What Is STR Real Estate?
Short Term Rentals (or STR Real Estate), refers to Investment Properties which are specifically purchased to be furnished and rented out for a couple of days (or maybe weeks) at a time. The rental period for STR guests is generally under 30 days. These are your typical VRBO or AirBnB type of investment properties. STR Real Estate is often not owner-occupied, and it’s frequently located in very appealing areas where real estate tends to be expensive.
Where Do Real Estate Agents See The Highest Demand For Buyers Seeking To Invest In VRBO-Style Rental Properties?
The favorable locations of STR investment properties are often the biggest draw for short term renters. In order to offer the amenities that vacationers are seeking in top destinations, investors will commonly turn to condos or single family homes in prime locations for this type of investment.
Short term renter tenants are typically seeking a weekend getaway, or a short vacation with top amenities (or enough space for a group that is vacationing together). It’s not surprising that college towns and popular vacation destination cities and towns can be areas that draw a lot of investor interest for this purpose.
As a Real Estate Agent, if you operate your Real Estate business in a city that’s desirable for vacationers, you’ve probably already been experiencing this increased demand from investors for some time now. If you represent investor clients (or hope to in the future), it’s only a matter of time before you’ll have a Buyer considering this type of investment.
I hope this article will help Agents consider the pros and cons of owning short term rental (STR) real estate, so you can educate your Investors and Buyer Clients accordingly.
Why Buyers Like The Idea Of Investing In Short Term Rentals
The main reason investors become interested in short term rental properties is because of the higher potential cash flow they can earn, when compared with that of a more traditional (long term) rental.
Short Term Rentals are typically furnished, so they operate more like a hotel than a traditional investment property. Guests can arrive and settle in quickly, to enjoy a couple of days (or weeks) stay. Because of this, owners can charge a premium rental rate. The nightly rental rates skyrocket if the property is in a desirable vacation destination, or is large enough to provide accommodations for a large group. As you can imagine, STR property owners can often make double (and sometime much more) income in a month from a short term rental, as they would by renting the same property to a long-term tenant.
Now that travel has re-opened post-pandemic, people are excited to get back out to enjoy vacations weekends away with friends. Investors are eager to jump into the STR market to host them. However, agents should know that there’s more than meets the eye for clients who are considering this type of real estate investing.
Biggest Risks Affecting STR Real Estate Investments
HOAs Can Limit Short Term Rentals At Any Time
Whether a short term rental is a condo or a single family home, it’s going to have neighboring properties. Depending on the guests staying there, a whole host of issues can arise to make neighbors unhappy. For this reason, the HOAs of most condo buildings have already outlawed short term rentals altogether. The close living quarters make it hard to run a short term rental without disturbing the neighbors around it.
The top short term rental complaints that involve neighboring properties are noise and parking (as reported by Hostfully). Don’t think these complaints don’t happen in single family home communities. They certainly do! If a single family home is located in an HOA community, disturbances can cause neighbors ban together in protest.
Investors need to be reminded that for properties in an HOA community, that Homeowners Association can implement new rules (or restrictions) at any point. Changing rules can directly impact an owner’s ability to operate a short term rental.
It’s challenging to have risks like this looming over your short term rental business, especially since they are totally out of an investor’s control. Guests tend to let loose when on vacation, which means later nights, and louder gatherings… which can equate to headaches for a STR property owner.
Cities and Counties Are Tightening Short Term Rentals Regulations
Most cities now require a formal license in order to operate a short term rental business. In addition to the license expense, there is also usually a tax requirement that comes with running a short-term-rental business. If an investor is coming into a market with changing regulations, they should understand that available licenses may be limited, have a wait list, or that they may not be able to secure a license or other unexpected reasons.
Jurisdictions are cracking down to address numerous community concerns, like parking, noise and housing availability issues.
In remote destinations (like mountain and ski towns), there are even considerations related to wildlife safety measures for communities. Consider a mountain community with strict regulations related to securing garbage in order to prevent problem bears.
