January, 2019

There are now new investment options in Real Estate, driven by strong growth in the short-term rental market, creating a new category

The past few years have witnessed massive changes in real estate markets.  From an investment perspective, the landscape is ever changing.  When one type of investment is in vogue, investors jump on the bandwagon and bid up the prices of that kind of property – and that rise in value that results is good for those who were in early.  But eventually markets top out.  This where single-family rental homes are in many markets.  And now, small multi-family is getting there as well. Today, in any hot market, it’s getting harder and harder to find a deal, whether it’s distressed, foreclosed, or a value-added deal – inventories are shrinking, prices are rising, and it’s extremely competitive. So what do the savvy investors do? They look for other categories. One such category is vacation rentals.

The vacation rental marketplace has changed dramatically in the last 15 years.  Those changes are making it a target for investors again.  Like many markets, this one has changed dramatically because of internet technology.  Before vacation rentals were listed on the internet, if you wanted to find one, you called a local property manager or a travel agent.  They were hard to find, and not very many travelers knew about them. We started our vacation rental business 14 years ago.  We are near the Grand Canyon and Flagstaff, AZ, and at the time, the relatively new VRBO.com had 14 listings in the area.  There were relatively few vacation rental travelers and relatively few listings.  That’s changed in a BIG way.  Now there are nearly 1400 vacation rentals in the area. Despite that growth, demand is exceeding supply.  Unlike then, nearly all travelers know about vacation rentals, and demand is up much more than supply.  Because of sites like VRBO, HomeAway, TripAdvisor, and the current champion, AirBnB, it’s a simple matter for homeowners to market their properties, and a simple matter for travelers to book one.

The market for vacation rentals has become so large, that even hotel booking sites are now listing vacation rentals.  But, not all vacation rentals are the same.  If you have stayed at some, you know this.  The typical vacation rental traveler spends a good amount of time trying to find the best properties at the right price and trying to avoid the turkeys.  In this market, there are some particular historical reasons why there is so much variation in the quality of vacation rental properties. During the last economic downturn, many, many people who had purchased vacation homes when prices were rising so fast, suddenly had to contend with being upside down on their primary home, AND their vacation home. Those homeowners sometimes lost the homes, some were snapped up at fire sale prices by investment funds, and a ton of them were put into the vacation rental market.  So, at that point, the vacation rental home landscape began to be divided into 3 distinct categories.  The first, the homeowner who needed to rent the home some in order to keep it.  The second, the investor groups who had snapped up the properties and needed them to provide a return, but didn’t want to make them into full-time rentals, and, lastly, the original category, those properties which were “meant” to be vacation rentals before all this began to happen. 

That last category represents the operators who really know the business.  The first two groups were in for a rude awakening. There were so many stories of people being unsuccessful at renting out their homes, and finally giving up their properties.  And likewise, investor groups who were good at finding deals, but knew nothing about vacation rentals began dumping their properties.  It was a secondary dip in the market. 

The story behind all this is that this division still exists today, it’s only a little different.  The investor specials which stayed in the vacation rental market tend to be boring, blah, sterile exercises in what are essentially larger hotel rooms with a kitchen.  They were never designed to be vacation rentals, and the fix and flip investors who tried getting into vacation rentals aren’t the most knowledgeable operators.  The vacation homeowners who wanted help with the costs of owning the home likewise got into the business accidentally, and have not proven to be terribly good at running vacation rentals. So, there are a couple of categories that end up not booking as often as their owners would like, and thence becoming the cheaper options in the market.

But, the original operators and some new operators who really learned the business are the ones who supply the better, more in-demand properties.  And there are a few which have become regional brands who get higher occupancy rates, and higher prices because the experience of staying in them is so much better.  Those that have been able to create a brand identity, and operate multiple properties also aren’t so completely dependent on internet listing sites, what we call Online Travel Agencies, or OTAs. They are able to get much of their booking traffic via their own websites through a combination of savvy marketing and excellent experiences that bring guests back.

It’s this market that offers a new option for investors wanting to place money into real estate that will provide an above market return.  The AVERAGE return on vacation rentals is just slightly higher today than single-family rentals.  But the returns experienced with well-run properties developed and operated by people who really know the business provide returns 2-3 times higher.

It is this understanding of what the customer really wants that makes the difference between extra successful operators which command higher occupancy and nightly rates and those that make up the bulk of cheaper and non-differentiated vacation rental properties. If you think investing in the hot vacation rental market is for you, now you know what to look for.  The savvy operators with a superior product and a track record are looking for investors to grow their businesses faster.