With Government Crackdowns, Are Short-Term Vacation Rentals a Doomed Investment Niche?

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Vacation rentals are hot, but are they a good investment?

Summer is coming, and I expect that real estate agents and various platforms will once again be pushing the opportunity to buy into vacation rentals as a form of real estate investment.

I love going on vacation. I love the idea of owning a beautiful property in all my favorite places to visit, like Miami and California. However, I am getting a little concerned about the numbers — specifically, whether real estate investors are setting themselves up for financial disaster when buying into overpriced properties that they may not be able to afford to keep.

You have to give Airbnb a huge round of applause. They have fast tracked to churning millions in revenue, all without owning any properties. They’ve even helped many homebuyers afford their own places by renting out rooms. They’ve allowed some investors achieve pretty high rental rates.

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The Downside of Short-Term Vacation Rentals

The downside for many of those living in these destinations, of course, is that “The Airbnb Effect is pricing out locals. When landlords can get two to four times the rent by advertising as a short-term rental versus serving families on annual leases, it becomes a temptation almost too appetizing to resist. But what if those rates are not sustainable?

Related: The Top 10 Do’s and Don’ts for Airbnb Short-Stay Landlords

Recently, I published this piece on where the real estate market is headed. It’s no secret that when the economy fluctuates, it can drive down vacation activity. That impacts airlines, hotel vacancy ratios, and how much can be charged for short-term rentals. If you’ve got a mortgage and payments on an investment property based on 90% occupancy and renting for $4,500 a month and then the market turns and you are sitting at 60% occupancy and can only rent it for $1,000 a month, how long can you keep it up?

Government Crackdown on Airbnb

Perhaps even more significant is the trend in local governments effectively outlawing or limiting the number of short-term rentals in their jurisdictions. In some cases, this law prohibits short-term rents. In other cases, it is achieved covertly by requiring permits and denying their issuance or putting a cap on the number of rentals in a given neighborhood.

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Related: 3 Easy Steps to Discovering Your Airbnb Income Potential

Check out some of these recent news stories:

Of course, the opposite is true, too. At least one state governor has pre-empted cities from banning Airbnb rentals.

The point here is that while regular annual rentals in bread and butter cities aren’t going anywhere, investors need to be cautious about jumping on fads that could leave them in the lurch and on the edge of a financial precipice.

Where are you investing? Have you run into issues with vacation rentals? How are you building sustainability into your portfolio?

Let me know your thoughts with a comment!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

4 Comments

  1. “If you’ve got a mortgage and payments on an investment property based on 90% occupancy and renting for $4,500 a month and then the market turns and you are sitting at 60% occupancy and can only rent it for $1,000 a month, how long can you keep it up?” If these are the premises, then the vacation rental owner did not complete a competent analysis before committing.

    My community is a prime year-round tourist destination, and lots of homeowners have jumped on the AirBnB bandwagon. The problem with AirBnB-type rentals is that they market to exactly the kind of tenant the landlord tries to screen out when leasing a long-term rental. Long term tenants who like to party are undesireable tenants in the neighborhood. Serial short-term tenants who like to party (and let’s face it, often that is exactly the tenant’s intention when they lease the short-term rental in the first place) are equally undesirable in the neighborhood.

    If the homebuyer needs to rent out a room short-term to afford the mortgage, they paid too much for the house. (Renting a room long-term is different). That is on the homebuyer. In my town lots of homebuyers pay more than fundamental value analysis would indicate the house is worth. They are willing to pay even more if they think they are buying a vacation rental. Then they create comps that help agents perpetuate the vicious cycle. They also price out locals from both buying or renting a home. It is insane that it takes 2-3 times the local median salary to “afford” a local median house in my community.

    In my town we have the strange phenomenon of (according to AirBnB listings) of several hundred short-term rentals in the small downtown area pricing out the workforce, while some local residents commenting on the newspaper’s online forum that if the workforce cannot afford the exorbitant rent to live here, they should either commute long distances or get a job in a community where they can afford the rent, all the while some of these same commenters are clamoring for the city to do something about short-term rentals because of unacceptable parties, traffic, and demand on street parking.

    I manage a vacation rental in an area outside downtown where homes are on 15-30 acre lots. Because of the neighbors’ noise complaints, we had to make it a policy to close the jacuzzi and spa area at 10:00 pm. Given that my community is also a college town, of course downtown homeowners are up-in-arms, between (some) long-term college students who think they are here to party instead of get an education, and short-term vacationers who came to party. Downtown homeowners do not even have the acreage buffer we have.

  2. Kevin Fox

    Hey Sterling.

    Great article! I think the changing legal landscape surrounding VR properties is something not enough people are mindful of.

    Hopefully this blog gets more investors paying attention to the changing legislation addressing short term rentals and motivates them to start fighting these clear infringements upon property rights.

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