Many traveling guests won’t be familiar with unique practices like these (which are unfamiliar to guests arriving from the city, for example). Even for STR owners who make best efforts to communicate these rules… the chances are high that some guests that won’t comply. The most responsible STR host can have an irresponsible (or lazy) guest.
As you can imagine, issues like this can have widespread impacts for the communities where short term rentals are operating.
One particular example of this type of change is happening in Aspen, CO. The city is cracking down with stricter rules around short term rentals after years of ongoing issues in their town. They have placed a moratorium on new STR licenses, and issued stricter regulations around STRs.
“Those regulations include occupancy limits, life safety requirements, noise and nuisance complaints, wildlife safety measures, proper and timely tax remittances and more. Haley Hart, long-range planner for the city, said many of the regulations are focused on being a good neighbor and changes it from being a passive enforcement system to an active one.”as reported by the The Steamboat Pilot
For STR Real Estate owners, this poses a significant risk to the viability of their investment for the long term. You can do everything right as an owner… and communicate all of the necessary requirements of your jurisdiction to your guests. But ultimately, you cannot control your guests’ behavior.
With stricter enforcement rules in place, cities will have a framework for shutting down problem rentals for good. In Aspen, CO there’s a 3-strikes and you’re out policy. Yikes! I don’t know about you, but if all it takes is 3 crappy guests to get my business shut down, I’d be thinking twice.
Liability And Rising Insurance Rates
While it might seem like these costs are an expected part of running a STR business, we are seeing record breaking increases in insurance premiums across the country. If these expenses aren’t factored into your budget as a business owner, they can eat into your profit.
Along the same lines, special liability insurance is necessary for short term rentals. Keep in mind that the availability and premium rates for these policies is subject to change over time.
Additional Considerations For Investors
Nation Wide Housing Crisis – Are VRBOs Making Things Worse?
When investors from outside of a community can purchase housing, and turn it into a business (a hotel of sorts), the value of that housing climbs accordingly. When a house can generate big monthly cash flow, investors will pay more for it as an asset. Over time, this drives up the cost of housing.
This impacts small communities (and resort communities) most. The impact of the increase in housing can make the cost of living unaffordable for locals. Over time, the increased housing prices will drive up tax rates, so even residents who have owned property in a community for a long time will start to feel the impact.
What will happen to the character and charm of small towns across the country, if we continue the trajectory of allowing this sort of business to operate in single family homes? To be clear, I’m not for shutting down STRs. But they do need to be managed and limited in number.
Communities across the nation are dealing with the impact of these investments, and the realities of what it’s doing to small town residents in some of those places is quite heartbreaking. Some investors care more than others about this sort of hidden cost to doing business as a STR investor. But, it’s worth mentioning as a factor to consider.
Is The Writing On The Wall For Short Term Rentals? How Can Realtors Educate Their Investor Buyers?
In 2023 and beyond, I’ll be advising my Investor Buyers to proceed with caution when considering the purchase of a Short Term Rental investment property.
If Buyers are counting on the high cash flow of short term rentals to keep their investment afloat, it’s not hard to see how affordability issues might come into play if things change for an investor. Suppose your short term rental license is revoked. Will the monthly rent for a longer-term rental still cover the bills? Investors should consider this when deciding where to invest.
Putting it all together…
With housing costs crushing small communities across the Nation, and the risks to running a short-term rental business that are outlined above, the long-term viability for this type of business is unclear.
Perhaps it would be wise for investors to purchase only when they can afford to cover the costs of their investment on a long-term rental lease (which will be far less than the expected monthly income from running a VRBO, in the majority of cases).
If the investment will cash flow at a long term rental rate, and you are able to run a short-term rental business in it for now to maximize cash flow… great. Consider that a bonus! But if things change, you’ll know you can still make it work with a lower, long term tenant.
Approaching a potential STR investment with this mentality will give you something to fall back on if things change in your community or jurisdiction. And that just seems smart.
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