The (Overdue) Collapse Of Short Term Rentals

Mon, 06 Nov 2023 12:02:35 +0000

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#realestate #airbnb #business

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Short term rentals are a one hundred BILLION dollar [$100,000,000,000] market that have reshaped global tourism, accelerated a nation-wide housing crisis, and created fortunes for early adopters. But now customers, the government, the public AND the hosts themselves are turning their back on a concept that started out as a fun alternative to stuffy hotel chains, but became everything wrong with modern real estate.

The short term rental market took off when Brian Chesky and Joe Gebbia tried to rent out a spare room with an air mattress to attendees of a conference because they realized all of the hotel rooms had been booked out.

They called their service Air Bed And Breakfast which was later shortened to the short stay app that you know and love (or hate) today. Air BNB is now worth more than hotel chains like Hilton and Wyndham combined. The company is by far the largest short term rental company, and it has achieved excellent penetration into markets around the world where other similar peer to peer or network market apps like Uber, Doordash, Lyft and even Amazon have failed to take share away from local competition.

It WAS a good idea, customers loved it for giving them a cheaper alternative to outdated hotels, and hosts liked the opportunity to earn extra income on a spare bedroom or even an entire separate property.

But the four parties that make the short term rental market work, the customers, the hosts, the public and the platforms are all not dealing with four unique problems that are threatening to undo this market and take out a lot of other real estate investments with it.

The first problem lies with the people who it’s hardest to feel sorry for, the hosts.

AirBNB and other short term rental platforms provided a unique opportunity for people to profit off real estate in a totally new way.

The extra income was nice but the added flexibility of a short-term roommate was the biggest appeal to most people. With a short term tenant, any problems are only going to last as long as their short stay. That was the early value proposition of AirBNB, but sharing a spare room and staying with a random person while on holidays only appealed to a certain type of alternative traveller.

Most people who AirBNB are putting up entire properties for guest to use as exclusive accommodation.

Instead of a short-term alternative to a roommate, the market became a short term higher yielding alternative to a conventional long term tenants in an investment property. They fitted doors with keypad locks that could be changed remotely between guests, easily cleanable surfaces, inexpensive but fashionable fittings and preferred properties with minimal landscaping.

All of this cut down on the additional effort hosts needed put in to managing a property.

But like all good thing it didn’t last forever.

AirBNB advertised its platform just as hard to new hosts as it did to guests and investors started buying multiple homes to turn them into AirBNBs.
Their fee was higher, but the higher short term rental price meant owners still came out ahead.

The additional cashflows from higher yielding short term rentals also made it easier to qualify for more home loans because the additional income could be used to pay for the loan on the next property and the next property.

The inevitable result was clear… for little additional effort hosts could make more money from their properties, so the market became oversaturated and host started to struggle to rent out their properties enough to make it worthwhile.

Short term rentals also made long term rentals more expensive so the gap between what someone can make from a short-term rental versus what they could make from a long-term rental is narrowing.

For many hosts it’s no longer worth the additional risk and effort to rent out properties short term, and for others that could only afford their loans because of the higher rent they got from short-term rental yields, they might be forced to sell.

So it’s time to learn How Money Works to find out how short-term rentals got so big, and failed so quickly.