Short-Term Rentals Are Still a Golden Investment Opportunity

In September 2021, Sharestates published a blog post on short-term rentals like Airbnb and VRBO properties. Those were red-hot markets then and we wanted to see if anything had changed. Are short-term rentals still a hot investment? Let's find out.

Short-Term Rentals in NYC Outnumber Homes for Rent

Compared to long-term rental agreements, short-term rentals have higher turnover simply because the rents are for shorter durations. Instead of locking tenants in for six months to a year, short-term rentals move tenants in and out in a month or less. Sometimes, the rental periods are for just a few days. In return, renters are willing to pay higher rents. That translates into more revenue for the landlord or property owner.

A Fortune article indicates that short-term rentals in New York City (NYC) outnumber available homes for rent. This is anecdotal, but there are some interesting tidbits in this data:

• Airbnb and VRBO listings are nearly double the available long-term rental units in New York City
• Most of Airbnb's NYC-based short-term rentals are in Manhattan
• In Manhattan, apartment rentals dropped from 20,743 in April 2021 to 4,709 in April 2022
• The April 2022 rental vacancy rate was low, giving property owners a leg up on negotiations
• Rents are up, overall
• NYC property restrictions make short-term rentals less lucrative for property owners

None of this says much about the short-term rental market across the country. This is one city where Airbnb rentals have been a hot market since the 2020 pandemic began. What about everywhere else?

What Makes a Good Short-Term Rental Market?

Whether short-term rentals are still a good investment depends a lot on the local market. Short-term rentals tend to do better in vacation hotspots and tourist locations. Investors wanting to get in on short-term rentals should evaluate the local market and ask the following questions:

• Is the location good for short-term rentals? In other words, do people vacation in that area a lot, or does it draw tourists? Is it a geographical location where people move in and out quickly or during a short period of time?
• Is there seasonal demand for short-term rentals? If so, find out which season is the most in-demand time of year.
• What are median home prices? If property values are high, property owners may not justify high enough rents to make the investment lucrative. It may take longer to see a return on investment.
• Does the property require rehabilitation or conversion? Conversion and rehab expenses must be calculated against potential rents to determine the return on investment. Does it make sense financially?
• What are local rents? Research the market to understand the cost of rentals. Is there an opportunity to make money, produce positive cash flow, or build equity faster?
• What are local vacancy rates? If an area has high vacancies or low occupancy rates, it may not be good for short-term rentals.
• What are the local rules and regulations? Too many restrictions can inhibit returns.

These are a few of the criteria investors can use to determine whether an area is good for short-term rentals. Other factors may come into play. The bottom line is you must assess whether the local region is suitable for short-term rentals before you make that investment.

How the Short-Term Rental Market is Changing

Last year, the short-term rental market was rising because more people were traveling. Coming out of the pandemic, the economy was booming, and remote work opportunities meant people could work from anywhere. These realities made these rentals desirable for many investors. Coming into 2022, things began to change.

Inflation caused consumer prices to rise, and the Fed began tinkering with interest rates. That drove up mortgage prices as property prices began to fall. Some people who couldn't rent before could suddenly afford to buy a home while some employers called their employees back to the office. That slowed the growth of the short-term rental market.

Something else happened. Airbnb demand shifted from urban areas to rural areas.

Another thing that changed is that short-term renters began booking longer stays. In other words, inflation and rising interest rates didn't kill the short-term rental market. They shifted it.

This is evident by the number of short-term rentals in the market in August 2022 versus November 2021. Airbnb units rose from 370,008 to more than half a million. While the average occupancy rate fell by 4 percent, it remained above 50 percent. Rent increased, short-term rental income went up, and cash-on-cash return remained stable. All of that is good news for short-term rental property owners.

Short-Term Rental Market Trends for 2023

Vacationers and tourists are not the only target markets for short-term rentals. Other demographics interested in short-term rentals include business travelers, university graduate students, medical professionals, and corporations. Let's see why.

• Business travelers move into a city for a few weeks or months, especially in industries known for setting up new business units-for instance, restaurants and retailers.
• Graduate students are interested in short-term rentals while performing internships or fellowships, which may be for a few weeks to a few months.
• The pandemic has given medical professionals, especially doctors and nurses, new opportunities to travel to deliver care. This could be a golden opportunity for short-term rentals in areas with high concentrations of elderly citizens or people struggling with certain illnesses.
• Corporations may be interested in short-term rentals for executives who travel a great deal for the company or for companies that require housing for on-site consultants.

The Vacation Rental Management Association conducted a study that highlights some of the key short-term rental market trends going into 2023. They found that higher average daily rent rates are ticking up, occupancy rates, while down overall are maintaining their current levels, and revenue per available night is expected to be better next year. Additionally, short-term renters are booking with longer lead times.

Now that property prices are correcting and the Fed is lowering its rate hikes, we could see short-term rentals tick up again. The average gas price is down to $3.193 from $4.43 in March, a key metric for travelers. Think Reality agrees and highlights four other trends in short-term rentals for the next year:

1. Market demand is shifting from large urban cities to smaller cities
2. There's a growing interest in long-term Airbnb rentals to service traveling medical professionals and executives
3. Fractional investing through platforms like Sharestates is increasing
4. Technology is facilitating better investment opportunities

There are plenty of reasons to be optimistic about the short-term rental market in 2023. Now could be the best time to get in while property values are lower, fuel prices are trending downward, and travel is picking up again.

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