Homebuyers face new competition from short-term rental investors
Have you ever felt like you couldn’t take a break? American buyers are definitely starting to feel this. In addition to rapidly rising interest rates and a lack of affordable inventory, a potential new obstacle is making it more difficult to buy a home: short-term rental investors.
Property in cities like New York, San Francisco and Los Angeles was already notoriously unaffordable. The average home price in Los Angeles is over $1 million. About 25 years ago, $1 million would have bought you a nice house in Malibu in a city where you would rub shoulders with the stars. Now he buys you a repairman in an emerging neighborhood – if you’re lucky.
This has created a mass exodus, and as people leave these cities, they flock to sunbelt states like Florida and Gulf Coast locales. The problem is that the Sunbelt was already a popular vacation destination. As more affluent buyers visit these areas, demand for short-term rental accommodation increases. After all, their families and friends need a place to stay when they visit, right?
The Airbnb effect
When Airbnb Inc. ABNB Launched as a home-sharing app for vacationers who wanted a more comfortable option than hotels, it seemed like a godsend. Suddenly, travelers could rent an entire house for a week, a weekend, or even a month for a price comparable to what they would pay to be locked in a hotel room with none of the comforts of home.
In a classic case where imitation is the sincerest form of flattery, Airbnb’s business model has been copied by a number of other companies. It has gone from pioneering colocation and short-term rental to being a single operator in the face of competition. Here is a partial list of other nationally recognized short-term vacation rental providers:
- Far from home
- A nice stay
- Flip Key
This list is in addition to many property management companies in holiday destinations specializing in short-term accommodation. It has become an industry worth over $1 trillion a year. This trend is having an unintended effect on the housing market by reducing the inventory available to traditional buyers.
mom and dad investors
Single-family homes as short-term vacation rentals used to be a niche market. But after the success of home-sharing platforms, savvy investors started to take notice. It wasn’t long before homeowners and investors realized they could make money off their homes by renting them out during the tourist season.
In Sunbelt states, which have summer and winter tourist seasons, $10,000 a month for six to eight months a year for a home that might have cost $150,000 to $200,000 started to look like a winning proposition for investors. Soon, everyday homeowners were using their equity to buy homes in vacation destinations with the sole purpose of converting them into short-term rentals. Then, the investment funds intervened.
Funds and institutional investors
Historically, most institutional investors and real estate investment trusts (REITs) have focused on multi-family commercial properties, industrial buildings (medical, manufacturing), commercial properties and hotels. These large investments have provided solid income and fairly stable returns.
However, when the short-term housing portfolio took off, the same funds realized they could make huge returns by buying large slices of single-family homes and converting them into short-term rentals. For example, a portfolio of 200 vacation homes with average rents of $10,000 per month equals $2 million per month in rental income.
Institutional investors and funds are too smart and have capital to ignore these types of returns. A stark example is Ohio-based ReAlpha, which is raising capital to buy $1.5 billion of homes across the Sunbelt with the express intention of operating that property as short-term vacation housing. . According to some estimates, the capital they invest will allow them to buy 5,000 houses.
They’re not the only players either. In addition to institutional funds and REITs, online investment platforms like here and the Jeff Bezos-supported Homes arrived have jumped in on the game and are making short-term housing condominiums an investment opportunity for ordinary Americans.
As you can imagine, investors who aggressively rush into buying single-family homes and converting them to short-term rentals are driving up home prices rapidly. To further complicate matters for potential buyers, these funds make all-cash, unconditional offers. They don’t have to wait for appraisals and loan approvals to close a deal.
This is great for home sellers, but for home buyers looking for a first home instead of an addition to their portfolio. Before, these buyers were simply competing with other buyers like them. Today they compete with large funds looking to close hundreds or thousands of deals at once.
This trend has the effect of making many potential buyers feel like they are stuck between a rock and a hard place. At the same time, as financing becomes more expensive and lending standards tighten, they find themselves competing with buyers with a seemingly limitless supply of cash to spend.
It’s a complicated problem
The truth is, buying a home has always been difficult. Even in the glory days of FHA financing and with no competition from institutional funds or investors, buying a property was a business fraught with challenges and many disappointments before a potential buyer found success. . But the new situation adds a layer of complexity to something that was already difficult.
Complicating matters further is the fact that most US cities are primarily zoned for single-family homes with a lot size larger than necessary by modern standards. All of these yards add up to a lot of space that could have accommodated more affordable homes. Therefore, the solution to the problem of rising house prices will have to involve cooperation with public and private interests.
What should potential buyers do in the meantime?
So what’s the solution for traditional home buyers trying to buy single-family homes in a market full of investor money? You could try to increase your purchasing power with solid real estate investments. If the $50,000 you’ve saved for a down payment isn’t enough to get your foot in the door, you can try making that money work.
Fractional real estate investing offers retail investors a simple option to buy shares in income-generating properties like short-term rentals, long-term rentals, and even commercial real estate.
Looking for ways to increase your yields? Check out Benzinga’s coverage of alternative real estate investments:
Or browse current investment options based on your criteria with Benzinga Offer Filter.
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