6 Reasons Short-Term Rentals Aren’t a Sustainable Investment Strategy

by | BiggerPockets.com

Short term, Airbnb-style rentals may be popular, but that doesn’t make them a sustainable real estate investment strategy.

Airbnb may wind up winning the legal battle for short-term rental landlords in many areas. Still, that won’t ensure the sustainability of this strategy for buy and hold or retirement investing. The high rents may be alluring to investors, and the destinations can be attractive. However, I see at least six flaws that could cause Airbnb investors a lot of pain down the road.

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6 Reasons Short-Term Rentals Aren’t a Sustainable Investment Strategy

1. Short-term rentals depend on the tourism industry.

These rentals and their high rates rely on tourists and some business travelers. We’ve been through plenty of fluctuations before, where when the economy winces, tourism grinds to a halt. This could be due to terrorism, a natural disaster like a hurricane, or simply the economy tightening. That can evaporate demand for these units fast.

Related: How to Use Airbnb to Travel & Live for Free in Retirement

2. Short-term rentals create artificially high rental rates.

These types of rentals are often marketed at two to three times annual rental rates. Those rates simply aren’t affordable for local workers. This causes two issues. First, it drives out key workers like good teachers, law enforcement, service workers, and entrepreneurs, who just can’t afford to live there. This can have a long-term negative impact on a location. Secondly, these rates cause buyers and sellers to trade properties based on these artificial and often temporarily inflated incomes. When that income dries up or pauses, many landlords will find themselves underwater and in negative cash flow on an asset that is far overpriced.

vacation-seasonal

3. Short-term rentals increase landlord competition.

Now that everyone can be a landlord, many are. That’s an enormous amount of competition. When things get tougher, it will be a race to the bottom of who can charge the least.

4. Short-term rental gain are often offset by high fees.

Higher rents on short-term rentals are often offset by higher management fees as well. Airbnb, VRBO, and HomeAway all charge fees. Professional managers can sometimes charge as much as 30% on short-term rentals.

5. Short-term rentals don’t support reliable, long-term tenants.

Savvy buy and hold investors prize long-term tenants. Investors who have tenants who stay for years save money on marketing, screening, cleanup, and turnover costs. When you rent to people only staying for a week or a month at a time, who have no vested interest in taking care of your property, that can lead to high costs for cleanup and repairs between tenants.

return-visit-vacation-rental

Related: With the First Airbnb Landlord Conviction, Should Vacation Owners Be Worried?

6. Short-term rentals provide inconsistent cash flow.

In some popular vacation destinations, it is possible to have your unit booked out for 12 to 18 months in advance. However, most landlords will struggle to piece together the occupancy puzzle—with some tenants staying for days, others for weeks, and a few for months. Will you still be profitable if you only manage 30% occupancy for the year?

Summary

Short-term rentals are alluring. Having one in your favorite vacation destination that you may go and use for 3-6 months of the year yourself may not be a terrible idea. You’ll enjoy using it. Those can be your best returns. However, those looking for long-term, consistent passive income and optimal returns may be best served sticking with annual rentals.

What do you think? Would you use Airbnb as a primary investment strategy? Why or why not?

Leave your thoughts below!

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.

42 Comments

  1. Audrey Ezeh

    Thanks for another great article Sterling! I’ve wanted to explore that market but my criteria has always been to only buy if it cash flows as a LT rental. I’m in a small market and it is getting quite saturated with airbnb rentals. I completely agree that it is not sustainable in the long run! Thanks for shedding more light I on the niche.

  2. David Krulac

    Sterling, This is the best article that you have written, thanks for your continued efforts. We’ve gone the opposite way seeking long term tenants who are staying long term. We’ve had tenants stay over 30 YEARS, not 30 DAYS. One said that the only way they’re leaving is horizontal! We had a 21 year tenant, who wouldn’t let us either paint or change our floor coverings during their entire tenancy. Other tenants have built sports courts, or added improvements to their rental at their costs. No vacancy for decades reduces costs including the no rent vacancy period and turnover rehab costs. And vacancy is probably the highest cost that nobody ever talks about. We also have the tenants pay most if not all utilities and bring most of their own appliances (reducing our repair and replacement costs) as well as their own furniture and accessories. Short term rentals have vacancy built in as just one more cost added to all the other costs, including utilities, appliances and furniture.
    David Krulac
    Guest on Bigger Pockets Podcast #82

