AMA – Are Short Term Rentals Still Lucrative?
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. Today is another AMA episode – Ask Me Anything. I’m here to answer your questions. If you have a question you think will interest a broad audience, send it in and I’ll answer it live on the air. Send your questions to Victor at VictorJM.com.
Today’s question comes from Emmanuel who asks, “Are short-term rentals still a profitable niche, or should investors pivot to long-term leases given regulatory changes?”
Well, Emmanuel, this is a great question. When I think about any product, whether it’s a hotel, a construction company, a restaurant, a service business, or a short-term rental, I’m thinking through the lens of product design. A product is designed with a very specific customer in mind. Real estate, of course, is hyperlocal. So, for example, if you’re near a hospital, and that hospital has a steady stream of traveling nurses, maintenance technicians, or families who are caring for someone in a hospital, there might be a solid thesis for delivering a product that solves a problem for a specific customer.
What I don’t recommend is you take a risk and just buy any property, put it into the general pool of short-term rentals and hope for the best. If you’re in a vacation area with seasonal traffic, then the business case is more difficult to determine. A short-term rental, like any other business, follows the law of supply and demand. You can do a market study to determine demand patterns, and there’s no shortage of great tools out there, like AirDNA, that can give you very accurate estimates of nightly rates on a seasonal basis within a geographic area.
However, none of these tools will forecast the future supply which is a problem because short-term rentals have a low barrier to entry. It’s like assessing the number of Uber drivers in a fleet. That can change quickly. As more supply enters the market, the competition increases and prices fall.
Many cities were slow to figure out how to handle short-term rentals. The proper framework for land use is the Zoning Code, which can be clear in some cases and ambiguous in others. The proper way to address land use is in the Zoning Code. Unfortunately, some cities have enacted special ordinances, which can make the regulations even murkier than before. The problem with an unregulated environment is you don’t know if and when the rules could change. So, I would suggest researching your local short-term rental ordinances to ensure that you are compliant.
Some owners take the risk of noncompliance if the ordinance is not really being enforced. However, that can present a series of problems such as finding yourself without property insurance or having insurance that won’t cover you in the event of an injury or loss. You want to invest in an area where the rules are clear and there’s a high enough barrier to entry for additional units. This helps eliminate the race to the bottom that is so prevalent in many markets.
Also, some jurisdictions do allow existing short-term rentals but put a moratorium on new ones. For instance, Florida Keys is one such place. Certain national parks also have a moratorium on new construction in the park and the lack of infrastructure in those areas makes new properties more difficult and expensive to develop. Hence, there’s a higher barrier to new suppliers entering the market. It’s worth remembering that exactly where regulation is seen as a barrier to doing business, it can also be seen as a barrier to competition.
Last but not least, regulation alone should not be the only criteria. Rules can change, even after they’ve been implemented. If a new short-term rental ordinance has just been implemented, it’s going to take some time to gain experience under that new ordinance before changes are made. Most cities don’t usually dream up a new set of rules out of thin air. They generally take note of existing rules from other communities and leverage the experience in those places that have paved the way.
To sum it up, I definitely don’t recommend adding a generic one-bedroom condo to the supply in an already saturated location. If your investment strategy rests on competing with a branded hotel chain and there’s very little to differentiate your product from others in the market, then you’re probably considering a poor investment. Make sure you design a product with a very specific customer in mind and where that particular customer is underserved. Ensure you have a sound thesis in that local area and that regulations are supportive of your business.
I want to thank you, Emmanuel, for a great question, and for those of you listening at home, have an awesome rest of your day. Go make some great things happen. I’ll talk to you again tomorrow.
Stay connected and discover more about my work in real estate and by visiting and following me on various platforms:
The Real Estate Espresso Podcast:
- 🎧 Spotify: The Real Estate Espresso Podcast
- 🌐 Website: www.victorjm.com
- 💼 LinkedIn: Victor Menasce
- 📺 YouTube: The Real Estate Espresso Podcast
- 📘 Facebook: www.facebook.com/realestateespresso
- 📧 Email: [email protected]
Y Street Capital:
- 🌐 Website: www.ystreetcapital.com
- 📘 Facebook: www.facebook.com/YStreetCapital
- 📸 Instagram: @ystreetcapital
