The short-term rental industry has exploded in the past two years, but until recently, this asset class was primarily limited to professional real estate investors and entrepreneurs. And while there are significant opportunities for individuals looking to purchase and operate short-term rental units, that is not the only way to get involved in this sector.
If you’re interested in taking advantage of the current short-term rental markets but aren’t sure where to start, we’ve created this overview of four different investment strategies and some of the considerations associated with each. Some investments are completely passive, while others require more active involvement, capital, and operational expertise.
A fully passive investment with diversified exposure
If you’re looking to dip your toes into the short-term rental sector but want to start with a small amount of money and put a premium on liquidity, purchasing stock in a publicly traded company may serve as a great starting point.
Airbnb stock will give you the most diverse and direct exposure to global short-term rental markets, but there are also alternative options with more concentrated exposure (Sonder) or more diversified travel industry exposure (Expedia). For the purpose of this analysis, we will focus on Airbnb.
Why It’s Worth It: This approach has the lowest barrier to entry and moves faster than the other investment strategies we’ll discuss — as of publication, a single Airbnb stock was trading at just over $100. It also offers the most liquidity.
Factors to Consider: Keep in mind that purchasing stock will not allow you to realize many of the benefits which make this growing sector so attractive. Additionally, Airbnb stock is correlated with the market as a whole. When publicly traded stock prices go down as a result of market downturns, stocks like Airbnb may go down even when the actual company or industry is performing well.
In fact, as of late June 2022, if you had invested in Airbnb stock at the start of 2022, your investment would be down 42%. If you invested one year ago, it would be down 33%, and if you invested 5 years ago, it would be down 28%.
And unlike other investment options we’ll discuss, your stock doesn’t just depend on the performance of Airbnb’s top operators, but rather on the performance of everyone on the platform.
A fully active investment with concentrated exposure
If you have experience with purchasing and managing real estate — or you’re willing to hire a team of experts to help — then owning a short-term rental unit may be the ideal way for you to enter the space.
Why It’s Worth It: Owning and operating a short-term rental unit has the potential for much higher returns than the other investment strategies we’ll discuss in this article. It also provides the unique tax benefits of a traditional real estate investment.
Let’s face it, owning and controlling a well-located property in an in-demand market provides lots of optionality. As long as you’re careful to comply with local laws and regulations, you can generate revenue from this asset in a variety of ways.
Factors to Consider: Higher returns are always appealing, but in this case, they come with a much larger time commitment, along with a substantial investment up front before you ever start generating rental income. Hosts must factor in not only the cost of acquiring a property, but also the costs of utilities, furnishings, ‘experiences’ to differentiate your property from competitors, and much more.
Short-term rentals also require different levels of maintenance, guest interaction, and upkeep than long-term rental properties. You — or a property manager you hire — will have to communicate regularly with guests and deal with things like unexpected repairs, ongoing maintenance and check in/out issues. Finding reliable cleaning, lawn care and maintenance companies to round out your team will be critical to your success.
When done well, we’ve seen operators with margins as large as 70%, but we’ve also seen operators lose money and quickly exit the STR model. Your returns will vary greatly depending on a variety of other factors, so it’s important to make sure you have a strong business strategy and are prepared to take on higher levels of operational risk.
A semi-passive investment with concentrated exposure
Becoming a lender to short-term rental operators and entrepreneurs is another way to enter the space without directly managing a property.
Why It’s Worth It: As a lender, you can set your own terms and interest rates, and you have total control over who you loan money to. And despite an abundance of non-bank lenders and mortgage brokers, fast-growing operators are always looking for alternative financing options to secure down-payment capital and upgrade their units.
Factors to Consider: Because the STR category has grown so rapidly, business models are anything but alike, and there is a wide dispersion in performance across the industry. This strategy will require you to identify and evaluate creditworthy operators on your own, and it can take time, knowledge, and money to build relationships, find great deals and brand yourself as a trusted and reliable capital provider.
It also comes with the risk of getting involved in collections and potentially litigation — or even having to take over the management of the property — if the loan is not repaid.
A fully passive investment with diversified exposure to the top operators
Investing with Nectar allows you to experience many of the same benefits as lending directly to entrepreneurs, but without the hassle of finding and evaluating those entrepreneurs, determining how much to lend them, and worrying about whether they will repay you or not.
Why It’s Worth It: Nectar does all the work of sourcing the most seasoned and highest performing short-term rental operators and underwriting a cash advance based on the stabilized, historical cash flow in their existing STR portfolio.
Because we invest in multiple operators, geographies, and STR typologies, your portfolio will be instantly diversified. Nectar’s agreements are structured in such a way that if operators have a couple of slower revenue months, the investor’s distribution isn’t impacted. If necessary, Nectar has the ability to step in and take a more active role in ensuring the property runs profitably. Collectively, this underwriting approach, structuring, portfolio construction and risk managed approach to STR financing, helps ensure investors receive quarterly distribution payments on time, as expected. Nectar has designed a business model which allows the STR entrepreneur to access the financing they need to get their next deal done, while also providing accredited investors with access to consistent and regular quarterly income from the top operators in the space.
Factors to Consider: This option is not accessible to everyone, as you must be an accredited investor and we do have minimum investment requirements. You also need to be prepared for less liquidity than you might see with some of these other strategies, as our agreements included a 3-year minimum investment.
Nectar returns are capped at 12.54% annually, but in exchange, you get to invest in a fully passive income opportunity with lower correlation to traditional stock and bond markets — as well as an inflation hedge. In this way, even investors with no real estate experience — or those who are looking for investments with shorter time frames — can benefit from the short-term rental market’s growth.
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