Short-Term Rentals Risks and Opportunities You Need to Consider | Tim Hubbard

Welcome back to the Short Term Rental Riches podcast. Happy you are here again. Things are changing in the economy. I'm sure you're aware of this. I just got back from 10 days in Belize with some of the smartest macroeconomic minds that I know and I want to share what I learned. So stay tuned. Let's jump right in.

Welcome to Short Term Rental Riches. We'll discuss investing in real estate, but with a specific focus on short term rentals. Quick actionable items to acquire, manage and scale your portfolio. I'm your host, Tim Hubbard. Welcome back to the Short Term Rental Riches podcast. So I just got back from Belize. This is the seventh year that I've gone to this conference and I learned so much every time. It's a diverse group of investors. A lot of them are super, super smart when it comes to economics and especially macroeconomics. Every time I leave this conference, every year, I've got a good dose of reality and what' really going on behind a lot of the charts and a lot of the news and a lot of the things that we see in front of us all the time. And I gotta say, unfortunately, there was a large consensus that things are not looking that good. Consumer credit card debt is up, people are starting to default on their auto loans. Consumer confidence is at a historic low. Interest rates are shooting up, which means money costs more and that's a affecting asset prices. So there was a lot of doom and gloom. But you know what, our economy's been propped up by a lot of printed money for years and years and we got that huge end surge during COVID and that didn't help us out a lot in the long run. So the general consensus is we're headed into some stormy weather, but on the other side of every storm.

Skies are blue and the sun is shining. So I want to give you kind of my strengths, weaknesses, opportunities and threats that I see with short term rentals. I'm a short term rental investor. I've invested a lot of real estate and I'm not biased just to short term rentals, but they are a unique class and I want to break down just some of the strengths and weaknesses that I saw. I was called up to talk in front of the group and kind of caught me off guard. I wasn't really ready. And after I had already spoke, I was sitting down there in the audience and I realized I left out a lot of things. So I made a little more comprehensive list and I want to share with you now. So shall we start with the risks, the threats, or the opportunities.

Let's start with the risks, the threats. Let's get the hard part out of the way. So some of these are obvious things and some of these things you guys have heard me talk about before on this channel. So regulation change. This is an obvious one. As recommended before, it's better to be in a place where you can secure a permit and you already know. But this is a risk to short term rentals. This is something that can change. I'm just going to jump through them. This is going to be like rapid fire risk versus opportunities. And there are a lot of opportunities even with the recession coming. So stay tuned, don't take off quite yet. So regulations can change. You could have a bad neighbor move in. My brother just sold his house because they had a neighbor move in that was riding their motorcycle up and down the backyard day in and day out and they just didn't want to deal with it. I don't think that was the only reason they sold their property. But that affected the way that they were living there and so they sold and they moved to a different spot. But this can happen with short term rentals too. If you have a neighbor that doesn't like you having guests in and you don't have a permit, well, then that can be a risk. I talk a lot about having backup plans with my short term rentals. So as most of you know, if you've listened to this, I acquire properties that are operating as long term rentals first and then I convert them to short term rentals. So that's an excellent backup plan for me. If something happens in the short term rental space, I'm going to go back and I'm going to rent it as a long term. So if you have a property out there or you're considering buying a short term rental that doesn't have other uses like going to a long term rental, or it's not very likely that could be rented as a long term rental. Well, then that is going to be a little riskier. Along these same lines, is it easy to sell your property? Some types of properties are easier to sell than others. A entry level single family home, for example, in the suburbs, $350,000 is normally going to be a lot easier to sell than a $4 million mansion overlooking the seas. There's just less people out in the world that can afford that type of property. And so it's going a smaller buyer pool. So if you're investing in properties, have smaller buyer pools and you want to get out of one for some reason Then it could be a little more risky if you have less potential to sell the property. A big one, and maybe the biggest one that I see intimidating people from getting in the short term rental space to begin with is property damage or risk with our properties. So it is true. People can have a party at your