It’s a story that echoed across social media platforms from rental property owners across the country: Vacation rentals are no longer generating the steady revenue that investors have come to expect during the pandemic. The era of #Airbnbbust has taken hold.
Real estate investor Sabrina Must, who once rented out her 2-bedroom condo in Encinitas, California for $1,000 a night over the holiday weekend, has reduced her rates to $275 a night due to declining demand. wall street journal reports, Another couple investing in real estate during the pandemic initially saw strong bookings, followed by low occupancy rates last summer.
This is a problem for many everyday people who decide to invest in real estate during periods of booming demand, sometimes without a backup plan or without the skills to stay competitive during a downturn. As the situation evolves, the short-term rental strategy is losing its appeal, especially as an entry point for beginners.
Why the Short-Term Rental Strategy Is Losing Steam
Excess supply limits cash flow capacity
Airbnb occupancy rates see year-over-year decline eight months straightAccording to data from vacation rental research company AirDNA. It’s not because inflation has reduced the demand for short-term rentals. In fact, overnight stays are up 21.3% in October compared to the previous year. But the supply of Airbnb listings grew 23.3% year-over-year. There were 66,000 new rental properties listed this October, the highest increase seen the year before.
What created the oversupply? During the pandemic, the demand for second homes almost double Because low interest rates collided with remote work opportunities and a desire for more space. Skyrocketing demand for vacation rentals and record revenue data in 2021 also encouraged a new group of real estate investors to buy homes exclusively as rentals. And Now, Zillow Predicts the Number of Landlords for the First Time grow significantly As other homeowners attempt to make money from their properties while inflation persists and stock market expectations are bearish. In addition, homeowners who have locked in low interest rates may be tempted to rent their homes instead of selling when it comes time to move.
Notably, the occupancy rate is still higher at 12.8% as compared to October 2019. AirDNA Forecast That supply will rise another 9% in 2023, despite higher mortgage rates putting affordability pressures for second-home buyers – but occupancy rates are expected to remain above pre-pandemic levels. However, if rising unemployment cuts demand for short-term rentals or if more landlords decide to become hosts in an effort to increase their income, there is reason to believe that occupancy rates could drop even further.
Average daily rates rise and bookings slow
Compared to 2019, demand for short-term rentals remained stable or increased worldwide. But Airbnb’s revenue growth slowed from 58% in the second quarter to 29% in the third quarter, and Airbnb Prediction That holiday revenue will not meet market expectations.
AirDNA too reports Slow growth in average daily rates. The 5.6% increase in expected average daily rates (ADR) for 2022 actually represents a real loss due to inflation. And ADR growth is expected to slow to 1.7% in 2023, while inflation is predicted to remain high. Revenue per available room is also expected to decline as slightly higher rates will not offset the shortfall in occupancy rates.
Local governments are cracking down
Short-term rentals were relatively unregulated in the early days of Airbnb, and there are still plenty of cities that only require hosts to apply for a short-term rental license. But increasingly, local governments are tightening short-term rental regulations due to criticism that the overabundance of vacation rentals limits the availability of affordable rental housing in a community.
In New York City, short term rentals of less than 30 days are Forbidden Unless the host is present and guests are provided with uninterrupted access to the entire unit. In San Francisco, Short-Term Rentals Are a Must-Have primary residence Where the owner resides for at least 275 days in a year. Similarly, Denver only allows homeowners to apply for a short-term rental license for their primary residence, These are just examples of a growing number of cities that are curtailing short-term rentals. It is clear that investors entering the short-term rental market will now need a backup plan because if large cities that depend on revenue from tourism are passing stricter requirements for rental property owners, this Could be anywhere.
How The Investor Struggle Could Affect The Housing Market
New investors who snapped up rental properties during the pandemic may not be able to cover their mortgage payments, based on estimated ADRs at the time. As the occupancy rates keep falling, many may be forced to sell their properties. The widespread sale of properties for short-term rental will increase the supply of homes, leading to a fall in home prices. Short supply is one factor currently keeping home prices from falling sharply, even as potential homebuyers pull back because of higher mortgage rates.
A more serious problem can arise when prices drop and new investors are left with underwater mortgages. Over the past year, debt service coverage ratio (DSCR) loans have become increasingly common, Bloomberg reports, allows investors to qualify for a larger amount based on future income projections rather than a large down payment or individual salary. Some of these loans (it is not clear how many) were packaged and sold by Wall Street firms to investors as mortgage-backed securities. Several lenders in the sector have said they expect to issue hundreds of millions in rental-based loans this year, and a significant portion of borrowers will qualify based on projected Airbnb income.
While most experts argue that the housing crash will not happen because lending standards are tighter now than they were before the 2008 financial crisis, these rental-based loans are another story. Without the full details of how many of these loans are due, it is impossible to say whether a potential default could lead to enough foreclosures to affect the economy. But of course, Airbnb’s downturn may be contributing to a larger supply of homes on the market.
How to stay in the Airbnb game
The broad supply of short-term rental properties means that investors in the space need to stand out as stellar hosts if they hope to maintain high revenues. Brian Egan, CEO and co-founder of vacation rental management company Evolve, explains wall street journal that the most successful hosts provide an excellent experience raising the bar for hospitality and ensuring that the property meets or exceed guest expectations After viewing the listing.
Hosts should also research the algorithms that each listing platform uses to try to increase their reach and raise their listings in order to improve conversions. Prioritizing professional photos and offering competitive pricing and policies can increase the likelihood that guests will book your rental, and quick response times are important as well.
Ultimately a backup plan is essential. If there is an oversupply of properties in your market then you may not be able to get the income that you are expecting. A deep recession can reduce the demand for vacation rentals in general. Or local regulations may prevent you from listing your property as a short-term rental. you may need to move to a medium term Or long term rental strategy, which you should make sure is possible in the area you buy. You must also have sufficient cash reserves to cover your mortgage payments and maintenance if fair market rents will not provide positive cash flow.
The Airbnb boom may be coming to an end, but there is still an opportunity to make money from short-term rentals, especially for experienced and strategic investors. Even as occupancy rates have fallen from their peak, hosts are making more money now than before the pandemic. But property prices and mortgage rates have skyrocketed since then, so new investors should proceed with caution. Don’t expect any property you buy to be an automatic success. Understand the risks, make research-backed purchasing decisions, and be ready to pivot in a changing economy.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
