Airbnb Investing Post-Covid — What Should Investors Expect?

For years, investors found Airbnb’s promise too irresistible to pass up. They were lured in by high gross nightly rates and the ability to rent out units on a short-term basis for as much as two to four times what monthly renters would pay. This caused a dramatic rise in real estate prices in some areas, as well as rents.

Then came the lockdowns of 2020, shaking up what these investors thought they knew. What’s next in this sector?

The COVID-19 effect on hospitality and short-term rentals

When everything started shutting down and people weren’t traveling, those investment models that relied on travel were hit hard. Think of offices, restaurants, hotels and Airbnb properties, and their owners and investors.

Initially, municipalities banned hotels and short-term rentals from accepting guests. As some states began opening up, owners were required to maintain vacancy periods between guests, limit the percentage of occupied units, and adhere to new decontamination protocols.

At the same time, many of these owners have been hit by other factors that have squeezed their finances, including higher taxes and newly proposed regulations.

This has increased the risks that the Airbnb model already had. Years ago I warned that people were overpaying for real estate with the speculation that they could get much higher rents through short-term rental platforms. It was the only way they could justify their numbers and offers.

Many inexperienced investors did not consider the high daily maintenance and management costs associated with this hotel-like model. You have to clean, handle the ongoing communication with potential guests and check in guests almost daily like a hotel as opposed to the passive income you would get from an annual rent. Between platform commissions and high vacancy rates, the net income is often much lower than these investors had imagined, while it is much more work.

Simply put, the pandemic and the halo effect have resulted in under-leveraged revenues and returns on over-leveraged real estate for which some paid well over fair market value.

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The short-term rental outlook

While some business and leisure trips will return, it will probably never be to the extent that we have seen before 2020. At least not for years.

I expect these homes to be sold at discounted rates. Most amateur landlords may not be able to afford to hold on. Or it just becomes such a source of stress that they want to get rid of those traits. Professional investors in this market who may have had more reserves to weather a storm may also simply get tired of underperforming investments and negative cash flow and decide to restructure their portfolios.

Some will have enough equity to sell at a discount and take the loss. Others may be able to negotiate short sales with lenders to sell for less than they paid. Then it seems almost inevitable that there will be others who will default and foreclose, creating dire opportunities for property acquisition through other channels.

Smart investors who saw this coming have great opportunities to help these owners lighten their burdens and create value. They can return these properties at more stable annual rents, adding tangible value and improving performance. Or, in the case of apartment buildings or hotels, condo conversions to sell units for lump sums.

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