With the release of the National Association of Realtors’ annual report on vacation home and investment property activity comes confirmation that the second-home market is booming while the rate of investment property purchase is declining.
The report touches on many areas that show a drive toward investment in short-term rental by three specific groups — affluent families, preretiree baby boomers, and investors who traditionally bought into residential rental properties.
This development is exciting for real estate agents who are looking for a new niche. Demand for short-term rentals is on the rise, as growth of the major players continues to reach new heights, and the strength of this market shows no evidence of a slowdown.
1. Second-home investment is on the rise.
According to the report, vacation-home sales accounted for 21 percent of all real estate transactions in 2014 — the highest since the survey began in 2003.
Despite arguments that the running costs of a vacation home cannot be fully met by short-term rental, many buyers are now factoring the potential of this income in their decision-making process
Takeaway: The growth in these sales coupled with the rise in demand for vacation rentals as evidenced by the runaway success of companies such as Airbnb and HomeAway creates the potential for a highly profitable niche business.
2. Interest in investment properties is slowing.
The NAR report shows a decline in the sale of residential properties purchased primarily to produce rental income, or for potential price appreciation, for the fourth straight year.
NAR Chief Economist Lawrence Yun attributed this to the decrease in distressed properties coming onto the market thereby reducing the number of bargains available to turn into profitable rentals.
Takeaway: Whereas traditional investors had a wide knowledge of their market with substantial online content available to them, the short-term rental model is vastly different and creates opportunities for real estate agents to become the go-to expert. Those who master the niche are likely to have buyers (who need the specialist information that is not as easy to obtain from online resources) seek them out.
3. Vacation-home owners live 200 miles away.
Vacation-home owners typically live over 100 miles from the property, which means if they plan to rent it out, they will need property management options in place before they buy. Property management companies differ widely, so it’s important to research what is available for a range of scenarios.
Takeaway: Referring your buyers to a list of suppliers will boost their confidence in you, particularly if you can explain the different property management options to them. Many new owners will be foreign investors who need more support than typical residential buyers, and they will find your expertise helpful.
4. Boomers are buying for later retirement.
Of vacation-home buyers, 19 percent plan to convert the property into their primary residence in the future. To fund those plans, buyers will be looking for properties that will meet their retirement needs, but they will also look for features that will create an income from rental in the interim period.
Takeaway: Beyond understanding the specific needs of the retirement market, a good knowledge of short-term rental demand, an understanding of occupancy rates and seasonality might make the difference between boomers choosing you as their buyer’s agent or choosing your competition.
5. There are more affluent families.
The typical vacation-home buyer in 2014 had a median household income of $94,380, and 54 percent of them bought a single-family home with a third of all buyers using the property for vacations or as a family retreat.
This stat shows that second-home purchase for the purpose of a family holiday is not slowing down. Typically they bought in the South and beach locations, so if that is where you are, these buyers could be your new market.
Takeaway: Become familiar with the inbound tourism demographics for your location. Collect information on how many people come for vacations in the area and for what type of accommodation they are searching. Prepare a fact sheet that you can share on your website. The prospect of being able to rent instead of leaving the property empty might encourage buyers to look at higher-value properties.
6. City locations list bolsters credibility.
Vacation homes are not all located in the traditional beach/mountain/lake regions, and those buyers who might have bought investment properties in cities purely for residential rental are now turning to the short-term market as a more lucrative model.
Airbnb has changed the landscape for city dwellers, particularly those who travel frequently. The option to rent their space while away, thereby creating an income flow, is attractive. In addition, the advent of Airbnb add-ons that coordinate cleaning and maintenance, bookings and other peripheral services, such as key management, concierge and even dining experiences, has made purchase of a city apartment or condo an option to strongly consider.
Takeaway: Creating a list of city locations where short-term rentals are popular such as theater districts, convention centers and sports arenas, will help to bolster your credibility when dealing with millennial buyers and first-time investors.
7. Regulations could trip you up.
The final takeaway is not so much from the NAR report, but rather it comes from an increasing movement in many areas to regulate the short-term rental industry. From outright bans to licensing systems and the collection of transient hotel taxes, the range of legislation at every level is becoming more complicated.
Takeaway: If you plan on diving into this niche and increasing your knowledge base, make sure you understand the current regulations and any pending legislation in your location. Selling a property to a buyer who intends to create income from short-term rental, only to come up against a wall of restrictions, does not contribute to a good relationship. And considering that most vacation-home investors plan to buy again in the next two years, this is a relationship you want to nurture.
In closing, the NAR Vacation Home and Property Investment Report gives a very clear indication that the second-home market is flourishing. With it comes great potential to share your knowledge of the vacation rental market, and help buyers make great decisions.