Investment Specialist, Team Denver Homes - RE/MAX Professionals.
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Hotel or vacation rental? If you’ve vacationed with friends or family at any point in the last decade, this is probably a familiar debate. And if you’re like a growing number of travelers, you may have exchanged the comfort and familiarity of housekeeping, 24-hour check-in and other hotel amenities for the convenience and affordability of a vacation rental — like access to a kitchen, communal space and other practical accommodations.
Because of their popularity, short-term rental properties are an attractive option for real estate investors. Adding a short-term rental property to your real estate portfolio is an excellent strategy to increase your cash flow, helping you fund future real estate investments and grow your portfolio.
The biggest challenge for investors is that local governments across the country have passed legislation banning or seriously limiting short-term rentals. But I believe a new trend in the short-term rental industry — condotels — will be a game-changer for investors who want to operate legal and profitable short-term rentals.
Challenges And Opportunities With Short-Term Rentals
There are the three main routes you can take to invest in this type of property:
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• Option 1: You buy a property that you intend to use primarily as your vacation home.
• Option 2: You use your primary residence as a short-term rental to earn income and offset your expenses. There are two types of primary residence short-term rentals:
1. You rent out your entire home when you are traveling or living somewhere else.
2. You consistently sublease an area of your home, whether it’s a room in your main house or an accessory dwelling unit (ADU) in your garage or basement.
• Option 3: You buy a property that you intend to use only for income generation through short-term rentals.
Option 3 is often the most appealing to real estate investors, but it is difficult or impossible to realize in most cities. In Denver, where I operate my real estate business, there was a major crackdown on investors who run short-term rentals for income purposes only. Now you can only use your primary residence as a short-term rental. I’m the listing agent for a new condotel, the first of its kind in Denver, that I think is going to change the way investors approach short-term rentals and become a major trend in other cities.
Why Condotels?
Condotels are hybrid properties that are composed of individually owned condominium units but operate like hotels, so they aren’t subject to the same laws that apply to residential short-term rentals. Travelers can rent units from the managing company, just as they would book a hotel room, and they receive the “best of both worlds” in terms of amenities found in vacation rentals and hotels — such as full kitchens, living rooms, housekeeping and concierge services, and access to gyms, restaurants or retail spaces.
The demand for this type of property is high among both investors and short-term renters, and I only see it increasing. I listed the Denver condotel’s units in October, and within two months, I had sold nearly all of them.
A condotel is a great opportunity for new investors who have saved up enough money for a down payment and are looking to buy their first property. Instead of buying a house in the suburbs that will take decades to appreciate in value, they are spending the same amount on a property they can legally use as a short-term rental to generate income immediately. With this cash flow, they can start to save for their next investment property and keep growing their portfolio.
The Enduring Demand For Short-Term Rentals
The short-term rental market has been gaining momentum for years. In 2018, consumers in the U.S. spent more on Airbnb than they did on Hilton and the brands it owns. Airbnb accounted for almost 20% of total consumer lodging spending that year — around 30% growth — and HomeAway, which includes VRBO and vacationrentals.com and is owned by travel booking website Expedia, took in 11%.
Even as Covid-19 has disrupted the travel industry, the vacation rental market is still going strong. Many travelers are opting to rent private homes instead of booking hotel rooms for more space, privacy and safety.
Before the pandemic, the short-term rental industry had shown 300% total growth in the previous five years, according to research from data analytics firm STR. Now short-term rentals are bouncing back faster than hotels, showing higher occupancy rates and getting far closer to reaching previous year levels in revenue per available room.
Tips For Selecting An Investment Property
If you decide to invest in a short-term rental property in a condotel, here are four tips for getting started:
1. Choose an in-demand location. When people book a short-term rental, they typically want to be in a cool neighborhood, walking distance from dining and retail options. Pick a property that is in a desirable area, close to the action.
2. Prioritize good HOA conditions. Verify the HOA terms and fees before you invest. A short-term rental property with high HOA payments will cut down on your earnings, and strict rules, like a ban on pets, may limit your ability to attract guests.
3. Calculate maintenance expenses. Short-term rentals generally require more maintenance than long-term rentals. Budget for wear and tear, and assume that you’ll need to fix and replace furniture, appliances and other amenities each year to keep your rental up to standard.
4. Check your local laws. Every city and county has its own restrictions and guidelines for short-term rentals. Always check with your local government to make sure you’re playing by the rules.
I believe condotels will be the next big thing for real estate investors. Keep an eye out for these investment opportunities that will allow you to meet high consumer demand for short-term rentals and expand your real estate portfolio.
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