4 Reasons Why Short Term Rentals Are Not A Sustainable Long Term Strategy | Nexus Property Management® Franchise

17 April 2024

THE BEST INVESTMENT STRATEGIES LIMIT RISK AND THE NUMBER OF VARIABLES BEYOND YOUR CONTROL

There is plenty of upside to getting into the short-term rental game. In some instances, property owners could make in three or four nights what a long-term rental might yield in a full month. But is this a sustainable strategy? Is it a bubble that’s bound to burst? Airbnb, VRBO, and the others have increased their share of the market but is it a good way for real estate investors to build wealth over the long term? According to Nexus Property Management®, the answer is “NO”. Nexus has been managing residential and commercial properties for over a decade and taps into a long term model that is tried and true. Whether you’re investing in real estate, stocks, or some other arena, it’s vital that you limit risk and think twice before taking what appears to be the easy route. Here are four reasons why short term rentals are not a reliable long term strategy.

LEARN MORE: SHORT TERM RENTAL PROPERTY TRENDS FOR 2023

LEARN MORE: AIRBNB IS WORSENING THE HOUSING CRISIS, INCREASING POSSIBILITY OF A BUBBLE

1. MAJOR VARIABLE BEYOND YOUR CONTROL: TRENDS IN LOCAL AND STATE LEGISLATION

Airbnb and other short term rental sites are no doubt popular with travelers and tourists, but they’re much less popular in communities that have been transformed by them. Across the country, vacancy rates have dropped significantly and you don’t have to keep up with the news daily to be aware that demand for housing is lagging far behind supply. It’s not just in San Francisco, where prices have most famously skyrocketed and working-class people cannot afford to live in city limits, where this is an issue. In fact, Connecticut, where Nexus recently opened its New Haven County office, boasts the lowest vacancy rate in the country at just 2 percent! What’s that mean? Towns, cities, and states are looking to increase the supply of homes in their communities. Traditional, long term tenancy based rentals feed this need. Short term, airbnb-style rentals only exacerbate it. Cities like Honolulu, Hawaii have banned any rentals shorter than 90 days. As of April 2023, 26 towns and cities had moved toward legislation to limit short term renting within their borders. No doubt this trend is only the beginning.

LEARN MORE: A GROWING NUMBER OF PLACES LOOKING TO REGULATE SHORT-TERM RENTALS

2. UNNECESSARY RISK: LACK OF COMPETITIVE ADVANTAGE

To win in short term games, it’s essential to have a competitive advantage. For the most part, the only true competitive advantage in vacation rentals is location. That is not to belittle the importance and value of location, but beyond that, there is very little that short-term rentals can do to differentiate themselves beyond attracting potential renters with lower prices. Wi-fi is universal at this point; TVs and in-home entertainment are fully affordable and provide little room to impress. Post Covid, there is no room for anything less than 100% sanitary, so units just become more and more alike. When this is the case, markets create a race to the bottom. To win, you need to drop your pricing. There is no brand loyalty or reputation to spike value. Instead, your profits just trend downward. And, unfortunately for those playing the short-term game, this approach has never been more popular. That just means more and more competition to underbid and increase your risks.

LEARN MORE: SHOULD I RENT TO REGULAR TENANTS OR POST ON AIRBNB?

3. MAJOR VARIABLE BEYOND YOUR CONTROL: MAINTENANCE AND MANAGEMENT AVAILABILITY AND COSTS

Nexus has offices across four different states and we get calls looking for management and maintenance from short-term rental owners often. Unfortunately for them, we do not offer our services because they don’t mesh with their model. It’s like fast food versus a sit down and eat experience: McDonald’s vs. ….name your favorite steak house. We’re not in it to make a quick buck and we don’t support those who are. There are n o shortcuts to success. The Nexus model is all about win-win relationships and short-term rentals are not so good for local communities. Nonetheless, short-term rental owners call us often because they struggle to find maintenance vendors who will work with them, who can service their issues quickly enough, and can offer an attractive price.

First of all, if you only have one or two properties, you don’t have much work for maintenance vendors, so you’re not going to be high on their list. At Nexus, our offices manage, on average, several hundred rental units. We attract maintenance workers to join our teams because there’s always work. And because there’s always work, we can provide clients with lower than industry average pricing. The model works. On top of that, our tenants can live in their apartments while they wait for a ceiling fan to be fixed, or an ant infestation to be treated, or a leaky sink to be repaired…but if you’re renting through Airbnb or VRBO and that unit isn’t 100% perfect as advertised, you’ve got a huge problem. You’re not renting that until it’s fixed, and if vendors know time is of the essence, you’re going to pay for it.

LEARN MORE: NO DEAL IF YOU CAN’T SCALE: IT’S HARD TO ATTRACT A VENDOR IF YOU DON’T HAVE MULTIPLE PROPERTIES

4. UNNECESSARY RISK AND VARIABLE BEYOND YOUR CONTROL: THE NATURE OF MARKETS

The beauty of markets in America is that over the long term, they’ve always gone up. If you invest in index funds and hold onto them for 20 years, you 100% make a profit. The same principle holds true in other markets, like real estate. The value of properties continue to rise, despite major market corrections along the way. But if you’re playing the short-term game, you’re vulnerable to those short term trends without the guarantees that time brings with them.

With that in mind, lenders routinely offer 25 year mortgages to traditional rental property buyers because risk is low and they assess that the property will be profitable for 25 years and beyond. That is not necessarily the case for short-term vacation-style rentals. You can likely get a loan, but don’t be surprised if rates are higher because the model is riskier. Beyond greater friction with lenders, the short-term market is also susceptible to big picture events and changes that attract media attention. Climate changes have already hit the rental market in ski-resort towns especially hard. Increased intensity and frequency of coastal storms makes owning seaside property more risky and market recovery commonly lags behind actual recovery. For example, New Orleans may have rebuilt itself post-Katrina, but the images and devastation of that storm carried the public consciousness for far longer and vacation rentals suffered because of it.

Public perception is very finicky and people are naturally risk averse. When Seattle’s homelessness problem is a front page story, rentals in the vicinity suffer. When talks of potential legislation, as noted before, grab the headlines, rentals suffer. If there’s a murder in an Airbnb, we know the media is going to blow that piece of the story up, and short-term rentals will suffer. If Covid, or a Covid-like virus sweeps across the globe again…you get the point. There’s a reason smart, experienced investors place most of their capital in long term investments. Defending against risk is the priority, but it doesn’t align with short-term rentals.

LEARN MORE: NEW ENGLAND CITY INCREASES SHORT-TERM RENTAL REGISTRATION FEE BY 400%!!!

CONCLUSION

Some people enjoy a more aggressive approach when it comes to investing but it’s important to differentiate between investing and gambling. When too many variables are out of your control, odds are you might be gambling. Instead, Nexus recommends the tried and true traditional approach to real estate investment…because it works and it doesn’t need tinkering with. Contact any of our offices to learn more about a reliable path to passive income that will comfortably create generational wealth for you and your family.

LEARN MORE: BUYING A RENTAL PROPERTY DOESN’T MEAN YOU’LL MAKE MONEY

MOST POPULAR NEXUS ARTICLES:

Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

Your Property, MANAGED®

The Real Estate Investing Authority®

Connecting You To Better Living®

You Could Own A Nexus Property Management® Office For Less Than You Think!