While vacation homes are not a new phenomenon, the short-term rental industry that we enjoy now was arguably born in 2007 when a couple guys in San Francisco inflated an air mattress in their apartment living room and made a website for it, dubbed Airbnb.com – short for Air Bed and Breakfast.
15 years later the industry, while not fully mature, has grown substantially. And there’s still much growth left to go. While the ease with which one can make any home cash flow as a short-term rental has become more challenging – it takes more than an air mattress in the living room to be successful these days – the potential returns on well positioned properties is among the highest one can find among any investment class. These outsized returns will undoubtedly fade away to something more normal as the industry continues to mature. But for now, opportunities still abound.
The most apparent metrics that affect STR returns are home prices and rental income. Location, Interest rates and the number and quality of competitors also play a significant role in ability to generate returns. Still, there are numerous homes on the market today that stand to earn short term rents that amount to 25%+ of the purchase price of the home on an annual basis. This simple standard of measure is the best way to spot a potential opportunity.
As prices rise, you’ll be locked in at the price you buy your home at today, along with the interest rate. If you position your house well among its competitors, it can stand out and attract the highest paying guests for years to come. Not only can your house provide net positive income for you, it can also serve as a nice nest egg as prices appreciate over the long term.
I would argue that this is no longer a beginners game. We are at or nearing the Varsity level of this industry and we’re starting to see some real professionals emerge. Further, these professionals are in high demand and it’s wise to partner with one whenever the opportunity presents itself. With a solid selection criterion in place, today’s investors stand to make double digit returns on cash flow alone and IRRs well above 20% when considering long term appreciation.
