Vacation Rentals Are Officially on Sale: Where They’re Worth Buying

Dave:
Vacation markets were some of the biggest winners of the pandemic housing boom, but now a lot of those same markets are starting to look very different. Sellers are cutting prices, buyers have more options, and although some short-term rental operators are struggling, it has made me wonder, could it actually be a good time to get back into the short-term rental market? I’m Dave Meyer, and today I’m joined by Garrett Brown, short-term rental expert and content creator at BiggerPockets. And we’re talking about what’s happening in the vacation rental and short-term rental heavy markets. We’ll get into why sellers of these markets may be more motivated than any other sellers, how to separate real buying opportunities from bad STR deals, and what all this means for investors heading into the next phase of the short-term rental cycle. This is On the Market. Let’s get to it. Hey everyone, I’m Dave Meyer.
Welcome to On the Market. Today, I am joined by my fellow BiggerPockets content creator, Garrett Brown. Garrett, thanks for joining us again.

Garrett:
Always a pleasure. Happy to join anytime.

Dave:
For those of you who do not know, Garrett is an agent, a real estate investor, and although you do different kinds of investing, is our resident short-term rental expert here at BiggerPockets. And so I read this article the other day and immediately messaged Garrett that he had to come on the podcast and talk to me about it. But basically, it was talking about how short-term rental markets are seeing the highest level of motivated sellers anywhere in the country. And although that can spell risk, I was kind of like, maybe this is time. It’s time to start buying short-term rentals again because personally, I like to be a little bit of a contrarian when everyone’s worried about one market, usually that means that’s where the good deals are. So that’s what we’re going to be talking about today. But Garrett, maybe you could just start by giving us a high level overview of what is going on in the short-term rental market.
How would you describe it?

Garrett:
Yeah. So during COVID, and I think a lot of people probably know of this, during COVID, there was a massive influx of supply. I think AirDNA was one of the leaders in data for short-term rentals. I believe during the pandemic, there was about a 20% supply increase into the market of short-term rentals. This

Dave:
Was

Garrett:
A booming market, kind of the gold rush. But now this is a maturing market that is now starting to. Regulations are really starting to line up how they should. And a lot of people heard about the insane cashflow that can come from short-term rentals, which is one of the biggest things to it. But they also didn’t realize that what comes with that insane cashflow is you have to run a hospitality business. This is real estate mixed with hospitality, but demand is still there. That is the one thing that I think COVID, I think AirDNA said it was about 57% in occupancy across the nation. Right now it is at 57.4%. So it’s actually higher than it was during COVID. So I set that to set the table for there is a mass exodus, but the demand has not gone anywhere. So I tend to lean to where you’re kind of thinking of this might actually be the time to make a few disrespectful offers and get back into it at the level that was not seen before.
So that’s kind of my quick overview, but we can dive into data and numbers and talk about the report because they weren’t wrong, but I think there’s some caveats that need to be placed into it to truly understand the data.

Dave:
I think a lot of times what happens is we have these inefficient markets and people react a little late. So people in 2021, 2022 saw, oh my God, there’s all this demand for short-term rentals. I kind of was under the impression that a lot of that demand came from people not wanting to go to hotels and wanting to isolate and sort of effect of what was going on during the pandemic. And rates were super cheap, so it was easy to buy these homes. And then too many people bought them and that there wasn’t enough demand to go around. So what is dragging on the market then if it’s not demand? Because it does feel like short-term rental operators are struggling.

Garrett:
The supply did increase dramatically past what it probably could have kept up with the demand. But the gap in the market, because hotels definitely have bounced back some too, but the gap in

