The concept of investing is simple enough to understand. The investor selects an asset class and pours money into it. Their goal is to generate a return on that investment due to the asset class gaining value.
Traditional asset classes include stocks, shares, and property. And it’s this last one that we at Techvestor believe will be the next great asset class.
But that comes with a twist.
Property investing typically involves buying a property so you can generate a passive income by renting it out over the long term. For example, a tenant moves into your property for a couple of years, and you collect their rent. You may also invest in property to renovate and sell it for a profit. Alternatively, you could simply add the property to your portfolio to benefit from capital gains in the future.
These are all workable strategies.
However, they’re not the strategies we believe will be the next great asset class. Instead, our research indicates that short-term rentals (STRs) will generate exceptional returns in the coming years.
But what are short-term rentals? And why is investing in short-term rentals an excellent strategy for investors at all levels? Keep reading as we dig into this asset class to explain what it is and why it’s a great option. We’ll also discuss how short-term rentals can create enough passive income to help you achieve your financial goals.
The History of Short-Term Rentals
To trace the history of STRs, we must go back to the 17th century and the first-ever vacation home. In 1624, King Louis XIII of France built Palais de Versailles. Created as a hunting lodge, this elegant palace was the first property ever built for the express purpose of vacationing. The Italians followed suit shortly after with the Palace of Castel Gandolfo. For several centuries, this location functioned as a summer retreat destination for the pope.
However, Lords and Ladies didn’t rent their homes to visitors for the weekend. Most summer palaces served as vacation homes for the nobles who owned them or for leading members of the Catholic Church. Regardless, the concept of the vacation home was born.
From there, we fast-forward a couple of centuries to the creation of postal systems. The United States Postal System was established in 1775 by the Second Continental Congress. With Benjamin Franklin installed as the system’s first postmaster general, this early version of the postal service set the foundation for the system we still have today.
But how is the creation of a postal service related to STRs? Because it made snail mail possible. And in doing so, it opened up the possibility of people asking to rent or borrow vacation homes from others. Somebody would send a letter asking for access to a property. And they would receive a reply either refusing or permitting them to holiday there.
The problem with snail mail—especially during that era—was that the “snail” part was pretty literal. It could take weeks for a letter to reach its intended recipient, with more weeks added on top for the reply. Regardless, the postal system made it easier for people to ask to borrow a vacation home in faraway locations. Thus, we collectively took an important step forward in the history of short-term rentals.
With the invention of the telegraph, requests to stay at vacation homes were sent and received faster. But it wasn’t until the 1950s that the next big innovation in STRs came about—classified ads.
By this point, families that owned holiday homes realized they rarely went on vacation for the entire holiday season. Their properties often sat vacant outside of the few weeks every year when they were spending time there.
So, some industrious families started placing classified adverts in local and national newspapers. Their goal? To advertise their vacation properties. Other families would use the ads to book time, and the homeowners could collect a fee for renting it out, marking the beginning of short-term rentals as we know them.
While this was another important step, STRs still weren’t established yet as viable investments or as an asset class. Instead, you’d advertise a property you owned in the classifieds to collect a little extra money when you weren’t using the property yourself.
That is until some businesspeople started to see the potential in vacation properties as investments, which eventually led to the establishment of the timeshare.
Vacation Properties Become Viable Investments
The first timeshares appeared in Europe during the 1960s. They operated on a simple principle. A developer would create some properties in a desirable vacation destination. But then, instead of selling the property to a single buyer, they’d advertise a shared ownership option. With this, several people came together to purchase a share of the property.
The “time” part of a timeshare came into play next. The purchase of a share came with an allotment of time in which the part-owner could use the property. For example, one owner may have access to the property for the whole month of June. After that, they hand it over to somebody who owns it for July. And so on and so on.
Soon after the timeshare concept proved successful in Europe, it made its way to the United States. The 1970s signaled a boom period for the idea. Throughout the decade, the timeshare industry recorded double-digit growth.
