Dalton Elliott


Episode 56.

Dalton Elliott, Director of Sales at Lima One Capital

00:00:00 – 00:02:01

I’m back with more short term rental insights. There are some very compelling trends to take note of and really incorporate into your short term rental calculus. What does the supply demand balance look like right now? What are cash flow trends? I will tell you all about it. I’m Dalton Elliott. This is the Real Estate of Things. You’re listening to the Real Estate of Things podcast. All right, we only know a couple of things for certain in this life. The sun will rise, the sun will set, and real estate investors are going to look for ways to maximize profit and r o I. So savvy investors know that there are many ways to capture profit, whether you’re building homes, flipping properties, or just amassing a rental portfolio. But in recent years, the advent of software platforms like um, Airbnb, v r b O, those platforms have really made short term rentals another possible profit center for investors. But because those properties cash flow much differently than traditional rentals, you have to watch out for different trends in order to evaluate whether this strategy is right for your real estate portfolio. So, if you’re in this boat, you know you’re looking at or maybe you have some short term rentals. UH. Knowing what’s happening now with short term rentals, that’s gonna be the key to maximizing profit. You know, this industry was hit harder than most when COVID broke out, but it is re emerging with great vigor. So here are four big trends we have found by talking to investors and just digging into the data. So I truly hope it’s gonna be helpful for you as you look to expand either just your knowledge about real estate or expand your real estate holdings. Let’s jump right into it. Trend Number one, the number of short term rentals is increasing to meet rising demand. I’m gonna put a…

00:02:01 – 00:04:02

…couple of numbers. Actually one point two million, right, that’s the number of available short term rentals, uh. And it’s increased fifteen percent year over year. So now we have more than one point two million short term rentals in the United States right now. But the increased inventory, it’s absolutely needed because what is the year over year demand increase up by fourteen percent? Right? So just barely UM, staying in tune with that up into the right. UM, here’s some other numbers. Forty fifty million, uh, that’s about two and a half percent the one point two million short term rentals. It’s about two and a half percent of the total forty fifty million rental properties that were estimated to have in the US. So it’s it’s no longer a blip on the radar. It’s really increasing and becoming a more and more material part of uh, you know, the real estate investment world. So the fact that both supply and demand are growing so quickly just speaks to the overall growth of that short term rental sector. UH. And also it should provide pretty great assurance to investors considering investments and short term rentals. Right. It’s it’s not a this Although we’re talking about trends, short term rentals are probably not a trend. They are here to stay, to keep an on moving trend. Number two, Consumer preference is pivoting towards short term rentals. I have stayed in airbnbs before I most trips. Now I’ll take a peek see what’s around um and what the options are hotel versus short term rental. I’m naturally a little bit more of a hotel person, and I think that’s the stage that we’re at. You have some folks who are dipping their toe in the water on the short term rental, or people who have just become complete converts, And like, I’m gonna try to get a short term rental and Airbnb b r b oh, I’m gonna try to book through there, and if I don’t find an option that hits the market, then I’ll go to the hotel world. But from an option standpoint, I mean, Airbnb just…

00:04:02 – 00:06:00

…has a litany of options, all across price ranges, all across you know, really similar to a hotel experience, or you can stay it. I’m you know, a budget family hotel you can stay at four seasons, or a more luxury property. So no different than the airbnb world. Back to the trends trend number two, the consumer preference piece. Right, So you ask, why is demand for short term rentals growing? Um, it’s just an overall consumer trend. There’s nothing while driving it. I think, Um, you have you have, uh, just a different consumer than you did twenty forty sixty years ago. Um. And here are a couple other pieces, right. Vacation rental industry stats UM courtesy of Eye Property Management. They showed that a majority of vacation ers choose single family homes, detached single family home over hotels, condos and the like. Uh one other piece. While the majority of short term rental bookings are seven days or less, long term stays are growing. If you go in Airbnb right now on the date section, you can just go ahead and click by month and you can see units that are available month by month. And especially as you have really the advent of remote work, remote work exploding uh u F folks who are exploring the options of Hey, I’m gonna work remote full time and that allows me to travel and just live different places as opposed to using my PTO here and there. If I want to go visit you know, name wherever, you just go live there for months on end. And these two trends, the first two trends we covered, they really speak to changing behavior that’s leading to increased occupancy in this space. You know, currently occupancy and short term rentals is right around six and that’s up from fifty three cent just three years ago.

