Some of the most interesting real estate deals today are Vacation rentals, which is a subset of the more broadly known STR (short-term rental) space. These investments offer the potential for outsized returns and combine my passions for branding/marketing, creating unique experiences, and generating outsized passive cash flow.  

This post isn’t about the Sonders/Mint Houses of the world and the emergence of semi-professional STR operators who take units within traditional apartment communities (I’ve written about them before).  

The STR space I’m excited about today are Vacation Rentals. These are properties typically located in year-round vacation destinations (mountains, beaches, national parks, vineyards, deserts etc.) that offer a unique travel experience. They’re managed largely by entrepreneurs and primarily rented through Airbnb and VRBO.

Savvy investors have the opportunity today to buy select vacation properties in unique locations, renovate them to meet/exceed the expectations of vacationers, and generate above market returns. If they own the deal outright (i.e. no outside investors), they can even carve out time to use the property for themselves (I hope to do something like this slope-side one day!).

What’s exciting about the space is that institutional capital will eventually come in, driving value for these assets higher. As The Real Estate God says, “frontrunning capital flows can be incredibly lucrative” and in this case, many smart investors are frontrunning institutions to vacation rentals.

I recently became a host of a beachfront Airbnb in South Florida. It’s a luxury 7BR home that sleeps 14 and has an expansive roof deck and infinity pool overlooking the ocean.  It’s a great vacation rental property at the current owner’s basis (it wouldn’t pencil at today’s market value). The income from Airbnb can cover the operating costs (mortgage, insurance, taxes, utilities, and R&M), generate a solid profit, and provide the owner with the flexibility to carve out 2-3 months for their own use. The breakeven occupancy at today’s daily rates is ~30%.

If we went all-in, treating it purely as an investment property, the CoC would be north of 30% at 50% leverage. Luxury Airbnb’s fill an unmet demand in the market:

The new Four Seasons on Fort Lauderdale beach charges $2,300/night for its 980 SF ocean view room.  Comparatively, a 7BR home in a superior location charging ~$2,500 – $3,000 per night is a great value.

While vacation rentals are great in theory, they’re operationally intensive, have regulatory risk, and are hard to scale. But there are all kinds of risks with new asset classes which is partly what drives the opportunity, right Richard Fertig? “The riches are in the niches”.

So what makes a great vacation rental investment? I’m certainly no expert, but here are a few of the things I’ve been thinking about as an Airbnb host:

• Provide a unique experience that can’t be replicated by hotels. A good vacation rental doesn’t compete with hotels but delivers a product/experience hotels cannot.  
• Create a great value proposition. Larger properties that can sleep 8+ people allow owners to generate high nightly rates while still offering a good value to guests since it’s typically being split between a large group. While a nice hotel in Fort Lauderdale runs $750+/night, five couples splitting a high-end rental are paying ~$500/night for more space.
• Offer a “locals touch”. The property should have uniquely local character and the hosts should provide an insider’s guide to the area. Staying at one of these properties should feel like you’re a local. Build relationships with local entrepreneurs who offer tours or outdoor adventures and help guests avoid tourist traps and discover those hidden gems that make the area special.  
• Create cool and unique spaces. Hidden sleeping areas, funky bars, game rooms, tiny homes on the property for additional sleeping spaces etc. Be creative and experiment.  

Vacation rentals are attracting institutional capital, such as the purpose-built Evermore Orlando Resort. Developed by Dart Interests, Evermore is the first wholly-owned purpose-built vacation rental. Phase I includes 1,500 bedrooms spread across a mix of homes, villas, and flats. This includes;

• 69 vacation homes with 5-11 bedrooms.
• 76 four-bedroom vacation rental flats.
• 41 two and four bedroom vacation rental villas.

There are no shortage of places to stay in the Disney area, but what will make the Evermore vacation rentals unique is that it is purpose-built for families and large groups. It’ll offer a great value with a high-design and a fully-amenitized resort.

The president of Dart said it best; “We are creating the first-ever wholly-owned, large-scale community of purpose-built vacation rental homes and operating them with hotel-quality standards and world-class resort amenities. Our approach solves the #1 problem for vacation renters: uncertainty in the quality of the home. Almost all vacation rentals are owned by individuals, each with their own unique tastes and willingness to maintain the properties. Our centralized ownership model makes it possible for our guests to be certain that they are getting a first-class home with superior safety standards. Our scale also means that we can deliver a wider array of services to our guests making their visit easier and more enjoyable.  Plus, our range in sizes – from 2 bedrooms to 11, makes us the perfect destination for any group, including large multi-generational or multi-family gatherings,” 

While Evermore is unique today, this seems to be the direction the home vacation rental industry is headed; professional operators, branded product, and purpose-built/designed. With that in mind, it’s an incredible time for entrepreneurs to go on the offensive, snapping up select vacation rentals and renovating them to create unique guest experiences. Cash-on-cash returns are outsized and cap rates will compress as more money floods into the space.

There’s a lot of talk about this on the edges of Twitter, but it’s still early…

The post The Institutionalization of Vacation Rentals first appeared on A Student of the Real Estate Game.