Timeshares are still popular today. They may even serve as worthwhile investments for people who want access to a vacation home. But they’re not suitable for people who want to make money from short-term rentals.
So vacation homeowners still had the classified ads, which they could use to find tenants for their vacation homes. But then everything changed. With the advent of the internet, STRs really started to show their potential as an asset class.
In 1995, a short-term rental platform named Vacation Rentals by Owner (VRBO) was launched. Property owners could use this website to list their properties, with other users able to browse and book at their leisure. A year later, Booking.com entered the scene. Though it began as an aggregator of hotels and similar options, Booking.com quickly evolved. Soon it allowed people to advertise their own vacation rentals.
The internet had arrived. And with it came the ability to advertise STRs to willing vacationers all over the world. Suddenly, vacation homes didn’t have to be properties that you rented out to locals or family and friends. They could be assets that generated a substantial return on the owner’s investment.
Craigslist and the Rise of Airbnb
Around the same time that VRBO and Booking.com rose to prominence, a little site called Craigslist emerged on the internet. Though it started as a mailing list, the site quickly evolved. Eventually, it became the online equivalent of the classifieds section found in most newspapers. Suddenly, Craigslist was the place to go to list adverts and request services. It stayed as such from the late-1990s into the early 2000s. Naturally, vacation homeowners began to use it for advertising their short-term rentals.
Craigslist became so popular that the auction website eBay purchased a 25% share of the website. It’s still popular today, and many use it to advertise their STRs to people all over the world. However, Craigslist also came with problems for those investing in short-term rentals. The platform developed a reputation for unintentionally hosting scammers. Eventually, Craigslist even built a webpage dedicated to helping users avoid scams.
Craigslist’s poor reputation in that regard led to many people avoiding the platform. Especially those searching for short-term rentals. This in turn, reduced the size of the market available to investors.
Also, Craigslist isn’t a dedicated property rental platform. So investors may find that their listings get lost in a sea of ads for other products and services.
That need for a dedicated platform brings us to what may be the most important development in short-term rentals—the creation of Airbnb.
In 2007, Joe Gebbia and Brian Chesky found themselves struggling to afford rent in San Francisco. They also knew that a big design conference was coming to the city, making getting a hotel almost impossible for those who’d left it until the last minute.
So, Gebbia hatched an idea.
What if the pair turned their loft into a bed and breakfast, complete with an inflatable mattress? They could rent it out to one of the conference-goers and make a little money on the side. Just like that, the core concept of Airbnb was born.
Next, Gebbia and Chesky created a website called airbedandbreakfast.com. They loaded their loft with three air mattresses and charged $80 per night for the space. Once the conference in San Francisco had ended, the duo realized how great their idea truly was. Working with a friend named Nathan Blecharczyk, they created a platform. After several failed launches, the company rebranded as Airbnb and began to grow into what we know it as today.
In March 2009, Airbnb had 2,500 listings and about 10,000 users. Today, the site has approximately 5.6 million listings in over 100,000 cities. About one billion people have stayed in Airbnbs. And around 150 million people a year use it to book their vacations.
Why is all of this important for those investing in short-term rentals? Because Airbnb finally gave investors a viable platform for their short-term rentals. The site lets investors advertise their properties to users in every country in the world, creating a huge market. And that market transformed short-term rentals. They went from vacation homes that people occasionally rented to a full-blown asset class.
Just like that, the world of short-term rentals had suddenly become an asset class with incredible potential for investors.
What Does the Data Tell Us?
Now that you know the history of short-term rentals, you probably have a vital question floating around in your head:
How are STRs a viable asset class for investors?
It’s a good question. And it’s one we’ll answer with data that shows exactly why you should consider STRs as the next addition to your portfolio.
Projected Growth to Over $100 Billion Per Year
The short-term rentals sector has enjoyed continued positive growth since 2017 (barring a small blip, which we’ll discuss in a moment). According to Statista, the industry is worth $82.78 billion in 2022:
There are a few things to take away from this chart.