00:06:01 – 00:08:03

Right So, looking at now versus just before COVID, more occupancy, what does that mean? That means less risk and more dollars for investors. I think that’s the appropriate order to stack those in right, less risk protecting your downside uh, and more money, more cash flow in the property. Uh. And one other piece, guests are choosing larger units. Um. Right now you have about thirty of short term rental bookings being for one bedroom units, but the two bedroom unit not too far behind it, and then three bedrooms. Um. You know, whenever I am looking to go travel with a group somewhere a couple of friends like air Airbnb really pops up in that type of trip planning, right if you’re looking to go somewhere with another couple, or if you’re looking to go somewhere with a big group of friends. Uh, it’s generally easy year to structure that sometimes in an Airbnb search than it is in a hotel search. Can be more cost effective too, So keeping right along the third trend I want to talk with you about, short term rental income is increasing. This is another good. This is another positive having rentals occupied more often. That’s not the only way you can see your profits increase. You’re just making more money on rental units right now. Right as we see long term rents increase, the same things happening in the short term rental space. The average daily rate right now, it’s about two hundred and fifty dollars average daily rate for a short term rental. That’s an increase of nearly thirty six dollars a day just from three years ago. Really using that pre pandemic METRICUM nineteen as a more fair comparison as opposed to you know, comparing two years ago to UM. Likewise, the revenue per available room that’s rev par to be r A v P A r UM it increased thirty…

00:08:03 – 00:10:00

…five dollars a day over the last three years to a hundred and fifty dollars UM. That that number shows what a short term rental landlord will make in average, whether the unit is rented or not. So with all these numbers, the average annual revenue for a short term rental that’s listed full time has grown to fifty six thousand dollars a year UH. It’s the highest level ever according to air d na UM. Air DNA is a great partner only one capital and if you are looking for a place to either dip your toe in the water on air short term rental data, if you’re looking at potentially buying a unit, highly encourage you to visit air DNA their platform, both just user friendliness and the data that’s behind it is second to none. Um. So let’s translate those numbers into monthly rent you know, rev par indicates the average short term rental is going to bring in more than undred a month. Uh. That number only increases for rentals that are listed full time. Now compare that to US detached, single family long term rental property. Very easy to see why so many investors are flocking to short term rentals. Uh. And while vacation markets are very strong, uh, we’re seeing an explosion, really an explosion uh in kind of non traditional markets, places that you don’t normally think of when you think of vacations. Uh. And it should come as no surprise that vacation destinations were tremendously popular during pandemic shutdowns. People with the ability to remote work naturally chose the best climates during that time. You’re looking at you know, Sedona, Cotchella, Valley, Lake, Tahoe Park City, Steamboat Springs, all those are showing decrease demand. Right, But that’s more of a return to normalcy than it really is a sign of weakness.

00:10:01 – 00:12:00

But with with the pandemic turning endemic, um, the return of normal activities means that more typical markets you know, New York, Philly, DC, Silicon Valley, go on and on, they’re showing increased demand, right, the return of big events. That’s another thing of sports back h festivals. Uh. You know you look at South Bend, Birmingham, Eugene, all cities that tie ended at You’ve seen increased demand there. So what’s the net result of these changes. It’s really that you know, vacation based short term rentals are still popular, but business travel rentals and event focused rentals they also provide quality, quality returns. It also helps in a lot of markets where you have um, you know, a lack luster um number of hotels. One place that comes to mind is Boston, right. I think it’s this is something that I’m going straight off the top of my half. My sister went to college in the Boston area, and I always remember anytime I would visit her, it seemed like hotels rather sold out or just ridiculously expensive for that metro. Uh. And I think the big pieces that you just don’t have UM supply that really meets the demand. UH. And airbnb short term rentals things you look through air Airbnb v R b O do really helped cover a gap in lodging in areas, especially whenever you have areas and cities that don’t have enough supply to cover demand. So those two short term rental trends really show the strength of this growing investment class. And if you’re interested in, you know, really diversifying your rental portfolio, uh, it’s a…