Dave:
The

Garrett:
Market that vacation rentals have truly started to fill, and I tell people this anytime I talk to them on bigger stays or even in the bigger pockets ecosphere, if you’re getting into the vacation rental market, you don’t want to be in the middle where you just have a basic three bedroom, two bath, suburban home that doesn’t add any value to the person that is looking to book that particular style of place. You either need to go big or go small. And the ones that are going big are going small. And what I mean by that is big, like a massive five, six bedroom house that can accommodate family reunions, all that. Those people are winning tremendously. My bread and butter has been building out one bedroom, unique cabins in the woods and doing different style of unique experiences. We’re crushing it. We’re making more money every single year than we ever have before cashflow wise and everything in between.
But the people that are really getting squeezed out of the market are the ones that saw this gold rush. They thoght, oh, I’ll just grab a generic house in Gulf Shores, Alabama where all the demand is going. And then they paid at the top of the market because every single person was trying to buy. So a lot of people just didn’t make good deals either.That’s one thing that kind of underpins it is everybody did not want to get left behind. So people were overpaying and a hundred to 200K over what the actual house was worth. And no rate is really going to save you from that when you have to eventually come back to grips of like, all right, well, what’s my long-term plan with this? The other big caveat, and this leads into why they were overpaying and why they’re crunched now, is they thought that how much revenue you make on a single family home will increase the value of the home, but they don’t realize that you can get a loan based on the rental revenue, but the appraiser that works on that DSCR loan, they don’t care about the rental revenues.
So they still are going to give you a residential appraisal value. So even if the home is making $200,000, if you get an appraiser to come in and say, well, it’s still only worth five or $600,000 based on comps in the area, and you were hoping that it was an eight or 900. Well, what we’re seeing a lot on the market is that people are listing their homes, but they’re not cutting their prices dramatically. And they’re kind of just hoping that they have a pie in the sky buyer come by and we’ll offer them what they think it’s worth because it made $150,000. So there’s a lot of stalemate in the market right there. But the people at the top of the 20% that make revenue in Airbnb, we’re all crushing it. It’s just the people that are at the bottom side of Airbnb are the ones that are really feeling it.
But in the end, there’s still a lot of opportunity here and a ton of demand that’s still coming in. All

Dave:
Right, thanks so much, Garrett. Super, super helpful. I got way more questions for you, but we got to take a quick break. We’ll be right back. Welcome back to On the Market. We’re here with Garrett Brown talking about the maybe hidden opportunities in short-term rentals. Let’s jump back in. All that kind of supports this report that I want to talk to you about, which is that there’s a lot of motivated sellers. And it makes me think that what’s getting cleared out of the market are bad operators and that the demand remains where it is and there’s a potential that supply could go down. That that could be a buying opportunity, especially because you’re saying there’s these kind of stalemates and these motivated sellers, you might be able to get a really good deal on these assets. Absolutely. I guess my question though then is based on what you’re saying is, are the things that are selling good assets?
Because if it’s just these sort of middle of the market stuff that a short-term rental operator maybe shouldn’t have bought in the first place, is that just what’s coming up for resale and therefore maybe it’s not an opportunity?

Garrett:
One thing I wanted to point out from their data too that I thought was interesting, 97.7% of the vacation homes that they went through, I think it was 1.5 million homes, they’re not selling. So there’s only two point. So when you look at it from a bird’s eye view, 97 plus percent are still not selling. So obviously there’s still some value into this, but if you nail it on the purchase price, if you nail it on the design and the amenities that fit that area by looking at the data, if you nail it on you understanding that you either need to set up an operation that runs itself for you, or you’re going to be the operation running the hospitality side, and you also get the right tax benefits set up with your CPA and all, if you nail all of those things, this is one of the best assets you can buy in real estate.
So I just want people to look at things holistically and understand that any deal could be the right deal, but there’s several levers that you have to get to. And the first thing is truly making some disrespectful offers. I’ve been a real estate agent for 10 years, and I can’t remember a time that the buyer in my 10 years has had this much power. Obviously I wasn’t in the early 2010s, so I’m sure there was a lot there too, but you need to lean into that, be patient and understand your numbers. Don’t make emotional decisions and take your time. This is also the best time to truly walk slowly through all your numbers. You don’t have to

Dave:
Run

Garrett:
A lot of times and just make a decision at this point.

Dave:
I agree with that. I mean, even though the number of vacation homes listed, you said it’s just a handful. And we’ll link to the article here, but you can see a map. It basically shows where vacation homes are being sold. And even the worst markets, the ones that they have in red are 6% of vacation homes. So it’s not crazy. The thing about it though that I think is kind of interesting is that in certain markets, locals are also selling. So the total number of inventory in that market is going up by more than just the SDRs, second home, vacation homes being sold. But it’s not a ton. But my feeling is that even though it’s 6% of vacation homes, there’s not a lot of buyers for that right now. If you look at any of the numbers, second home, so even people who aren’t investors, people who just want to use it second home, second home purchases are way down.
A lot of people have turned off of SDR because it’s become more competitive, all the things Garrett talked about. So it just makes me feel like if you are one of the few investors who are seeing opportunity here, even 6% of vacation homes being on the market, that’s a lot of offers you can make.