The first is obvious—the large dip in revenue that occurred in 2020 and 2021. In 2020, we saw overall revenue from STRs decline by almost $40 billion. Though they grew by $10 billion in 2021, it wasn’t until 2022 that annual revenue came back to what it was in 2019.
Why did this happen? Because of a once-in-a-lifetime global pandemic.
The COVID-19 pandemic wreaked havoc on the hospitality sector. Sadly, short-term rentals weren’t immune from its effects. Lockdowns and travel restrictions were imposed. And in turn, investors found themselves unable to rent their properties to holidaymakers for large portions of 2020 and 2021. Naturally, this led to a marked decline in revenue figures.
Now, turn your attention to the projections for 2022 and beyond. Statista’s data suggests that revenue generated from STRs will likely be just shy of that generated in 2019. The market will stabilize within a year, creating the foundation for consistent growth between 2022 and 2026. By the end of 2026, analysts expect the short-term rentals sector to achieve a value of $105.70 billion. That’s over $20 billion more than it’s worth at the time of this writing.
This data tells us two things:
- The amount you can charge in rent will increase year-over-year.
- Demand for short-term rentals will continue to rise now that pandemic restrictions aren’t affecting the market.
Statista is far from the only analytics firm to suggest growth for the vacation rental market. A report from Grand View Research also suggests continued growth until 2030:
Grand View’s figures match Statista’s in terms of the market size of the short-term rentals sector in 2022. Their projections suggest that total global revenue will increase from approximately $82.5 billion in 2022 to a staggering $119 billion in 2030. This creates a compound annual growth rate (CAGR) of 5.3%.
This CAGR compares well with the traditional real estate investment sector, which is expected to achieve an average CAGR of 5.2% between 2022 and 2030. It also far outpaces several other asset classes, such as the MSCI Emerging Markets Index. This index has seen a decline of 27% as of October 2022. And it looks set to shrink further.
The data is clear.
Short-term rentals are set for continued growth as an asset class over the next decade. Investing in short-term rentals gives you access to an asset that generates a continued (and growing) passive income. And your revenue will only increase as long as unexpected external factors—like another pandemic—don’t affect the market.
Rising Rent Prices
Property has always been a reliable asset class for investors. Traditional renting is historically profitable. Plus, rental property tends to outpace average inflation rates. A chart shared by The Motley Fool demonstrates this:
Here, we see how rents have increased between 1940 and 2020. Note that the graph shows consistent growth, with a single slight dip between 2011 and 2013. The chart shows year-on-year rental growth of 8.86% since 1980.
Compare this to the average inflation rates in America between 1960 and 2022:
Barring some brief periods where inflation rose above 10% in the 1970s and early 1980s, American inflation tends to average out at around the 4% mark. Average rental inflation more than doubles that figure. So, property investors benefit from an asset class that generates particularly high returns.
Of course, you’ve likely noted that these figures relate to traditional rentals. However, they apply to short-term rentals too. AllTheRooms shows this with its analysis of average prices for Airbnbs between 2020 and 2021:
There are two important points to note with this data.
The first and most obvious is that rental prices increased across the board between 2020 and 2021. Globally, they rose by $27 per night. The North American market enjoyed the most substantial gains, with rents rising from $163 to $208, creating an increase of $45.
The point here is that rents increased substantially. This is a pattern we expect to continue into 2022 and beyond.
Second, note the years analyzed in this table. Both 2020 and 2021 were terrible years for the hospitality industry due to the pandemic. Lockdowns created a terrible decline in demand. And yet those who invested in STRs still managed to raise their prices far beyond what inflation suggested they could.
AllTheRooms broke its data down even further to share price increases by state:
No matter what state you look at, the story is the same. Average short-term rental prices increased between 2020 and 2021. Those investing in short-term rentals experienced growth despite all the challenges from COVID-19.
