Short term rentals seemed like the perfect way to maximize income from a real estate investment. They can earn far more over the same time period than long-term rentals. But there was always a catch: you only get those impressive profits if your AirBNB stays full at all times. Not only is that unlikely, but you can’t even reasonably calculate the odds of your property being booked. Occupancy in short-term rentals depends on an almost infinite number of factors.
Recently, some people have been sounding the alarm that short-term rentals like AirBNB are due for a crash. Is there truth in the warning? Is it time to get out of the short-term rental market?
Problems With AirBNB
Long-term rental markets are fairly predictable and slow to change. If a certain number of people live in your area, every one of them will need a place to live. When people do move away, it’s often gradual. Short-term rentals, however, can be much more volatile. It takes under five minutes to cancel a booking when people choose to stay home.
There’s also your competition to think of. In some areas, AirBNBs have been increasing dramatically over the past few years. As in any market, when there are good profits to make, investors rush in. But too many suppliers can outpace demand, leading to a decline in sales.
Is an AirBNB crash happening, though? Turns out it’s not so easy to tell.
The Controversy
In a recent Twitter thread, real estate consultant Nick Gerli claimed revenues were down over 50% in some markets. He was using data from AllTheRooms, a service which provides data and analytics to AirBNB hosts. Services like this are vital to AirBNB owners. Knowing local occupancy rates, average prices, and inventory can help them decide what to do with their properties.
However, there can be a large discrepancy in data from different sources. A different Twitter account, using data from a competing analysis service, AirDNA, claimed the numbers were drastically more positive. Markets showing a 50% decline in AllTheRooms were showing only a 9% decline in AirDNA. Meanwhile AirDNA itself claims growth in the market, with bookings increasing 19% this quarter!
As you can see, there’s no simple answer to how well short-term rentals are doing now, let alone what they will do over the coming months. It comes down in part to whom you trust to provide the most accurate data.
What Hosts Can Do
If you’re an AirBNB host, you definitely need to have your eyes on the market trends. Purchasing a service like AllTheRooms or AirDNA can help you do that—but keep in mind, no statistics are perfect, and no one can tell you the future.
If you haven’t been able to keep your property occupied enough of the time to make a profit, there are several options you have. You could switch the property to a long-term rental. While long-term rentals are lower in revenue per day, the tenant will be there all year. You hopefully won’t have to find another one for some time. And long-term tenants need less attention and have more investment in the property than someone staying for only a weekend.
And of course, you can sell it. Real estate prices remain high at the moment, so if you’ve owned the property for at least a few years, it’s likely to earn you a profit when you sell. Remember that, since it’s not your primary residence, you will need to pay capital gains tax on your profit.
What Would an AirBNB Crash Do to the Housing Market?
When single-family housing is tied up in short-term rentals instead, it can reduce housing inventory and make buying a first home more expensive. So, if AirBNB crashes and hosts sell their properties, does that mean a rapid drop in home prices? That would be good for prospective homebuyers, but disastrous to real estate investors.
However, it might be too early to either celebrate or panic. The high real estate costs lately come from a variety of factors, and AirBNB may not be a major one. With 144 million housing units in the US, and1.2 million short term rentals, only 0.8% of homes are tied up in AirBNB and its competitors. That said, only 570,000 homes are currently for sale. So if all those AirBNB hosts got out of the business at the same time and sold, it could have a dramatic effect. But many AirBNB hosts, especially if they’ve owned the property for a while and have significant equity, wouldn’t sell even if they did get out of short-term rentals. Instead, they might switch to long-term or keep the property as a personal vacation home.
What will bring housing prices down again? Experts suggest the biggest need is more new construction. Mortgage rates also have big effects on the housing market. While high mortgage rates make it harder for individuals to buy a home, they can also make current homeowners less likely to sell. Currently, housing prices have calmed down somewhat, but we aren’t seeing a correction to the prices of a few years ago.
Get Sound Advice
When you’re making big investment decisions like what to do with a vacation property, you need solid advice from an independent source. A financial advisor can consider all of your finances holistically and help you sort through your options. To meet the right advisor for you, contact us today. We’ll match you with someone with expertise in your specific needs.
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