[Blog] Short-Term Rentals Are Here to Stay

Jeramie Worley

I have been in the vacation rental business since before Airbnb existed. Back then, it was a clunky manual transaction with limited to no automation, tech or platform fees. It was beautiful. We had a chance to interact with, interview and inspire our guests with all the personalization and wow factor we put into our second homes. We offered them to people on vacation, and they took care of our property because they knew we were not The Hilton; we were Moms and Pops. We still are, yet we are now called “hosts” and very much controlled by the ridiculous policies of large marketing platforms who have become more like travel sites than marketing platforms. The distance between the traveler and the personal attention of a host has gotten fewer and farther between, but we are still seeing traveler demand increase for short-term rentals. Even in poor economic times, this asset class succeeds because it is a lower cost and more comfortable alternative to hotels where multiple families can share costs, experiences and frugal homemade meals.

Despite what you hear about in the news, short-term rentals are just getting started.

Don’t be afraid of recent news in New York City regarding unreasonable city policy surrounding short-term rentals. This is not just a trend; it is a lifestyle for us. We’ve seen this battle before.

I was able to fight alongside Missouri property owners in 2017 and 2018 when the Missouri legislature was proposing laws that would affect property owners. A bill was being circulated that not only violated the rights of short-term rental (STR) property owners but also had the broad overreach that, if passed, could begin to chip away at the profits of long-term rental (LTR) property owners. I was impressed by the smart, dedicated approach of LTR property management associations, so I formed one of my own. I’ve acted as the president of the Missouri Vacation Home Alliance, a 502c6 advocacy group since 2017.

Throughout all of those efforts, and through the many investors I’ve met, I realized we all have the same goal. Whether we are rich or want to be, we all need a greater return on our time. I discovered that STRs fit the bill. It gave the little guy a chance to build wealth and save for the future because retirement is approaching faster than our ability to save. Hotel and lodging associations pointed their sights on us, hiring lobbyists and supporting opposing legislation, not because we were doing anything wrong, but because we were filling the demand that travelers wanted. Somone’s ox was getting gored, so rather than remodel aging hotels to fit traveler demand, they attempted to “level the playing field.” It worked in small part, but traveler demand continues to push against the knee-jerk policies of municipal governments, forcing many to walk back overreaching regulations.

For many years, insurance companies made it difficult to insure this asset class because the properties were vacant two-thirds of the year. Some would insure the property but would not insure the personal property, leaving many hosts to self-insure their assets. The only alternative was to get a very expensive hotel/motel policy, which included a “loss of rent” rider, and from personal experience, I know is hard to claim. It’s what we had to do at the time. If you wanted to give up the benefits of owning the property in an LLC, you could insure the property in your personal name, with a second home rental rider but the rules surrounding this were functionally challenging, or they forced hosts to violate the rules of the policy just to simply get coverage. This was until Proper and Foremost came along with a product that served this growing market. Eventually, hosts could find reasonable prices, insure their personal property and find insurance partners who would solve the problems of their customers. The industry had started to mature, thanks to these pioneers in the insurance business.

Many people have recently rushed to the STR space to make easy money. They have had a rude awakening because it can be challenging. You must be a real estate expert, a hospitality expert and be brilliant at marketing and customer service. I like to say it is a challenge, yes, but it is the highest-paid part-time job you will ever have. Here is an example. Let's say you have a five-bedroom, three-bath apartment. In an LTR scenario, you might be able to rent it out for $2,000 a month. That’s a total of $24,000 in rental income for the year. But remember, you'll have expenses to cover, and those can add up quickly. By the time you factor in property taxes, insurance, repairs and other costs, your profit margins may not be as high as you'd hoped.

Now, let's look at the same property as an STR investment. If you rent it out for $400 a night, you could potentially make $62,000 a year in rental income. Yes, you'll still have expenses to cover, but you can see how much more margin there is with STR. And here's the kicker: if you only rent out your property for 155 nights a year, you still have almost 200 nights left to do whatever you want. You can rent it out more often and earn even more income, donate some of those nights to charity or use them for your own personal enjoyment. The added benefit is that payment is usually taken upfront from the renter, so there is no more collecting late rent. When people are in your home, they are sleeping half the time, and the rest is spent doing tourist attractions. There are fewer regulations, if any, regarding damage deposits, and the clean-up after each renter is handled by a janitorial service rather than a full carpet replacement or paint job.

You can literally run an extremely high cash flow real estate investment on a 60% vacancy rate. It doesn’t make sense, but it does. Most people would happily pay four times their monthly mortgage to spend a week at a Disney resort. Tourism trends ebb and flow, yet people still go on vacation. It is necessary and valued above most things. When you ask someone what is most important to them, family is usually in the top three. When the economy is bad, people do not stop going on vacation, they simply vacation smarter. They pool their resources and can rent a beautiful nine-bedroom, nine-bathroom cabin for less than the cost of a hotel when you share the cost with your crazy brothers and sisters.

Short-term rentals are here to stay, regardless of what you hear about them in the news. Millennial buyers are 18% more likely to buy a second home and rent it out than they are to buy a primary residence. Established markets like Gatlinburg, Breckenridge and Orlando are simply adjusting to a surge in popularity, yet they will never stop being massively popular destinations. Emerging markets are popping up constantly, and so are many new income opportunities. The STR business has matured. It is no longer the new kid on the block. It has earned its place as a true asset class among multi-family, storage units, commercial real estate and many others. In fact, when I speak to brokerages and associations on the subject, I often prove how a seven-bedroom STR can outperform a twelve-unit apartment complex or how a 12-bedroom STR can outperform a 15,000 square-foot commercial building. It is one of my most favorite things to do. We talk about this and many other real estate topics and recipes for success on my podcast, Cocktails and Dreams Real Estate Podcast.

I pray your investments are more than just an avenue for money. I pray they are purposeful and that they bless the families that use them. Enjoy the journey; we only get one shot at it.