Of course, there is one more issue to confront when it comes to inflation—the year 2022. Data from Statista demonstrates inflation in the United States between January 2020 and September 2022:
The United States has experienced record-breaking levels of inflation during 2022. It’s even reached a point where the rents for short-term rentals look unlikely to outstrip general inflation in the country.
But this is an anomaly.
With the return of economic stability will come a return to lower inflation. STRs will still see continued rent price increases, even as inflation returns to sub-3% levels. The occasional short-term blip in the market doesn’t damage a good asset class’s long-term profit-generating potential. Any smart investor knows that.
Rising Consumer Demand
Demand is critical to the success of any asset class.
In traditional property investing, demand plays a huge role in determining your asking price when you sell a property. It also determines how much rent you can charge. More demand from tenants leads to higher rents, with low demand having the opposite effect.
Consumer demand affects other asset classes too. Take stocks and shares, for example. When you purchase shares, you’re buying a small percentage of a company. That company has to make products and services that consumers want. Assuming the company meets the market’s demands, the value of its shares increases, giving you a return on your investment. Low market demand for the company’s products leads to fewer sales, reducing the value of your shares.
It’s simple supply and demand economics.
And it applies to short-term rentals as much as it does to any other asset class.
The good news is that the data suggests consumer demand for STRs looks likely to increase in the coming years.
Data from Statista suggests that 13.1% of people will have stayed in a short-term vacation rental by the end of 2021. That amounts to about one in every eight people. By 2025, Statista expects the number to increase to one in five, creating a 20% user penetration figure. This stat tells us that more and more people see short-term rentals as viable vacation options.
As user penetration increases, demand for rental properties follows suit. More people want to stay in STRs, which means property owners can increase their prices. As we’ve seen from the rental price data shared earlier, that’s happening for Airbnbs throughout the United States.
Demand for short-term rentals is rising so fast that even major hotel companies are trying to get in on the act. In 2019, Marriott created its Homes & Villas by Marriot International arm. The company’s vacation rental offering went live with 2,000 properties and currently has about 25,000. That’s enormous growth over three years. Again, this illustrates that demand for short-term rentals is rising consistently.
Why We Believe STRs are the Next Great Asset to Own
The data shows us that short-term rentals are a great asset class. Projections suggest growth in the sector through to the end of 2030. This means investors will see their rents increase in addition to the value of their properties.
Demand is also high, with more people preferring STRs over hotels and other traditional forms of accommodation each year. And with rent prices outpacing inflation, STRs are assets that provide a substantial return on your investment. Those are all great reasons why we believe short-term rentals are the next great asset class to own.
But the data isn’t the only thing you have to consider before you invest. What this asset class provides for you is as important as the figures that tell us it’s a good asset class.
You Generate a Passive Income
A passive income is any money you earn that you don’t have to work for directly. For example, the salary you earn from a job is a form of direct income. You’re trading your time and labor for money. With passive income, you put little-to-no work into your income stream. The asset you hold generates money for you without you having to invest substantial time and energy into earning that money.
Short-term rentals are an excellent source of passive income.
Once you’ve bought your vacation property, you only have to do minimal work to make it an income-generating asset. After initial renovations—assuming they’re required—you only need to list the property online through a platform like Airbnb. Vacationers find the property, book it, and pay you for the privilege of staying in your vacation home.
Of course, you have to maintain the property and ensure that it’s suitable for your guests. But you can even hand that work over to a property management firm. Property managers take a percentage of your income in return for finding tenants and keeping the property in good condition. Once they’re in place, you can sit back and let the money roll in.
You Have Options
Owning short-term rentals gives you several income-generating options.
Renting it out as a vacation home is the most obvious. The rise of platforms like Airbnb and VRBO allows you to reach a global audience of potential short-term tenants. Furthermore, short-term renting comes with the benefit of being able to charge higher rents. According to GuestReady, STRs can generate as much as 60% higher profits than properties with longer rental periods.