property, they can damage things, they can steal things, they can accidentally set your house on fire. This is true. There are lots of things that can happen with our properties. They can slip and fall in your shower and try to sue you. So there's a lot of risks in regards to the properties. But don't go anywhere. We're going to talk about the flip side of this. Remember, there's a flip side to every challenge. There is opportunities. So let's get through a few more here. Oversupply. What happens if you get a short term rental and then every single person on your street and in your neighborhood also rents their property as a short term rental? Well, it could lower your price, right? Assuming the demand was not exceeding the supply. So this is always a demand supply equation. We want to be in a place that has more demand coming in than it has supply. That'll ensure that we have good rates and good occupancy. So I talk about a lot on this channel. Being in the right city to begin with, being in the right place, in the right neighborhood to make sure we have demand that we need for a successful investment. So that is a risk, though you could have oversupply, discretionary income disappears. So this happens in recessions, right? And so if we're in one already or we're starting down that path or we'll soon be in recession, people are going to have less money to spend, which means they're going to go on less vacations. So this is going to affect different types of short term rentals in different ways. So if you have a vacation rental, a pure vacation rental, it's likely you could see lower occupancy. Now, not all vacation rentals are created equally. Some might be rented out for years, but if you're just getting started, you might have a little harder time if some of this discretionary income goes away and people are traveling less travel bans. What about travel bans like Covid or a war? I can't believe I even have to mention that now. But these are realities, right? There are times when people just can't travel because of government restrictions or regulations or whatever it is. So hopefully we don't have too many of these again in the future. But that is a risk for Us in the short term rental world, if we're counting on, if we're relying on people traveling. So remember that financing terms, this is for those of you that have loans on your properties. What if your loan is not locked in and the interest rates go up? Like they're going up right now, that can really affect your returns and that can be risky. So it's nice to have a long term locked in rate. If you don't have one now, you know interest rates are going up right now, it doesn't mean that they're going to go up forever. We're trying to control inflation and the only way we can do that is by raising interest rates. And so hopefully we get to the point soon where inflation is a little more under control and we can lower interest rates back down, but we don't know when that will be. So if you don't have fixed financing, this can be a risk. But this isn't just a risk for short term rentals. This is a risk for real estate in general or businesses in general or anyone that has a loan and needs the lower, less expensive financing terms to be successful or to have a good investment. So that is another risk. Increased costs, supply shortages, increases in wages, all these things can affect our bottom line, can affect our return. And with short term rentals we have to buy quite a few things that we don't with long term rentals. So we don't have to buy furniture for long term rentals, we don't have to pay housekeepers and all these things. So if these costs go up but we can't raise our rates, then that is a little riskier, another risk. And again there's a lot of different risks based on the type of property you have, based on the type of short term rental you have. There's so many different types of short term rentals from the, the yurt and the desert and Joshua tree to the castle in Ireland overlooking the ocean. There are risk parameters based on the type of property you have. If you guys been listening to the show for a while, you know that I like to invest in cities that have good population growth, good employment diversity, their landlor friendly. All these things that make for a good market for long term rentals too. But depending on type of property you could have much more risk than someone else. Especially if we are heading into recession. Okay, so that was quite a few risks and that was by no means comprehensive. There's a lot more that I'm sure I left out. But just to give you an overview now for the Good part. Hopefully you haven't left me yet. Because there are a lot of opportunities and even with recession, still bullish on short term rentals. So number one first opportunity, we can make more money with short term rentals. We can, I have a lot of people have, but not with all short term rentals. Right. So that all comes down to the numbers. But there are lots of opportunities to make much more cash flow with a short term rental than you can with a long term rental. Another nice thing in regards to the finances. Our income is paid up front so we don't have risk of someone not paying their monthly rent. Right.

