Building Short-Term Rentals: Is Now the Time?
Fewer people are traveling in fear of contracting COVID-19 from time spent in enclosed, high turnover spaces, namely airplanes, hotels, cruise ships and even rental cars. Some of those who are willing to travel have assisted in the growing demand for peer-to-peer vacation rentals on web
sites such as AirBnB and VRBO. Many real estate and travel industry professionals predict that demand for short term rentals will continue to increase as vaccinations gain traction, travel restrictions become lifted, and economic and social conditions continue to improve.
In markets like Metro Phoenix where inventory for residential units for sale are at record lows, some real estate investors have asked about what they should look for if (and when) they decide to move forward with a built-for-(short-term) rental development model. Interested in how to take part in this growing real estate market trend? Keep reading to learn more.
1. Location and Target Market
The saying “Location, Location, Location” comes up quite often when having surface level real estate conversations, but it is especially prevalent in relation to short term rentals. When looking at the vacation rental sector’s main competitor, hotels are often situated in areas that are in close proximity to venues that attract guests from other cities and make mention of this in their marketing activity. For example, the Residence Inn and Sheraton hotel brands by Marriott market their properties to prospective guests that are likely traveling for business purposes. Many of these hotels are nearby airports, commercial parks, and corporate headquarters so that they are seen as convenient locations for business travelers to stay during business trips that involve air travel and/or business meetings at another office. Similarly, resorts tend to be located in quiet areas with immediate or close access to tourist attractions such as scenic mountains, beaches, skiing, nightlife, or other leisure activities that would attract vacationing travelers looking to pay a premium for a tranquil escape spanning from a couple of days to two weeks.
In assessing what location is suitable to build a vacation rental property, consider the breakdown of hotel properties above and apply it to your property search. The right property should be marketable as being in close proximity to major employers that would host visiting business travelers and/or major attractions that would attract tourists. For example, one might consider building a multi-unit vacation rental property in Old Town Scottsdale that has mountain views with close proximity to shops, restaurants, and nightlife - all of which are commonly desired amenities for tourists visiting Scottsdale. A similar product could be built in nearby Chandler targeting sun seeking tourists that may want a lower key, family oriented accommodation, however it is worth noting that much of Chandler’s growth has resulted from immense economic development from relocating medium and large-sized companies in search of business and tax friendly locales. Short-term rentals in markets like Chandler can host the families of relocating professionals in need of time to search for a longer term housing solution while their family continues with online work and school in their own “bubble”. Additionally, these properties can be marketable year-round to business travelers who may come with additional support staff (or even their own family) for just a couple days to as many as a couple of months.
A controversial short-term rental consumer demographic is college students. This clientele seeks out available short-term rentals near universities, nightlife, or even suburban areas and have sometimes used these accommodation for partying events. One of our clients said this has happened in the same neighborhoods as their properties in Scottsdale and Tempe, and pointed to shuttered nightclubs due to COVID-19 as the reason for this demand. While this specific target market is certainly lucrative, it means higher turnover, higher risk of property damage, and potential legal consequences for hosting excessive noise, underage drinking, and illegal substances.
Regardless of where and what you build, demand for new development always needs to be closely evaluated. Some building types or specific markets may be in demand throughout the year, while others may be seasonal depending on climate, transient attractions (i.e. Annual sporting tournaments like MLB Spring Training), along with other location-specific circumstances.
2. Build the Right Product
Your buildable project should vary depending on which market you choose and which audience you are targeting. Small studio (and even 1-bedroom) floor plans will be in direct competition with the majority of existing hotels. As those accommodations are offering membership-based incentives, a broad-based marketing campaign and standardized cleaning processes, smaller real estate developers competing with hotels can expect an uphill battle. Our consultants would suggest 2+ Bedroom floor plans with a minimum of 2+ bathrooms, as short-term guests are more likely to cohabitate in larger numbers during their tenancy than traditional long-term tenants. If you are offering urban-styled accommodations, a 2-3 Bedroom floor plan may be the most efficient when trying to offer the greatest amount of space in a high dense surroundings, particularly when building multiple units. If you plan on building in suburban or rural areas and offering private outdoor space for guests (this is seeing increasing popularity in the era of COVID-19 travel), consider a minimum of 3 to as many as 6 bedrooms, with the bathroom ratio increasing with the amount of offered bedrooms. Expect large family and friend groups as well as small corporate retreats to have an interest in this type of short-term rental.
3. Financial Feasibility
More often than not, real estate developers are successful when they have the right product, place, and price. Despite some circumstances in markets with severely limited supply, developers must test the feasibility of a proposed project to ensure that their land, construction, material, personnel, municipal, and other inevitable costs remain as low as possible to ensure that they can sell or rent their development for a profit that is worth their time and resources. Unlike most traditional long-term rentals, short term rentals carry the additional financial burden of fully furnished units, entertainment items such as indoor and outdoor games, all utilities covered by the owner (including internet and cable), and frequent professional cleaning. Some short-term rental owners prefer to self-manage their properties to save money and be more interactive in the process, while others contract third party property management groups that specialize in vacation rental management. Many municipal, county and state governments require short-term rental registration and additional taxes at a similar rate to what hotels pay, so research geography-specific taxes and regulations before confirming that you want to own a short-term rental property.
In closing, now is a great time to plan and develop short-term rental communities, as long as the right steps are taken to accommodate demand and earn revenue in well performing markets. As part of our exit strategy planning and financial feasibility services, WALL2WALL Consultancy can help you structure a short-term rental development to prepare for financial success in any market, as well as provide supplemental tips on what you would need to prepare for being a short-term rental owner. Contact us today and we would be happy to assist further.