Garrett:
A

Dave:
Hundred percent. In markets, I’m looking at the ones that are in red. Smokey Mountains. I’m not super familiar with the Smokies. I know everyone bought there. I’m a little skeptical about that one. Places I’ve been that I know that are high demand. Palm Springs, California, a lot of sales there. Flagstaff, Arizona, a lot of Colorado, Lake Tahoe. These are places that are awesome, at least the ones that I’ve been to. They’re cool. I would imagine people are going to want to be there. And so maybe it’s the time to get back into it, but how do you do the research here? How do you differentiate a market that is in a correction and has opportunity or one that’s really overbought and is going to face a bigger correction? And maybe it’s just a little bit riskier.

Garrett:
So the thing that I want people to truly look into when they’re looking at this markets right now, besides working with somebody, if you’re not in that area, you need to work with a local real estate agent that understands short-term rentals because there’s several things you’re not going to know going into it, zoning laws. There may be specific ordinances you’re not aware of. Some may just know better areas that tend to perform better. Work with an investor, a friendly agent that truly understands the market and knows short-term rentals. But the main thing I want to harp on is you need to go inside something like AirDNA. B&B Calc is another one that’s very popular that I like a lot. There’s a couple other software engines out there that do short-term rental data. You need to figure out what are the top performing homes in that area doing?
AirDNA and B&B Calc will show you like, oh, the top performing homes in this area are a five bedroom with a pool, maybe a hot tub and some other design amenities. And if you’re looking across the data and 15 of the top 20 homes fit this type of criteria, you probably need to find something very, very close to that and try to compete or do better than those type of homes. There’s two ways you can really get into short-term rentals at this point. You either need a pretty solid budget, and when I say solid budget, besides the purchase, you probably need $100,000 in liquidity to build out the design amenities, all the things that could be successful, and you can truly build an awesome short-term rental. Co-hosting is another way to get into the short-term rental Airbnb world without having to go purchase a home or have $100,000 plus liquid to go and build out the amenities to it.
And what co-hosting, all it is, is just you’re basically a property manager, but at a much lower level. You just help vacation rental owners in the area. And Airbnb even has a platform called the co-hosting platform inside of it where you can just manage these rentals for people that don’t want to do it. It’s something I do inside my business to balance cashflow along with units that I buy on my own. But it’s not just buying a place and then crossing your fingers and putting it on Airbnb anymore. It is a mature market and there’s a lot of really sophisticated players in this game now and institutional money. For sure. So you’re playing with the big boys at this point. All

Dave:
Right. So clearly there are some opportunities if you know how to do this well in short-term rentals. We got to talk markets though and how to pick them. We’ll get to that right after this break. Welcome back to On the Market. I’m Dave Meyer here with Garrett Brown. I’m talking about how to find good opportunities in the short-term rental market. Let’s get back to it. Assuming though that people do want to do this and they know what it takes, because I completely agree with you, this is not a gold brush anymore. It was for a minute. And then people are now realizing that the gold drives up and you have to actually be good at your job. And just assuming that though, you’ve talked a lot about the particular asset, which makes sense to me. That is going to stand out in any of these markets, but how do you assess competition?
Because that to me, at least in my one experience, has been the hard part. I bought a place that in our little subdivision, I think there was five short-term rentals out of 350. Now there’s like 50. And it’s a great asset and we do a good job, but I have more competition. And so I don’t know if I were getting back into this market, if even a disrespectful offer would make me do it. And so that’s kind of what. I mean, I’m sure at a certain price, but it would need to be 30% below list price, which I don’t think people are selling that in this kind of market. So that’s what I’m trying to understand here on top of, yes, got to be good. But where are the sort of inefficiencies in the market where the drops in the discounts that you can get mean that you’re going to be able to rely on your own skill and not be negatively impacted by forces that are sort of outside of your control, which is how much other supply there is?