If we have a really successful vacation rental, it can book up years in advance. So I mean you could have all your income paid really far in advance. That doesn't really happen with long term rentals. So in the short term rental world we have more visibility than we've ever had. So short term rentals, the demand has grown exponentially and it's still growing. People are deciding to stay in short term rentals over hotels. So we have more visibility than we ever have. We also have more people working remotely than we have ever had. And now there are a lot of companies requiring people to go back to the offices to work, but it's not going to go back to pre pandemic levels. So we will have more people working remotely, which means they can stay in our properties longer. And they are, and the data shows us that. So that is good news for us that are invested in short term rentals. Those long term stays sometimes are longer than others actually to the point now where people are living in short term rentals. So there is a big merger happening between long term rentals and short term rentals. There are people that are staying a few months at a time here, a few months at a time there. And, and that wasn't really a common thing years and years ago. It's much more common now and that's good for us in the short term rental space. Boost our occupancies and we get higher rates than we can potentially with a long term lease. So life and business and travel, they're all kind of merging. Those are great signs for short term rentals. Marriott Homes and Villages for example, they are a division of Marriott and they started right before the pandemic. I think they had 2,000 rentals, they have 60,000 now. That shows you one of the biggest hotel companies in the world is trying to stay ahead of this demand. They are adding a lot. That's 30 times growth, 30x growth in just a few years. So the biggest players in the world know this, and that's not going away. Airbnb guests have now booked over 1 billion stays. 1 billion with a B. That is a lot. And remember, that's just Airbnb. There's a lot of other common OTAs like VRBO and HomeAway and Expedia and booking.com and TripAdvisor, Google Vacations, there's a lot. So people are staying in them. It's great. It's great news. I enjoy staying in them myself. Property protection. We have way better protection for our properties than we've ever had with short term rentals. Not only because of the OTAs like Airbnb has their air cover. If you missed that episode, go back and check it out. Provides way more protection for our properties directly through Airbnb, but we also have insurance companies popping up to specifically insure short term rentals against our property damage and liability against our guests. So we have much more coverage. Then of course, we have all this new technology like smart cameras and smart locks and all these things that can help us protect our property a little bit better compared to long term rentals. With short term rentals, we don't really have that giant turnover cost. I have plenty of long term rentals where the tenant moved out and I had to paint the whole unit or have the whole unit painted maybe I had to change the flooring, do all these things. And so it was like one big cost. And I still have long term rentals. So this still happens occasionally, unfortunately, but that doesn't really happen with short term rentals. Right. If we're in there, we're checking them out more and more often. Our housekeepers are in there. We don't have like one giant turnover expense like we might have with a long term rental. Lending options. Now, I know this might not be the best time to talk about lending because interest rates are going up, but the reality is there are more and more lenders lending specifically for short term rentals than there have ever been. And they will base it off of your short term rental income. So not all lenders are created equally. Some have much better terms than others. But just know that we have way more options now than we ever had before. Speaking of options, we have tons of management options now, so we don't have to manage our short term rentals ourselves. And there are way more options than there have ever been. There's lots of tools, management platforms I talk a lot about on the show. I really like using software. We have more Software tools than ever. We have the ability to manage a lot of our short term rentals virtually, which is super scalable, right? That's what I do. So my whole team is in the Philippines and they're excellent, they are amazing. And I know that I can add properties essentially anywhere in the world. We can plug it into my system and they can help manage them. So you can have a virtual management team to really, really scale. But on the ground we also have more options too, right? We have more management companies popping up for short term rentals. We have more people supporting the industry. So management has gotten much, much easier as well. Another benefit to short term rentals is for a lot of people, they have a property that can already work as a short term rental. It might be a guest house in the back of their primary residence, a granny suite above the house. A lot of people have a property that might work. It might be a traditional rental that has good short term rental qualities. So if we have assets that aren't being used most efficiently like a guest house, that could be a short term rental. By adding that, that really helps boost the income. Especially for the middle class. It's kind of getting squeezed right now. That helps boost their income and use an asset that they already have. So I think that's another good one as well. Another note on scaling, there are lots of ways to scale with short term rentals. Now you guys know that I managed over 20,000 guests with my team and my properties. But you can do it much, much bigger than that. You can do large developments designed for short term rentals knowing that people are now not just visiting short term rentals, but they're living in them. So hotels are doing this now. They're building their properties differently. Some of them are having co working spaces in there. They're being built as short term rentals. So we got to take these cues from some of these hotel companies and the hotel industry that's been around a really long time. They know that a lot of people are preferring short term rentals. Another benefit to short term rentals, we have the option to do them anywhere in the world, right? Of course we can't invest easily anywhere in the world. Depends on our residency and our citizenship. But I have properties in two other countries outside of my home country and they operate very well as short term rentals. And that's kind of cool, right? It's just kind of. It's more fun, I guess. That's what I'm getting at. Long term rentals, don't get me wrong, they are a sure path to wealth if we do it right. And I still like long term rentals, but at the end of the day, a lot of times they're more basic. Tenant goes in there for a year. We don't have the design element. We don't get to be as involved on the creative side as maybe we would want to. Before I start with short term rentals, I didn't realize that I actually really like interior design. So there are a whole bunch of benefits. I'm going to leave you with one more. I know this episode's been a little bit longer, but this is a super duper important one. And it's tax benefits. So there are a lot of tax benefits available to you potentially if you're operating a short term rental. Tax benefits that are not available operating traditional long term rentals. So it's called materially participating versus being a real estate professional, which is what the long term rental world would potentially designate someone as. So both of these designations allow you to use your real estate losses to offset other income. But it's much harder to qualify as a real estate professional because it has to be your primary job versus operating a short term rental. So there's some huge tax benefits there. And if you enjoy traveling like I do and you're a professional investor and short term rentals, check with your cpa. But very likely you can travel around the world and you can write off your expense staying in a lot of these accommodations because it is legitimately research if you have it structured that way and if you are in fact researching so tons and tons of opportunities. I know there's a lot of craziness going on in the economy right now, but there's always two sides to everything, right? There are some scary sets of data out there and depending on the type of short term rental you have, it might be riskier than others. But on the other side, there is a ton of opportunity with short term rentals. I'm still excited about them, I'm still adding them, although I am being careful. And I would tell you that I'm not rushing into anything at the moment. I'm not in a huge rush to acquire properties right now, but if the right one comes along, I'm still going to acquire it. And if things continue as they're going, I do think there's going to be some really good opportunities to pick up a lot of properties, maybe at a good discount. So hopefully that didn't freak you out. Hopefully it excited you a little bit with all the opportunities. And again, this wasn't a comprehensive list, so I know it probably left out a lot of things, but I just wanted to give you quick update for me jotting my notes down at this recent conference I was at. I hope you guys are doing really well out there and I hope you found some value in this episode. Until next time, I hope you have a wonderful day. Cheers. If you're looking for a ton of free resources, well, you can check out the links in the show notes or head to our website restmethods.com where you'll find free guides, house rules, and my ebook on finding the best short term rental properties. Thanks for tuning in.