  3. John Underwood

    I use my VRBO to pay for my Lake House. Instead of a bed and breakfast for tourist. My house is for people that want to go on vacation. I am also close to a local University that brings in parents for graduation and other college events such as football games on the fall. Surprising to me people like to come to the lake in the winter and cozy by the fire with a view of the lake. There is also fishing tournaments that bring on pro and amateur fisherman. We make good money but I was happy with it paying the mortgage and utilities. I see your point about random STR in certain areas, but if you get one where people are willing to vacation they will pay top dollar and the VRBO croud takes good care of hour house too. I also use Airbnb but it isn’t very popular in my area maybe because my house is set for high prices vs the lower or bargain price. All I can say is Homeaway keeps my house slam full. I wish the other listing sites worked as well for me so that my eggs weren’t all in one basket. The key I believe is location. If you are close to attraction and not just another place downtown they will come. I think water access or view is a huge plus. Ocean, lake, river etc. You don’t have to buy in you town either. You might want to buy in an area that you like to vacation at. If you like an area changed are other people will want to vacation there also.

  4. Rachel Luoto

    As a short-term and long-term owner, I agree with #6 the most and #5 the least.

    For me most of this is mitigated by making my short-term rental a short-term play.

    Thank you for sharing!

    To the curious, episode 229 goes into short-term rentals for a more positive view

  5. Dede Christensen

    Great article! It’s a puzzle for me, as I rent to long term tenants. They are picky when it comes to how the furniture looks, feels, etc. . In the future, to avoid decorating diversions that are costly, I will make sure they see it before they sign. . …..I agree with #5 and 6. The Hawaii market is flooded with vacation rentals.

    • Rachel Fazio

      Hey Ben –
      As usual, I agree with you. Some of the things this article brings up are true for certain areas. They are not true for where I am in Little Rock. There is literally 0 tourism here. All we have is travelling medical professionals and individuals from other places in the state who are coming in for medical treatment. There may be an occasional business traveler or student or whatnot, but that’s really it. I personally AirBnB out my home and all of my guests have been extremely courteous and cared for the property well. This is all also a completely different ballpark from having long term tenants; they have almost nothing to do with each other. (With the exception of me now trying to get one of my summer law school guests as a long term tenant, but that’s another story!)

  6. Al Williamson

    Sterling, you’re the man but you miss so much of what a landlord can do with a short-term rental.

    All your cons can be fixed. The world of possibilities is so much bigger than rentals in destination locations. Those areas are red oceans – very competitive.

    But… There’s another side. I’ll need to guest post to explain.

  7. I am going to have to disagree on a few points. While there’s could be social arguments against short term rental (making rents more expensive,) in terms of investment and returns, short term rentals can be exceptionally profitable. I have three apartments in the south of France that I only rent short term and what I make over theee months in the summer is far more than an entire year at market rents. You have no losses due to evictions, minimal security risk (AirBnB provides protections,) and I add a cleaning fee that covers professional cleaning after each guest. I also don’t have to worry about criminal screening (AirBnB does random background checks,) and since guests can be rated by hosts, there is less of a guessing game when it comes to guest quality – if guests have bad ratings, I won’t rent to them.

    In locales like San Francisco, the high rents, the tight supply means that houses are appreciating in value – specifically because of the high rents. If rents are “affordable” that means less equity growth.

    The eviction and marketing risk of long term rentals can’t be overstated: an empty long term rental means that it’s on you to find new tenants and if you ever have an eviction in a state like California or New York – it can mean months and months of zero rent plus eviction expenses and the inevitable trashing of the property that occurs. With AirBnB, I don’t have to market – I even use their smart pricing feature to ensure my prices continually adjust due to demand in the area.

    Finally, associating short term rentals with just tourism is missing a trend – business travelers are increasingly using AirBnB. I have to visit Cupertino monthly in connection with my work with a famous fruit company and they generally put me up in a nearby AirBnB. Other companies are starting to do the same. Really hotels are the risky investment these days!

    However, your points are definitely valid in many markets. I wouldn’t want to rely on short terms in a market like Des Moines or Denver. I also would add a bit to your point by introducing this qualifier – not all rentals are ideal for short term, it really is location and market specific – but some definitely are more profitable as short term.

    Great article though. I don’t agree with everything but you make valid points. I think the key area where we do agree is that short term rentals ought not be a panacea – but just one possible arrow in our investment quiver.

