Many property owners use listing platforms to sustain their short-term rental businesses. Whether they host on Airbnb, Vrbo, or another vacation rental platform, they generate rental income by hosting residential space on a short-term basis, usually for 30 days or less.
The process of renting out a long-term rental on a short-term basis is referred to as rental arbitrage. This strategy can be a profitable and convenient way of generating rental income off of space that wasn’t being used, such as a spare bedroom in your apartment or an in-law unit in your home.
In many cases, investors could implement rental arbitrage without having to own the property themselves — as long as their landlord and lease allow it. With such low barriers to entry and high profit potential, short-term rentals (STRs) quickly became popular. In fact, it became so popular that the industry has now become oversaturated.
When STRs began popping up all across the country, Airbnb certainly supported a lot of these rentals. Whether you needed a room, an entire home, or a bungalow in the middle of the forest, you could pretty much find it on Airbnb.
The abundance of Airbnbs led to an oversupply on the platform and consequently, a reduction in daily rates. The Airbnb business soon became much less profitable than it once was, resulting in the ‘Airbnbust.’
The Airbnbust, or Airbnb-bust, is a worldwide phenomenon characterized by a rapid increase in supply of vacation rentals on the platform. Oversupply has made it more difficult for the average Airbnb host to compete, given that the supply of vacations on the platform is surpassing demand.
As a result of this imbalance in the market, hosts are now seeing a decrease in potential earnings, making the Airbnb business less alluring than in its earlier days. The decline in profitability for Airbnbs can be attributed to three key trends:
The first thing to note is that when supply outpaces demand in any industry, prices go down. The more Airbnb propeties on the market, the smaller the chances of your Airbnb being booked and the less you’ll be able to charge per night.
According to AirDNA, available listings reached 1.43 million in April of this year, marking a 18.9% year-over-year increase. Demand has only grown 12.6% in the same amount of time, which means that supply is currently outpacing demand. As a result, hosts have less of an opportunity to capitalize on cash flow and have to work harder to make their rentals stand out.
Despite high mortgage rates dissuading prospective buyers from purchasing second homes, AirDNA forecasts a further 9% increase in supply in 2023. This could be because in order to host an Airbnb property, you don’t necessarily need to own it, you just need to be able to manage it. As more vacation rentals appear on the platform, Airbnb hosts will likely see their profit margins dip even further.
The decline in cash flow potential is directly tied to lower occupancy rates. Although occupancy rates for 2023 are expected to remain above pre-pandemic levels, AirDNA predicts that they will drop to 56.4%, marking a decline in occupancy rates for the second year in a row.
A healthy occupancy rate for an Airbnb rental is above 50%, so hosts can remain profitable if they choose to stay or break into the market in 2023. But their earnings won’t be as lucrative given that AirDNA also predicts only a slight increase in ADRs of 1.7%. The most profitable days on Airbnb seem to be behind us.
During the early stages of Airbnb, short-term rentals operated with minimal regulations. However, local governments are now implementing stricter rules for short-term rentals in response to concerns that a surplus of vacation rentals limits the availability of affordable long-term housing.
In places like New York City where the housing crisis is largely out of control, hosts have faced the brunt of these regulations. Politicians passed a law stating that short-term rentals of less than 30 days are prohibited unless the host is present. Guests must also have unobstructed access to the entire unit. Airbnb recently sued the City of New York over the new regulations, claiming it’s a “de facto ban” of the platform in NYC.
In San Francisco, short-term rentals are only permitted in primary residences where the owner resides for at least 275 days per year. Similarly, in Denver, homeowners can only apply for a short-term rental license for their primary residence. Dallas also recently instated its own short-term rental restrictions. It goes without saying that investors entering the short-term rental market now must have more to worry about.
In the second half of the year, Airbnb hosts can expect increased competition. Hosts catering to budget-friendly travelers will be especially susceptible to Airbnbust, given that an influx of new and more affordable options are flooding the short-term rental market.
To stand out in an increasingly competitive market, Airbnb hosts should try to make their property more attractive to travelers. Hosts will need to analyze their competition and diligently update their property to exceed customer expectations if they want to avoid less bookings.