Garrett:
My main thing I want people to look at when they’re looking at some of these numbers is there’s a few things that you need to be thinking about inside of it. One, tourism demand is always going to be huge. If you’re looking at an area that is not a majorly tourism area, you need to make sure it works as a midterm rental and works as a long-term rental. If you’re looking at a place that is not a traditional tourism place like the Smoky Mountains and things there. The other thing is I can’t harp on it enough of just figuring out what are the top performing ones in that area and what sets them apart. We’ve kind of got something that’s happened in the past few years, and most of us call it the amenities arms race, which it’s basically where everybody’s just adding so many amenities who can out amenitize the next house and all this too.
You got to find the sweet balance of what are the amenities that truly drive guest bookings in that area and not try to overextend yourself the other way? And so if you see constantly in the top 10%, and when I guarantee this is probably pretty prominent in most listings, that a pool or a hot tub is in all these listings, that is something you’re going to have to have inside of your unit to get to that top performing unit. Otherwise, if you can’t afford it, if the unit doesn’t have it, you don’t want to try to figure out another way around it because the market has already told you what people demand. And if all the supply in your area is doing that, and you’re seeing a ton of people that are still making good money, that means that the demand could keep up with it.
But if you’re looking in some markets that are, I’m sure Palm Springs probably fits into the. Flagstaff, I have different feelings on because I know it’s still quite a bit of travel that goes out there, but I guarantee you the people that are floating in the middle or considering it probably didn’t realize what are the one or two amenities that are truly driving the market for them. And it is the same thing as in long-term rentals and apartments, commercial real estate. There’s always going to be supply that you have to be competitive against. You just need to truly figure out what is the lever that you can pull that gets you to that top percentage of the market. And then after that, you can start pulling other smaller levers to keep increasing things. But the cool thing about short-term rentals, even more than long-term rentals though, is you can dramatically increase your cashflow with just a few simple changes.
That’s a little harder on the long-term rental side without spending a ton redoing flooring or bathrooms and stuff like that. On the short-term rental side, that thousand dollar cowboy pool probably increased my cashflow, if I had to guess, 15 to 20,000 for

Dave:
The

Garrett:
Year on just that one property alone.

Dave:
Hey, you’ve looked at this report, you look at this stuff all the time. Are there any markets in particular you like or dislike?

Garrett:
I personally think Houston is a really good market.

Dave:
Really? Okay.

Garrett:
The thing about Houston is it is not like, we call them super properties across the nation where it’s like these crazy properties that have the putt-putt course and the pool and all the ones you see in Asheville, North Carolina, Austin.

Dave:
The one we stayed at in Austin. Yeah, exactly. We stayed at one for BiggerPockets. It had what? Two hot tubs, a game room. It was cool. It was a good job.

Garrett:
There’s not many places in Houston that have built that way yet. And I believe that if you’re doing the super property route, I believe Houston’s a good market. I still believe 30A, I have a lot of friends that operate out there. 30A is a market that you’re not buying for cashflow. There’s a lot of markets that it depends on what your goals are. You can hit a lot of these things, but 30A, for example, you’re probably not getting much cash flow, but that’s an appreciation machine out there where a lot of wealth is buying places out there and will continue to do that. So if you’re looking into an appreciation game, that type of market is great. Cashflow, the thing about it is you can find even short. I mean, AirDNA announced Port Arthur, Texas was their number one market this year, which is a little town on the east side of Texas.
It’s near a bunch of the Louisiana casinos. It’s kind of known for oil and gas and pipelines and all that. But it’s not a ton of tourism demand, but it’s enough that it justifies a potential purchase price out there because they also have lower entry prices than some other areas. I personally wouldn’t buy out there, but I know some people that their goal may be to. They may live an hour away from Port Arthur, and that may be something they like to go over to that area

Dave:
Sometimes.