00:12:00 – 00:14:00

…good time to consider doing so. Um. But remember that market fundamentals. We’re talking very broad percentages, very broad dollars, all broad metrics. They don’t guarantee success. You need to design a strategy specifically for your situation to ensure profit. A couple of factors you can consider whenever you’re thinking through this market proximity, yield, cash financing. Right, I think those are the key ones, uh for the market piece. Right, The strength of your investment is going to be based on how the property fits into the market. Is the market geared towards business travelers or vacation ers? What amenities do you need to have to really drive maximum returns? Did an episode a couple of months back talking about short term rental amenities the best ones to pick to get the most bang for your buck. You also need to look at sub markets. What what sub markets are populer, especially with values so high right now, even though we’re seeing a little bit of cooling off, which is definitely appropriate and healthy. Uh, even as we’re seeing that cooling off, Uh, you know, looking outside of just the big blue chip areas not the worst idea, but uh, you know, how how is your market going to affect your investment? So do your homework there. Proximity is another one that’s a really big one, often overlooked. Right, Managing a short term rental is way more time consuming than a regular long term rental because of the turnover. Right, are you close enough to manage it yourself maintenance issues, cleaning issues, or do you have a strong property management company that can take care of that for you? You know, as you’re penciling out the numbers, if you’re doing the property management side, make sure you’re accounting for that. It’s not cheap, but you get what you pay for, right, So there’s a massive convenience and efficiency factor. There can one person or when…

00:14:00 – 00:16:00

…company manage all your rentals or do you need to build a team to Proximity is a big one to keep in mind. Yield is another thing you need to calculate yields differently for short term rentals than you do long term rentals. How much money can you expect to make, what’s the upside, what’s the downside? Um? How can you account for factors like weather or special events to really maximize return in peak weeks cash As important as the yield calculation is to really understanding when money will be coming in. You know, make sure you have enough to account for the slower times. Is your short term rental a summer rental by the beach, you know, a mountain cabin um the high in demand in the fall um, or something winter related ski snowboarding area that is in high demand in the winter but less demanded in other seasons. So knowing when money is going to come in that’s gonna allow you to manage your cash flows. Expenses that come during slow times don’t put you in a crunch. And finally, financing, typically rental property financing UM which underwrites on debt service coverage ratio that doesn’t account for the more unstable short term rental income that you get. So you need a financing partner for your short term rentals that really understands your strategy and has financing options that match. Uh. You know my day job, I work at lem and Capital. We offer both long term and bridge solutions UM for our clients who have short term rentals or are looking to get into short term rentals. Uh, you know, a variety of long structure options just so you can implement your strategy however you choose. So that’s it. I hope you learned something from today’s episode. Uh, short term rentals are here to stay. That’s abundantly clear, and I think it’s a great thing. Um. They absolutely serve really of a number…

00:16:00 – 00:17:19

…of facets of the real estate space and of the lodging space. It’s really a good symbiotic relationship. So thank you all for listening. Take care. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? LIMA one Capital has the best suite of loan products in the industry, bar none. Whether that’s fix and flips, fix and holds, building new construction, or buying rental properties, they have incredible finance and solutions for it all. A reliable, common sense lender is one of the most important parts of your investment team, and that’s exactly what you get with Lima one. Let Lima one Capital show you how they’ve helped thousands of real estate investor scale and increase their wealth. Check out Lima one dot com or call eight hundred to five nine zero five nine five to speak with the consultant and preparation for your next project. Thank you for joining us today on the Real Estate of Things podcast. Subscribe and tune in weekly for new content from the industry’s best while we continue to unpack the nuances of this dynamic market. Follow us across social media for additional insights and analysis on the topics covered in each episode, and remember to rate, review, and share the show.

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