Once upon a time, investing in multifamily units was a straightforward experience. You purchased a unit, found tenants, signed rental agreements, and moved forward through the cycle of rentals and vacancies while performing maintenance as needed.
However, the rise of short-term rentals through companies like Airbnb and VRBO has changed the landscape of multifamily housing. As an investor, it is worth looking closely at the opportunities and challenges of short-term rentals. You may find untapped earning potential within the market or decide short-term rentals don't align with your business model.
Whatever conclusion you come to, everyone can agree that short-term rentals are here to stay. And wise investors will factor them in when considering multifamily investment property options.
What is a Short-Term Rental?
Most rental properties are for long-term rental. Tenants choose to live there for at least a year, and many stay much longer. Short-term rentals are for people who need a place to live for a much shorter duration. Their stay can be anywhere from a few days to a few months.
Many short-term rentals cater to people on vacation or traveling for business. Short-term rentals offer fully furnished accommodations and can be for an entire living space or for a single room within that space.
Typically, short-term rentals are advertised through businesses such as Airbnb or VRBO and work much like a hotel. Guests reserve a time frame in which they would like to stay and pay their fees. Hosts typically provide a key or code with which to access the property.
Short-term rentals have become a preferred option for many travelers, as they often cost less than a hotel stay and provide a more comfortable, homey atmosphere. As their popularity grows, these types of rentals continue to significantly impact both the hospitality and real estate industries.
A Cool Reception
As short-term rentals first began to make their way into multifamily housing complexes, they were met with pushback from long-term residents. There were concerns about security, as strangers came and went from those designated units. Residents complained that visitors and their friends were overtaking the pools, BBQ areas, gyms, and other common areas. Sometimes, short-term guests would host loud parties and disrupt the peace of the families who lived there.
Another common problem came from the long-term residents themselves. As they saw opportunities to make money on empty bedrooms within their personal units, they began to list single-room options on short-term rental websites. This often took place without the landlord's knowledge or permission, creating issues with rental agreements.
Investment Opportunities
Landlords and investors had both a problem and an opportunity. Savvy property owners knew there was a way to monopolize this new wave of rental options and began to find ways to make it work for them in the following ways:
- Investors recognized that short-term rentals could be a high-return property investment. For example, a long-term rental unit may generate an average monthly rent of $2000 (depending on the location). If that same property could bring in $200 per night as a short-term rental, it would only need to be occupied 10 days out of every month to make the same amount. Anything on top of that would be icing on the cake.
- Listing a unit as a short-term rental solved issues associated with vacancies. A property owner could rent out a vacant unit as a short-term rental until new long-term tenants could be found. This bridged the gap between tenants and allowed landlords to continue generating cash flow while their rentals were unoccupied.
- The creation of “Friendly Buildings” improved income stability. These multifamily units marketed themselves toward residents interested in subletting rooms or their entire units while they were away. The tenant and the landlord agree to this arrangement, with the terms that the landlord takes a small cut of the money the tenant makes through subletting.
As investors began to see the possibilities associated with short-term rental properties, the once negative feelings associated with them began to change, and their popularity grew.
Impacts to Consider
Due to the high profitability of the short-term rental market, it seems to be an appealing option for many investors. However, there are a few important things to consider before jumping in.
- Though investors love short-term rentals, long-term residents still have issues with the constant rotation of strangers throughout their neighborhood. Many Homeowners' Associations (HOAs) have created bylaws that prohibit or restrict short-term rentals within their jurisdiction. Before purchasing a property for the purpose of renting in the short term, make sure to do your research and understand the terms by which your property can be used.
- Some cities have cracked down on short-term rentals, limiting the number of days they are allowed to be rented, requiring registration, and placing them in the same tax categories as hotels. When investing in a short-term rental, you must do your due diligence.
- While long-term rentals can provide landlords with a fairly hands-off experience, short-term rentals require more upkeep. This upkeep can be done through third-party contractors; however, housekeeping, host availability, and maintenance are all constantly taking place as guests transition in and out of the space. For some property owners, this is not an issue, but for those looking for more of a passive income stream, short-term rentals may not be the right fit.
Overall, short-term rentals have fundamentally reshaped the multifamily investment landscape, offering new opportunities for cash flow and adding operational challenges. While presenting lucrative options for property owners and investors, they also demand a planned approach to management and compliance with laws.
As the short-term rental industry continues to grow, investors who find a balance between the needs of short-term and long-term tenants can succeed. Whether seen as an opportunity or a challenge, short-term rentals are the new mainstay in multifamily real estate.