Garrett:
And you get the lifestyle benefit that they can go stay in it occasionally, get some cashflow out of it. The appreciation won’t be as high because this isn’t as high of an appreciating area. But I say all that to say usually within an hour of you, there might be a market that could be enticing to you. I like that. An hour to two hours maybe. I just don’t recommend somebody buying their first vacation rental, buying it across the country and not knowing what they’re kind of getting themselves into. If you’re an experienced person that does this and understands it, you have all the power to do that. But I really would want people to look around in their area, see if there’s anything that could potentially work, get on AirDNA, look at how many bedrooms and what amenity is working in that particular area. And then just be patient.
Start seeing some places, work with a good agent, run your numbers, stick to them. And I do believe there’s still going to be more people lowering prices in this market. There may not be a ton of people that are fire selling, but there’s definitely enough that you can put out some offers and the worst they say is no. And then in a few months you circle back and offer again

Dave:
And

Garrett:
They might say yes.

Dave:
Start the process now. Yeah, that’s kind of how I see the market right now. So it’s like build a relationship with someone. Just like you’re going to make something that’s disrespectful, but stick to it, be fair, be kind, be like, “This is what I’m willing to pay. Understand if you’re not willing to accept that, call me if things change and just follow up.” But I like your advice about doing something local. I think it’s really hard in any market, and I do out-of-state investing. In any market, it is very difficult to out-compete local knowledge. So you have to have a different advantage. I think the things I’ve done as an out-of-state rental property investor is I come from a more expensive market and my capital goes a long way. I can buy things, I can offer cash and then refinance them. I can do renovations paying for cash instead of using hard money.
There are things that I can do that give me an advantage. In a short-term rental market, look for your advantage. I think that what you’re talking about, Garrett, is awesome because so much attention gets paid to Palm Springs and Smokey’s, but that’s where the institutional money goes. You’re not going to out-compete them. It’s going to be really hard. There are a lot of entrenched players. There are tons of local spots, even big cities, like you just mentioned with Houston, that you have some advantage of. You understand the exact corner where a great Airbnb would go. You understand that when your friends come to visit, they want to go to these four amenities and you’re going to buy something right in the middle of those four. Or like Garrett said, there’s a place everyone likes to drive. They come visit your market, everyone’s like, “Let’s go do a day trip.” Those are the kind of places that tend to not attract institutional investors because if they’re doing a data query of where the highest vacation demand, it’s not going to be there, but it’s okay because it has to just be relative to the supply.
So that’s the thing to remember is can you compete? Is there going to be a ton of competition? If those answers are favorable, it’s riskier right now, but I kind of like it. I just kind of like the idea of banking on the long-term demand because there is going to be demand. And in general, I am a very conservative investor. I like to underwrite things assuming everything is going to go to shit. That’s the way I like to look at deals. And I kind of feel like we’re in this situation in short-term rentals where a lot of people got mixed up and into bad situations because they were underwriting deals based on real data on occupancy and ADR, but there’s a lag. They didn’t see that everyone else was doing it at the same time. And it’s not that the data was wrong, it was kind of this big mass movement.
I think now underwriting is easy because if your deal works at current occupancy rates, I only think it’s going to get better. I agree. Because if anything, supply’s going to go down. That’s kind of the way I see it. So you’re very unlikely to get blindsided by a supply spike. And in fact, you might get a tailwind. And I like that. I had this friend who used to work at BiggerPockets, he was a software engineer, and he used to buy these old crappy cars. And I was like, “Dude, why do you buy these bad cars?” He’s like, “I like when they hit maximum depreciation. They can’t go any lower. That’s when I buy them.” And I was thinking about that. Not that the values of homes can’t go lower, but the supply issue, I don’t think it’s going to get worse. I think you’ve kind of hit the worst part.
So get the rebound. And don’t count on the rebound, but find something that works today and then maybe benefit from the rebound. I kind of like that kind of investing. Yep. So thank you, Garrett. This has been super helpful. Any last thoughts before we get out of here?

Garrett:
No. Anybody wants to chop shop about short-term rentals, I’m always available to chat and help you guide on the right path to figure out which one of these disrespectful offers might actually work for you. But I agree completely. Supply is down, I think, to about 4% increasing year over year when it was 20% a few years ago.

Dave:
And

Garrett:
The data in the market now is just going to be more reliable because it’s not going to be as skewed as a Black Swan event like we had with COVID too. So I’m excited for people out there to truly see what’s coming next for them, and I’m happy to be a resource any way I can.

Dave:
Awesome. Well, thanks again, Garrett, and thank you all so much for watching this episode of On the Market. I’m Dave Meyer. He’s Garrett Brown. We’ll see you next time.