  8. Duane symanietz

    I don’t agree that rents would be artificially high or there would be too much landlord competition. The free market is setting that price by the fact people are willing to pay it. As far as too much competition , I would ask whats stopping you from using an Airbnb style rental? I think there will always be a market for long term rental but the market is demanding short term rentals in the same way they are demanding services like UBER. Municipalities are resisting change but I think will give way to Market demand like the city of Austin just did to UBER because people want these services

  9. Jessie Huffey

    The one thing no one has mentioned thus far is LIABILITY and it’s the biggest reason I decided not to pursue short term rentals. Homeowners Insurance will not cover you or your home if they are aware it is a short term rental. There is a special insurance you can buy from HomeAway instead of homeowners insurance but it is EXPENSIVE and may not even be adequate in many cases. Investors make themselves much more vulnerable to damage/ personal liability if they have short term rentals, for that reason alone it is a very risky investment strategy.

  10. Paul Smith

    I prefer the STR model. It works for my market. I went from $2/sf to over $5/sf (LT vs STR). My STR rentals are at 55% occupancy. I’ve turned my cleaning into a profit center for me. I started with 1 unit, up to four, and will do another 4 in the next three months.

    I’ve got less wear and tear on my units. Parking which would add $200/mth for most of my tenants is a non-issue for STR guests. I love the STR model, and in my market I really don’t see any reason why I can’t do this long term.

  11. Mauricio Tassara

    I found your article to be very interesting. I live outside the US and decided to purchase house with a nice double lot in the north miami hollywood / Florida area . I invested in a large pool and did some lanscaping. It is a walk to the beach property. Although in general have been building a longterm rental business through the acquisition of condos , i decided to buy this FL property because i like to go there a few weeks per year and enjoy the FL sunshine and at the same time i can rent it for short periods at very reasonable prices. This more than pays all expenses including management fees. If idid not apply this short term business model i could not use it when ever i wanted to . Plus , Florida has warm weather all yea round so there is a lot of interest from people coming from north and south. I have been doing this for 3 years and can not complain. If theres is demand for this service then i do not think that it is an artificial business model. Technology has helped very much.

  12. Sterling .. Some points well taken but coming from someone who has had several SFR and now one short term rental the short term tenants take much better care of the property. The overall wear and tear is drastically different from my long term rentals compared to short term. On a short term rental entire portions of the house often go unused — like the kitchen, extra bathrooms/bedrooms, etc. This means less maintenance costs.

  13. Terrence Evans

    I normally don’t post here but personally i think there are a lot of flaws in this piece. And I think much of what you say may be market dependent. Let’s go thru some of them.

    reason #1 – Well not really. There are several uses above and beyond that as a vacation rental / tourist. Many people like to use STRs as alternatives for business travel for example. Or what if you needed to stay in town for a few weeks because of a medical procedure or to help out people who are undergoing said procedure. Sure you could stay in a hotel. Sure you could stay at an extended stay hotel. Or you could stay at a STR.

    reason #2 – Here in LA, rents are going up for lots of different reasons and STRs are well down on that list. Besides, the normal working folks you mentioned aren’t staying at a STR anyways for the reason you stated. Unless they are doing so because their credit is bad.

    reason #4 – sure but that isn’t a reason to not do this. Its a cost of doing business. Or you find another way.

    reason #5 – again, sure.. but as long as it is your business to make sure your property is tip top shape before the next rental, you suck it up.

    reason #6 – legitimate concern but going back to #1, if there are lots of reasons why people would rent your STR, then that concern gets mitigated.

  14. Keith Weigand

    One reason STR are higher rates is because we have extra expenses then the traditional LTR. For example, utilities, cable, furniture, internet etc. If there is any damage (as mentioned), it gets taken out of their security deposit. There are some challenges with STR but there are also solutions. Most short term renters are usually more responsible people. They have the means for a vacation with higher rates as opposed to any class D and some class C properties. Good article but I disagree with many but you do make some good points as far as tightening regulations.

  15. Darwin Crawford

    I just got rid of my last AirBnb place. Too much work, too little money. I split-test two condo’s that I have in the same building, one as a normal rental, and one as AirBnb. No comparison. I was full-time AirBnb, now not one. Not nearly the game its cracked up to be. Crazy expectations, purchasing supplies, managing cleaning crews, forget it.

    This is nice, Scottsdale AZ property that rents to nice people both short and long term.

  16. Nathan G.

    Sterling, your article is correct that investors MAY get better results from a long-term rental. In my experience, long-term rentals produce a higher NOI. I see a lot of people claiming it’s not true but they don’t seem to be providing a lot of evidence.

    A couple years back I was managing 200 long-term rentals and 70 short-term. Our tourist season runs four months with pretty high prices. During the off-season the vacation homes lost money compared to long-term rentals because the owner still paid for utilities, management fees, and other expenses but they had to rent them monthly at a much lower rate just to keep them full. When you consider vacancies and expenses, only a few of the vacation rentals managed to earn a higher return than a comparable long-term rental.

