As Airbnb struggles to stay afloat during the pandemic, investors who have built short-term rental empires on the platform have a tough decision to make: They can keep their properties and wait for a rebound, or sell them to build liquidity for a plausible longer-term recession.
Rental & Realty Group Managing Broker Luana Leventhal told Inman a sizable share of investors in Davenport, Florida, are considering the latter option since they’re unable to handle housing costs for multiple properties.
“It’s a tough decision,” Leventhal said. “A lot of people are really struggling and it’s sad. We think [the slowdown] going to extend through the summer and fall until travel bounces back and people can afford it.”
“A lot of people who own a property with us, they don’t own just one. They own 10 or 15. Their number one concern is the period of vacancy and lack of funds,” she added. “Ten homes not generating income is a problem versus one or two, which is workable.”
Although the focus is on mortgage payments, Leventhal said investors must think about utility costs, maintenance and repairs, homeowners’ association fees and property management.
“Some of these communities have high HOA fees of $500 or $600 per month, and some management companies are still charging fees although the home is sitting vacant,” she said. “If it’s costing you a ton of money each month, you have to think about how long you can carry the property and if you want to carry that property.”
For owners who aren’t ready to let go, Leventhal said they’re shifting their rental strategy from short-term to long-term leases anywhere from 60 days to one year.
“We’ve seen a large influx of people for the past two weeks converting their properties from a vacation rental to a long-term property rental,” she said while noting investors employed the same strategy in 2008. “The rental market is still strong. However, a lot of people who are normally here at this time of the year to buy, are not here.”
“A lot of homes in Davenport are newer so they’re not at a point where they can sell without taking a loss,” she added. “We’re anticipating they’ll hold onto them for a couple more years before selling.”
In Palm Springs, California, KUD Properties Vice President Ross Stout said investors are more likely to keep their properties and pivot to a long-term rental strategy in hopes they’ll benefit from what Palm Springs has to offer in terms of long-term home appreciation and rental opportunities.
“People are seeing the long-term value of Palm Springs, and they’re sticking it out,” he said. “Palm Springs is really driven by tourism and the Airbnb market. We’re one of the top Airbnb markets in the United States and the top second-home market.”
Much like Davenport, Stout said investors are focusing on long-term rental leases with the goal of getting someone to sign for one year. Long-term rental rates sit about $5,000 per month, Stout explained, which is a $1,000 to $5,000 cut from the revenue generated by Airbnb renters.
“Most people are able to find an annual tenant and come close to matching their Airbnb revenue,” he said. “I’ve seen a lot of my clients go to a 30-day or 60-day rental, and it’s been easy to find a 60-day tenant because why not be quarantined in Palm Springs.”
“I’m listing a home for $1.5 million right now and I can’t show it because six people under 30 were down here for a weekend, and then pandemic hit and they decided not to go back to San Francisco,” he added. “They’ve been in there extending [the lease] for 10 days at a time, and it’s been 90 days now. They don’t want to go home.”
For those who must sell, Stout said it’s been relatively easy to find buyers due to pent-up demand in the area. However, investors must be prepared to sell right at market value to get deals moving.
“We don’t know when Airbnb will come back to our area, it’s somewhat of a moving target at this time,” he said of investors who want or need to sell. “Sometimes the inability to hold a second mortgage without any income on it for a 90-day period, they need to get it sold.”
“It’s not quite a sellers’ market due to the uncertainty, but we’ve been able to come to a happy medium being there’s low inventory and high demand,” he said of three listings with multiple offers. “It’s been easy to form deals at market value.”
Although investors may feel the pressure to sell quickly, Stout advises them to avoid a fire sale at all costs.
“Never settle for a fire sale, and from what I’m seeing there’s still high demand,” he said of many vacation and second-home markets. “With phase two starting [in California], that’ll give people more confidence to put their home on the market to meet buyer demand.”
Meanwhile, in Park City, Utah, Summit Sotheby’s International Realty agent Christine Grenney said investors in the city are holding tight to their investments as most of them are experienced and relatively unfazed by unexpected market slumps.
“I don’t [think] we’re going to see very many people with the ‘I have to sell,’ approach,” Grenney said. “That would be a unique case-by-case where they need the revenue for something else.”
“I don’t see people wanting to sell a property because of a few months dip in their revenue,” she added. “Any good advisor will tell you [that] you shouldn’t buy vacation properties if you have to bank on them being booked every single week or month of the year.”
She added, “You should have some reserves in place for something unexpected. It would be somewhat shortsighted to let go of a property.”
Grenney, who owns a handful of properties herself, said she’s shifted to a long-term rental strategy and has kept her rent costs at the same level even though the rental market has slowed. As it may take longer to find a renter, she encourages investors to expand their ideas of a good return on investment.
“We don’t guarantee investment property buyers that they’re going to have a huge return [on investment] in Park City,” she said referring to short-term or long-term rental revenue. “But part of your return is the appreciation in that property. We’ve seen pretty healthy appreciation in Park City for the past five to eight years.”
Furthermore, Greeney said investors should have enough liquid reserves to carry them through a downturn.
“Fifty percent of our sales in Park City are cash buyers,” she said. “I would like to think those people have enough reserves so they’re not shooting from the hip and making quick decisions when they’re purchasing, so they’re unlikely to have to make quick decisions when they’re selling.”
“We’ve seen a major uptick in our real estate activity in the last seven days,” she added. But, some people will ultimately have to make those decisions based on the amount of debt they’re carrying.”
“I think we’re seeing short-term solutions where people want to get out of a big city and come to Park City,” she continued while adding investors are taking advantage of that demand, which can yield about $1,800 to $2,100 per month for a two-bedroom.
Although generating revenue is a priority for investors, Grenney encourages them not to forget the health of their community — which plays into the long-term viability of their business.
“I want to be careful as a responsible citizen,” she concluded. “I don’t want to be the realtor that spreads the message that everyone with a second home should come to Park City for the summer because that’s not a smart or safe suggestion to make.”
“Park City is a magical place with open space, but because of the size of our community and reduced resources, I don’t want to suggest that as a safe solution,” she added. “We have to be smart.”