The Downfall of Short Term Rentals

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The Downside

Increased Risk

Short-term rentals carry a higher level of risk than traditional long-term rentals. You're relying on a constant stream of short-term renters, which can be unpredictable and may result in more frequent turnover. This increases the risk of damage to the property, late payments, and other issues.

Legal Issues

Many cities have strict regulations regarding short-term rentals. These regulations can vary widely from place to place and can change quickly. As an investor, you need to ensure that you're in compliance with all local laws and regulations, which can be challenging and time-consuming.

Management

Managing short-term rentals requires a significant amount of effort. You need to market the property, handle reservations, and deal with any issues that arise during the rental period. This can be challenging, especially if you're managing the property yourself.

Seasonality

Short-term rentals are often subject to seasonal fluctuations. Demand may be high during peak travel seasons, but may drop significantly during slower months. This can make it difficult to maintain a steady stream of income.

What Do You Do When Rent Growth Disappears in a Market?

The asking rents you could’ve gotten a couple of years ago aren’t so readily available right now. In many cases, we're seeing negative lease tradeouts happen.

That means when a tenant moves out and you try to re-lease that unit, you're actually getting less rent than the previous tenant was paying.

Public people say, “Oh, this is bad. Interest rates going up is bad. Rents not going up is bad. And how do we deal with that?” 

The question becomes critical: in an environment where we're trying to buy and scale, how do we do it? Do we just wait for the market to improve or do we do something else?

This problem goes deeper than just lower rents. There's still an oversupply issue that hopefully should clear up in the next year. We're still in the middle of that oversupply. Deliveries are high, and they're still coming in. 

Investors who don't adapt their approach are either going to overpay for properties or sit on the sidelines indefinitely. Neither option helps you build wealth or scale your portfolio.

How to Adapt Your Strategy When Markets Shift

The key is understanding that you're constantly adjusting your underwriting. You can't keep using the same assumptions from two years ago. Here's how to handle the current market conditions:

First, adjust your rent projections realistically. 

Let's say, for example, your rent is $1,400 on a current unit. That tenant moves out, but you can only get $1,350 now. If you have a $100 rent bump from renovations, you have to price that now at $1,450. So, $1,350 plus the $100. Instead of going $1,400 plus $100, you're going back $50 and up $100. It's a little bit of a different dynamic, but that's what has to go into the underwriting now.

Second, focus more on renewals. 

We're talking about it in the podcast on renewals because that's where you can maintain your income. When markets are flat, keeping good tenants becomes even more valuable than trying to push rents on turnover.

Third, use reliable data sources. 

You have to look at CoStar data to really understand where they're projecting rents to go, so you can have that organic rent growth kick back in after a year. Don't just hope things will get better – base your projections on solid market research.

Fourth, factor in forced appreciation correctly. 

You're forecasting whatever the forced appreciation rent bumps are. Let’s say you renovate a unit. Ideally, those renovations should allow you to ask for higher rents for that unit. But right now, you might have to start at a lower baseline. Even though your improvements still add value, you still need to be realistic about your starting point. 

Better Deals Are Available 

Here's the good news: you're typically able to get a price reduction on whatever you're purchasing as long as the market understands that going into whatever you're purchasing. Sellers are starting to recognize the new reality, which means better acquisition opportunities for investors who underwrite conservatively.

It's very difficult or impossible to try to time the market. The market is never perfect. If we try to time the market, no one would be buying anything, right? Instead, you adapt your underwriting and your tactics so that they fit the current market. 

This creates opportunities for disciplined investors. When others are backing away from deals, you can step in with realistic projections and secure properties at better prices. The key is making sure your conservative assumptions still support profitable deals.