    Podcast 229 had a lot of good information but failed to address the negatives, probably because the guest has never owned or managed a long-term rental. Here are some points to consider:

    1. Vacation rentals are far more work intensive. If you manage it yourself, it will take far more of your time than a long-term rental because you are constantly booking new reservations, checking people in, answering questions, checking people out, cleaning and inspecting, dealing with utilities and contractors, etc.

    2. If you hire a manager, say goodbye to 30 – 50% of your income.

    3. Those $300 nights are pretty sexy but expect a lot of vacancies. In the off season, you’ll have to lower your rates to keep it full but your expenses will probably go up, which could easily offset the high income you earned during the peak season.

    4. These investors have been working AirBnB for five years or less in a market that’s been hot the entire time while using a new, sexy marketing/booking service. There’s a very good chance this will change in the next five years and these success stories could come crashing down. Remember Napster? Pets.com? There’s nothing wrong with considering a new system and trying it out but be aware these new services have a tendency to kill themselves off with new fees, heavy regulation, or when a better product comes along. I’d rather build my wealth using systems proven by people with 30+ years in the business.

    5. Know your market! My market is saturated with small guest houses that rent for $150 a night so they experience high vacancy rates. However, my friends have a beautiful retreat that sleeps 35 and rents for $6,000 a week and they book solid for four months straight because there are few properties that allow multiple families or large groups to gather.

    There’s far more to it (e.g. tax benefits) but the key point is that it’s foolish to say vacation rentals will always be successful or that they will always fail. If you know the market and buy smart, a vacation home might be a good investment. In my experience, long-term rentals are a far better vehicle for building wealth.

  17. Shelby Pracht

    Great points to consider. I have both long term and short term rentals. Many of your points are SO dependant on your location though. In my area, I’m lucky to break even with a long term rental, where as I am cash-flowing an average of 1000-1200/per month with my Airbnb.

  18. Andrew Mitchell

    In general if you don’t know what you are doing with short term and do know what you are doing with long term then you make more money with long term… you make your money in your niche.
    I suggest you pick a vacation rental area and compare redfin/zillow to airbnb on recent sales. Yes you will see homes that don’t make economic sense… but you will also see homes that charge 0.1%-0.2% of the home value per night on a home worth $1M+ where you don’t have to worry about a new roof costing you a year’s net income.

    With OP’s points…

    1) Short-term rentals depend on the tourism industry:
    Down markets affect fly-to destinations.
    Those vacationers in a down market switch to drive-to locations.
    Hence you hedge on market ups and downs by picking drive-to locations.

    2) Short-term rentals create artificially high rental rates.
    How is this artificial? People will continue to take vacations… and companies have just about stopped building hotels. Is there an artificial shortage of hotels? No. Vacation rental properties are better for the vacationer. The internet isn’t going away, and that is what is allowing the marketplace to help short term rentals.

    3) Short-term rentals increase landlord competition.
    Increased competition on both sides of the market brings you to a fair value faster. Don’t compete with people who bought a vacation home for themselves and rent it while they aren’t there… i.e. don’t compete with people who aren’t in it for cash flow. Find a niche where demand outstrips supply.

    4) Short-term rental gain are often offset by high fees?
    Expenses and fees are high… yes… Management fees are high, we pay a cable tv bill of $200/mo for each of our short term rentals… but we gross $200k-$400k/year per property, so I’m ok with that.
    So choose the right property (i.e. to do short term properties you have to do your numbers, just like long term)

    5) Short-term rentals don’t support reliable, long-term tenants?
    Good, no bad tenants that take months to kick out.
    You pay the management fees so you don’t have to deal with this.

    6) Short-term rentals provide inconsistent cash flow?
    When a short term tenant cancels you lose 2% of your annual income with no extra costs to find new tenants (and you get to enjoy a nice weekend in the mountains).
    When long term tenants go away you lose 20% of your annual income for the property by the time you waste time searching for new tenants.
    The law of large numbers demonstrates short term rentals will give you more predictable income. It won’t be the same every month, but it is much more predictable than long term.

  19. Marc Silsbe

    Alright First Post, here goes. I have a triplex that’s a LTR and a townhouse for STR. I manage the LTR by myself and the STR is managed by a company that rents out executive suites where you can rent by the week or month. The tenants I’ve had so far are people that have had insurance claims (eg. flooding / fire) tech workers and people between mortgages. The STR company has two packages a 70/30 split (where I get 70) or they’ll pay me a flat rate where I basically break even. Over the last year I’m cash flowing just over $800 a month. My friend has an equivalent property that she rents as an LTR and is barely cash flowing.

