenix) will fare better than markets that are very far from recovery (Chicago, NY, LA, Detroit)

Source, Knowland Meeting Recovery Report

Meetings and other transient travel track together, especially considering pandemic recovery.

2.  This will be dependent on price point.  The recession is going to hit the places that are at a lower price point harder.  The $69/night Days Inn is going to be worse off than the $512/night Ritz-Carlton.  The people that will have to cut out luxuries to fill the gas tank are going to cut travel 1st.  Especially vacation travel.  The people that may have to not max out their investments are still going to travel.  Their work travel will stay the same and most will still be able to vacation.  This is broad and sweeping but for the most part, should hold true.

So, in essence, it's better to be in a good location that will allow for travel, and it's better to be at a more resilient price point.  If you can have both, great!  I would want at least one.  I would advise against a low-rent STR in Detroit for the next year or so for example.

Timothy Church · Answer

You forgot the 6% HOT to the state of Texas! Another fun hit to your return.@Derrick Cameron Jenkins Everything is always connected and there will be an effect but that is what you plan for. One of the reasons I own properties down here in Galveston is that we are such close proximity to Houston. When the economy is doing great, people who normally wouldn't be able to go on a vacation can come here. When things begin to drop, those typically fly out of Houston for the Keys or somewhere nicer, will settle for Galveston. Overall it is finding a market that has a draw to those who can still afford to travel in a depression of the market. Overall I'll say that returns have definitely leveled off and in some areas dropped compared to the previous years. While even I expected COVID to create a huge drop when it happened, the rentals I manage turned around and beat previous years even with a 45-day ban here on the island. Last year the travel bug from COVID was still going strong and it was a great year. With the economy changing, income has changed but as long as you've planned for that STRs can still be a great investment!

Rick Albert · Answer

I don't think there is going to be a crash, but rather a slow down (which is a good thing).

I've been trying to get into the STR market, but I can't get my head around it. Cities are cracking down, either flat out restricting them or charging fees. Take Galveston, TX for example. They charge a 9% gross fee, Airbnb takes 3%, property management is another 15% (25% total but comparing to traditional rentals), plus utilities, Netflix, and additional wear and tear. Basically an extra 30% in expenses. That doesn't sound exciting to me.

With that said, I believe there is going to be demand for STR. Even if a recession hits, people have been couped up in their homes for two plus years and traveling internationally is expensive right now. Going local with friends/family and splitting the cost of an Airbnb is going to be cheaper than getting hotels. But I will say from research I've been doing, it's all about the experience. Having a boring place is going to be hard to rent out.

Just my 2 cents.

John D. · Answer

For those considering the greater Palm Springs area, all of the owners I know are down significantly compared to last year or the year before.  And rates for rentals were much lower this Coachella.  If you are using revenue numbers from the last couple of years to guide you, you will likely be disappointed.....seems like we are back to a new normal where the rental numbers were 3 or 4 years ago.  Not unexpected but something to take note of.

Kristina Kuba · Answer

@Derrick Cameron Jenkins

Yes, the market is cooling and your mortgage payment is going higher.

I see the benefit for investors that you can attain a retail ready short term rental without paying over ask and waiving appraisal contingency and inspection periods.

I would dig into your STR market and see what drives it.  Is it medical tourism, university tourism, sports tourism, etc?

I know my Tampa investors still have strong short term rental months with Tom Brady returning in the fall and our Lightning team currently in the playoffs!

Mikayla Mitchell · Answer

And one thing is to not take advice from a realtor who is saying to blindly invest. Of course they are going to deny the STR market going down because it’s in their best interest. Listen to investors who are currently in the market you want to go into. From what I hear, STRs are decreasing.

Derrick Cameron Jenkins · Answer

Thanks for that input. I am fairly new to the investing game. I have two residential properties and one Aribitraged STR. I was hoping this next investment would be the one that sets me free from my 9-5 giving me enough room to pursue a more fulfilling life, so I am trying my best to make it a win.

Evan Polaski · Answer

@Derrick Cameron Jenkins, take with a grain of salt, because my crystal ball is just about as great as everyone else's.  STRs are hotels.  Travel will likely go down in recessions.  But my personal view of areas like Palm Springs, is they will always be in fairly high demand.  Coachella for one is likely not going anywhere, and also, people continued to travel during the financial crisis.  Now, if you assumptions are very aggressive, meaning you have no room for vacancy to run a little higher than historic averages over last few years, and/or you are squeezed so tight that any drop in nightly rates will put you under, then it is not the right move.

But I would also argue that medical office, may or may not be any safer.  Recessions effect people's spending on medical care too, and reimbursement rates from medicare has mandated 2% annual drops since 2013, although I am not sure where this currently stands.  While I do feel overall this is, on a whole, safer; just like any investment, it depends on the deal.  Dentist offices certainly shuttered in the financial crisis, hospitals took on less office space and let leases expire without renewing.

Given that I have recently been thinking about Palm Springs airbnb, I am biased to that.  But then again, given that I have recently been thinking about a Palm Springs airbnb may be a good reason to not go that route (since I am likely not the only one).

Jeremy Horton · Answer

I've been in the market for STRs somewhat too, I looked at the southern coast summer of last year and said ahh everything looks ok, I'll come back early 2022. Boom. Places have jumped in price by 40-50% in the last 6 months. Now interest rates are increasing rapidly. I don't like it - I think a lot of people got in over their heads. I think there was a lot of extra money floating around that people used for vacation homes. Most places don't cashflow like they would have a year or 2 ago. 2021 was an anomaly - revenue wise. And lots of places want to base their prices and future revenue off 2021 numbers. I'm not seeing very many good deals. I can make what a hands-on expensive STR would make with a LTR where I live. It's not worth the risk especially since we're dealing with a changing market.

Personally I'm going to keep an eye out and give it 6 months to a year. But already you are "hearing" that bookings are down. On top of that prices are starting to come down. DOM is increasing. That's coming from my realtors both in the smokies and the southern coast.

I don't believe we saw a permanent change in the housing market in typical STR locations, maybe a little inflation but these places got overpriced quick - the demand rose due to low interest rates and money injected into the economy by the Fed and supply simply couldn't keep up. The demand will die down as interest rates rise and the free money disappears. Let the hype die out and we'll be back where we were in 2019 imo

Bruce Woodruff · Answer

My .02 - The STR market will slow down for a while and then return to where it has been since 2020. People have a need to get out and get a change of scenery once in a while, even more when times are hard and they are stressed and depressed (see Covid).

Rising inflation effects on STR?

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