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.
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?
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.
Check out some of these recent news stories:
- Austin bans non-owner occupied short-term rentals
- Council votes down Airbnb approval in Asheville
- Irvine property owners get hit with $500 a day penalty for short-term rentals
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!