Valued at $168.5 trillion, residential real estate is the world’s largest asset class. It’s more than twice the global asset value of equities, which is about $70 trillion, and it’s twenty-six times larger than the $6.5 trillion value of gold.
More importantly, residential real estate has also been the best performing asset class for the last 150 years. The National Bureau of Economic Research published an in-depth data set that offered the inflation adjust annual yields for major asset classes across 16 wealthy economies from 1870 up until 2015. They found that housing yields and annual return of 7.05%. Equities returned 6.89%, bonds returned 2.5%.
Low market volatility and consistently high returns makes residential real estate hard to beat from an investment standpoint. Still, post-COVID investors are exercising caution, and understandably so—the pandemic has changed and challenged every market pattern we’ve known.
Housing as a sector hasn’t been immune to the economic shock of COVID-19. The complications of the pandemic have introduced new risks, and purchase behavior has fluctuated. But demand in the housing sector has certainly not disappeared—it’s taken on a different form, and for smart investors, it’s opening new doors.
A New Kind of Demand: The Shorter-Term Stay
Flexibility has been a winning strategy throughout the pandemic, and a preference for mobility and freedom is creating new tenant patterns. Professionals want to take advantage of the work-from-anywhere movement. Families want to explore new markets, maybe with a more favorable cost of living. And after an incredibly long year, people everywhere are looking for a safe, short-term change of scenery. But with many parts of our lives still uncertain, and a potential return to office looming large, no one wants to sign a year long lease or deal with process-heavy intake protocols; the future of post-COVID real estate is flexible.
Further, this widespread shift in demand has happened incredibly quickly. The need for short-term accommodations has far exceeded the market supply, and Airbnb has gone on record saying they’ll need millions of additional hosts to make a dent in that demand. This isn’t an opportunity investors could have planned for, but it’s one of those organic opportunities that could forever change a portfolio.
Short-Term Rentals: A Market Analysis
COVID-19 created a novel discrepancy between home values and the demand for alternative accommodations in rural markets. Drive-to areas with favorable living conditions have been seeing a surge in short-term rentals. Further, a drop-off in hosts and property listings is creating the opportunity for each property owner to earn a higher revenue.
Particularly well performing, up-and-coming markets are Castroville, CA; Slade, KY; Cherry Log, GA; Shenandoah, VA; and Athens, NY. In many of these areas, home purchase prices remain lower than average, offering prospective investors a lower barrier to market entry. For mid-sized markets, Ridgedale, Missouri; Orderville, Utah, and Satellite Beach, Florida are performing at high annual revenue potentials. And La Quinta, CA; Santa Rosa Beach, FL; and Gulf Shores, AL, are some of the most profitable areas across the larger markets.
Time—The Most Overlooked Investor Expense
A real cost-analysis factors a prospective investor’s time into the equation. Short term rentals can become a full-time enterprise without a proper plan put in place. Below are a few areas of focus that investors would be well-advised to prioritize.
Turnovers
Without proper management, tenant turnovers become one of the costliest aspects of short-term rental management. But one investment can go a long way in this direction. Using an integrated software platform for direct bookings, owners can streamline their guest intake process, accepting bookings and automating the due-diligence process on either end of the guest’s stay. In addition, investing in an automated property management system is the best way to handle the hands-on aspects of tenant turnover—executing repairs, distributing payments, and cleaning the space. Owners can implement a system to automatically observe the cleaning and repair needs of the property, and to offer the tasks to maintenance professionals who can opt-in. Without the host having to be on the ground, the property is adaptively staffed, payments to the cleaning professionals are streamlined, and repairs needed are logged as line items so an investor can see everything as it relates to their bottom line.
Touch-Free Capabilities
The path to proper margins necessarily includes an investment in touch-free capacities. Since the inception of COVID-19, guest standards are higher for both convenience and safety. AirBnB recently released an important finding: hosts who add self-check in will earn an average of 13% more over the next year. Virtual ID verification and smartphone-enabled access control makes for a hands-free and hassle-free intake process.
Work-at-Home Amenities
In the same study, AirBnB reported that wireless internet was the fourth most sought after amenity, and hosts who add laptop-friendly workspace will earn 14% more than their counterparts. Spacious work stations with high-speed internet and a few thoughtful touches—a printer, complementary coffee and tea—helps the property appeal to the target market audience of working professionals.
Data—An Investor’s Best Friend
Every investor understands the importance of data and metrics as it relates to their investments. But residential real estate investments can feel less tangible; their performance isn’t quite as obvious as the squiggly line of a stock chart. Gathering, tracking, and utilizing data is an important part of the short-term rental strategy. Luckily, this doesn’t have to be time or labor intensive. Using an integrated owner’s portal can help investors keep track of their revenues, expenses, and payments all in one space. They can track the revenue potential of their property over time, and they can have a quantitative understanding of the success of different marketing strategies, prices, and stay lengths. All in one place, an investor can view their most important metrics such as occupancy, management fees, accommodation revenues, and more. Not only does this help the investor make better decisions on their existing property, it can also be an invaluable tool for building a multi-property portfolio.
In summary, housing will continue to be a portfolio powerhouse in the wake of the pandemic. Demand is manifesting differently, and short-term rentals with work-from-home amenities will continue to outperform the long-term market. With a few early investments into important areas of automation, new and established investors can capitalize on a potentially career-making portfolio add. The future of real estate is shaping itself in live time—investors would be well-advised not to wait.