As an Airbnb host there’s not much you can do to change your city’s regulations concerning STRs. However, there are a couple things you can do to better navigate the changes that are afoot. If you’d like to remain in the STR industry be mindful of the following advice:
As cities continue to grapple with the impact of short-term rentals on local housing initiatives, it’s likely that more regulations will be introduced. NYC, San Francisco and Denever aren’t the only cities tightening their grip on Airbnbs. Even cities like Dallas, which is known for its landlord-friendly environment, have recently implemented regulations that prohibit STRs in single-family residential zones.
The rise of city-specific Airbnb regulations don’t necessarily mean that investors are left without options. Instead, they simply add an additional layer to STR operations, requiring their host to do more due diligence. To navigate this new landscape, hosts must stay informed about the newest policies concerning and be willing to collaborate with their local governments to ensure compliance.
Affordability is no longer a competitive edge in today’s saturated market. To thrive in the midst of massive competition, a short-term rental owner should set themselves apart by providing unique rental experiences to their guests. This can involve offering special amenities such as distinctive interior designs, access to on-site fitness facilities, or car rental services.
Showcasing the local attractions and activities available in the area can also be a great way to stand out. Exceptional customer service is another way to ensure guest satisfaction. It could also help boost your reviews and propel you to Superhost status, which increases the likelihood of your rental appearing at the top of Airbnb’s search feeds.
Given the challenging environment, many investors are choosing to exit the short-term rental industry altogether. In NYC, it’s expected for there to be 10,000 fewer Airbnb listings by the end of the year as a result of these new regulations. For many Airbnb investors, hosting is no longer worth it. Instead of hosting on Airbnb, investors have the option of renting their properties to mid-term or long-term tenants.
A short-term rental typically involves a rental period of up to 30 days. Examples of short-term residential rentals include vacation homes, spare bedrooms, or single-family homes with tenants on month-to-month leases.
A long-term rental, on the other hand, usually involves a fixed annual rent on a 12- month lease. Most residential leases follow the 12-month timeframe, but leases of various lengths can be negotiated between landlord and tenant.
A mid-term rental falls somewhere between short-term and long-term rentals, typically lasting 3-6 months. These types of leases are commonly sought after by travel nurses, business travelers, and digital nomads who require accommodation for a moderate period of time.
Here are four convincing reasons why transitioning from a short-term rental to a mid-or long-term rental may be a strategic option for you:
Steady rental income can be achieved throughout the year with a lease agreement lasting at least 12 months and a tenant who consistently pays their rent on time. A responsible long-term tenant allows landlords to receive a regular rental fee, either on a weekly or monthly basis which ultimately provides them with consistent cash returns. Natural fluctuations in the short-term market don't typically allow for the same kind of cash flow stability. However, landlords need to be more thorough when evaluating prospective tenants.
Having a clear understanding of expected cash flow each month allows landlords to budget effectively for maintenance and needed repairs. It also allows for more accurate forecasting of the potential return on investment. By knowing the amount of cash coming in regularly, landlords make informed decisions regarding property upkeep and improvements and accurately predict their ROI.
For a long-term rental property, professional property management fees are between 8% and 10% per month, whereas management fees for short-term rentals can reach as high as 30%. Property management for an long-term rental is usually more economica because there’s less work to be done when there is less tenant turnover.
When an investor has a clear understanding of the cash flow generated by a rental property occupied by a long-term tenant, it can also make financing the property easier. Lenders tend to offer better interest rates and financing terms to real estate investors who can demonstrate a stable cash flow stream from a long-term rental.
Lenders perceive long-term rentals as lower risk compared to STRs, because these properties come with potential vacancies and higher maintenance costs. As a result, lenders are more inclined to provide attractive financing options to investors who have long-term tenants in place.
Tenants who commit to a long-term lease usually handle home maintenance, yard upkeep, and utility payments for the entire year. Long-term tenants tend to treat the property as their own which often leads to less wear and tear, overall. As a result, utility and maintenance expenses are usually lower for the landlord.
Even if the tenant does cause some damage to the property, it can often be covered by the security deposit. It’s customary for landlords of long-term rentals to request a security deposit from tenants. This requirement helps mitigate potential property damage in the future.
The oversaturation of vacation rentals combined with increased local regulations has made it more difficult to succeed as a short-term rental investor. That said, investors can still be profitable if they take steps to make their listing stand out and remain compliant with local laws.
If you’re considering a transition to mid-term and long-term rentals, short-term rental investors can avoid the new challenges associated with Airbnbs and establish a more predictable and sustainable investment strategy.