Higher reward comes with higher risk. Investors are seeing that right now in a big way. I hate to see any of my fellow investors suffer, but at the same time there was a question I kept asking the past year that no one really answered.
“What happens in the vacation rental market when there is a recession or hiccup in the economy?”
Airbnb Rental Arbitrage Receives a Death Blow
The above question was mainly asked in regard to the Airbnb rental arbitrage model. If you are unfamiliar with this it is the practice of entering a long-term lease on a property and then renting it as a vacation rental on sites like Airbnb.
The arbitrage method does have its merits, don’t get me wrong. You don’t need to buy a property or worry about capital expenditures (HVAC, etc.) so your start up costs and time to get up and running are minimal.
Once you secure a long-term lease with a landlord that is fine with you using the property for vacation rentals then it’s just a matter of furnishing the place and servicing your guests.
You then pay the monthly rent and keep whatever is left over. It can be a pretty good return on your money!
But, what about vacancy?
And herein lies the risk. You have to pay the monthly rent on this property regardless of whether you get guests or not. Every month you run the risk of being profitable or taking a loss.
You really don’t know what your cash on cash return or cash flow will be every month. Yes, you can certainly have solid estimates after you’ve been in business for a while, but it is not like with a long-term rental where you know X amount of dollars for rent will be received each month.
This is not to say long-term rentals are a guarantee, you certainly deal with dead beat tenants and evictions from time to time, but you do know what the financial model looks like.
Two Week Ban on Vacation Rental in Florida
Florida Governor DeSantis just imposed a two week ban on all vacation rentals in the state of Florida due to COVID-19. Most vacation rental business came to a screeching halt weeks ago, but there was still some niche business going on and some vacationers that just straight ignored the pandemic.
So is the the death blow to many Airbnb rental arbitrage investors? And how long will it last? This ban could easily be extended and if investors don’t have reserves built up to pay their leases they will find themselves losing their deposit and last month’s rent payments at a minimum.
I’m sure hundred if not thousands of these investors are just gonna walk away from these lease obligations. In the end, what do they have to lose besides some money? It’s not like they need to be concerned with being evicted, being they don’t live at the property.
It’s gonna be a bad look for the industry and a lot of landlords are gonna get burned and be stuck holding the bag on a vacant property at a time when getting a long-term tenant will be difficult to find.
On the flipside, the landlord knew the risks to when they took on an Airbnb arbitrage operator, it takes two to tango.
The Rainbow after the Rain
The Airbnb operators that are still standing after this may find much less competition in the market, so even if there is a drop in demand it could easily be offset by that.
Hang in there my vacation rental operators. This too shall pass!
Know your numbers…
If you are not using a rental property calculator to figure out your potential cashflow come and use mine: Scaredy Cat Calculator. If you want to learn how to do the long-term rental thing check out my videos and let’s get on a coaching call together! Scaredy Cat Rental Investing Video Series