    Now the best part. I basically just have to go to the mailbox and get my check. The company will call me if lets say the dryer needs to be fixed and they give me the option on whether or not I want to have it repaired myself.
    The STR has a cleaning service twice a week and as tenants move out I don’t have to repaint worry about holes in the wall from previous tenants bringing in their own things, etc…. With furnished apartments you always have the option of getting rid of some of your personal furniture and upgrading your own home – lots of great perks like that. For grass service and snow removal which I pay you can have that company apply any discounts to your own personal property.

    I also don’t think you need to have an STR in a vacation destination to be successful – if I did it would be Orlando where its busy all year.

    For number 5 and 6 I did my homework first and new the supply demand and I just keep a couple of extra months rent in the bank to take care of the fluctuations.

    For #4 I have no hesitation on giving them 30% if they can keep the place filled over 80% of the time and I don’t have to speak with anyone, drop off keys, etc its worth it to me. I work full time and just want this property to take care of itself.

    Thanks for writing the article.

  20. Mike Henrie

    I understand what you’re saying, but I have some personal experience in this particular industry. I’ve been renting my little log cabin on HomeAway and AirBnB for 12 years now. Originally it was a necessity as I had just enlisted in the Air Force and needed to offset the mortgage. It has been paid off for 7 years now and nets $10K+ each year. I love to wake up in the morning and see that another vacationer has requested to stay. With two or three touches of the smart phone I make several hundred dollars. Combine that with a free vacation destination for my little family and it’s a win win.

  21. Nancy Bachety

    Long term rental owners will love it when the short term rentals drive up rents due to less inventory. How many times have you read that more and more ltr owners are considering or have shifted to str? Of those that do, if they aren’t in the right area or haven’t done their numbers correctly, they’ll write articles like this.
    It’s not a personal issue, it’s a personal choice, iow it’s an investment choice. You say notes, I say commercial property. You say str, I say ltr. You say (fill in the blank) I say (fill in the blank). Take away: find what works for you. Besides that, what’s the harm in rotating between 3 or 4 vacation homes in a year while writing off your travel, furnishings and expenses?
    This article title is as ridiculous as the previous post declaring not buying real estate for its tax savings, but it achieves getting conversations and comments posted.

  22. Doug Gangi

    I own a second home in Salt Lake City near the ski areas, and using it as a vacation rental has been a great investment so far. We bought the home with the primary intention of using it for ourselves as (1) a ski retreat for 2-3 trips per year (including spring break); and (2) as a reprieve from the hot summers in Phoenix (generally spend 4-6 weeks in the SLC house in June/July). But we didn’t want the house to sit empty the rest of the year, primarily because we were afraid that a frozen pipe or other small problem could turn into a real disaster. We decided we wanted a home that could be rented out while we were not using it.

    So we shopped for a home that was “legal” for a short-term rental in that it complied with all of the local laws and ordinances, as well as the HOA CC&R’s. And we shopped for a home that is within a few minutes of Alta, Snowbird, and the popular SLC ski resorts…which brings a LOT of winter visitors.

    And so far, our experience has been great. Although we give up almost 40% to the property management company for their services, we net approximately $28-$30K per year (after fees). The winter months of December – April bring in most of our revenue, and because of the proximity to the ski areas we can get upwards of $500/night. The expenses of owning the home, including mortgage, HOA, utilities, cable, internet, trash, etc. total about $21K/year…so with net rents we actually make $5K. That’s not much, but if you consider that the house is being rented ONLY when we are not using it, that actually means we are ahead $26K every year (the $21K we would normally lose plus the $5K we actually make).

    And then there’s appreciation, which we have gained about $80K in the past 5 years.

    So while short-term rentals might not be a great investment for the sole purpose of investing, I think they are a great investment for a home that you will use part of the year that also happens to be in a popular tourist destination.

    We intend on purchasing one more vacation rental, this time in the Caribbean, and we will absolutely do the same thing as we have done with the Salt Lake City house – use it a month every year, and then rent it out the times we are not there.

  23. Hanan Kim

    Great article. Legalities/City Code/Ordinance issues are probably the greatest risk to short term rentals, especially in areas with high purchase prices. It’s not a safe investment strategy if not done legally. You may cash flow initially, but when the City comes knocking on your door, you’ll be left with a high mortgage obligation that long term rents will likely not cover creating a negative cash flow situation.

    I have trouble with #6 – short term tenants will will likely take better care of your property than long term tenants with alot less wear and tear. The kitchen is lightly used if at all in most cases. Also, with cleaning services in/out regularly, the homes tend to stay in better condition.

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