For example, let’s assume you charge $1,000 per month for a long-term rental. By splitting that month into four separate weeks, you could easily charge $400 per week for a vacation stay. That’s an additional $600 per month added to the $1,000 you had. Better yet, $400 per week breaks down to about $57 per night. That’s just over half the $102 per night average that American hotels charge.
So, you can make more money from short-term rentals than you can from long-term ones. Plus, you have enough flexibility in terms of how much you charge to make your STR a more attractive option than a hotel room.
Your options extend further.
If you’d prefer not to deal with the hassle of different guests coming and going every week, you can rent the property out for a full season. You may have to charge a little less in rent per week, but your property management burden reduces to the point where this option may be more profitable.
Finally, you also have the future to consider.
If you choose to sell the property down the road, you benefit from capital gains. The following chart demonstrates how property prices have increased since 1992:
As you can see, there’s a fairly consistent rise in property values between 1992 and 2022. The sole blip comes in around 2008, which is when the Global Financial Crisis (GFC) occurred. After a couple of years where property prices declined, we’ve seen consistent increases year-on-year since 2013.
In short, holding onto short-term rentals should lead to you making money when you choose to sell. Add rental income to that capital gain and you stand to net a substantial return on your investment.
Substantial Tax Advantages
There are some downsides to owning short-term rentals.
As you’re renting the property to vacationers, you need to spend money on maintenance expenses. You may also have to pay a property management company to oversee the property. Plus you have mortgage payments and interest to consider alongside insurance premiums. Finally, the value of the items you stock the property with will depreciate over time. For example, a washing machine purchased for your STR in 2022 will decline in value year-on-year.
Thankfully, these costs come with tax benefits.
Ownership of short-term rentals allows you to deduct certain expenses from your yearly tax bill:
- Mortgage interest
- Fees paid to property managers
- Maintenance and repairs
- Property taxes
- Asset depreciation
Combining these deductions into a tax-effective strategy allows you to reduce your taxable income. While you still have to absorb some upfront expenses, you should benefit from a lower bill come tax season. Consult with a relevant financial professional—like an accountant—to discuss a strategy that helps you take advantage of these tax benefits.
You Have Your Own Vacation Home
The average American spends $144 per night on a domestic vacation.
Owning short-term rentals means you can reduce the cost of your own vacations. Instead of shelling out on a hotel or somebody else’s vacation home, you can stay in your own and save a lot of money.
Granted, staying in your own STR for a week means you’re not collecting rental income from a tenant. But when a week-long domestic holiday would normally cost you just over $1,000, having access to your own vacation home can be a serious money saver.
This advantage allows you to save a bit of money that you can dedicate to other assets.
Why Passive Investing is the Best Option for Most
After seeing the data and learning why investing in short-term rentals is so beneficial, you may feel ready to make a start. There’s just one problem—finding the right STRs is a huge challenge. The property market is vast, and you have to conduct a lot of research to find the right vacation home for your portfolio. Without access to expertise, you may end up making poor decisions that could cost you in the long run.
Thankfully, you don’t have to go it alone.
Instead of investing in real estate directly, you can take the passive investing option. With passive real estate investing, you give your money to a group of experts and have them handle the hard work for you.
For example, you may take part in a real estate investment trust (REIT). This essentially allows you to deposit short-term rental funds into a pot. Working in syndication with other investors, you give that money to a company that can invest on your behalf. They handle the hard work while you sit back and collect the profits from your short-term rentals.
Passive investing takes the need for property market expertise out of the equation. You can safely invest your money with a group that understands how to reach your financial goals. And in doing so, you experience several benefits.
Passive investing allows you to grow your property portfolio faster than investing on your own. When you go solo, you’re responsible for raising all the money required to purchase your STR. Let’s assume the property you want to buy costs $250,000. You can get a mortgage, but the bank wants a $25,000 down payment to grant it.
You may be able to afford that. But it takes time to raise the down payment. And once you’ve paid it, you only have access to one property. If you want to buy more short-term rentals, you have to wait until you’ve saved more money and built up enough equity to make your next investment.
With passive income, you can conduct your investment efforts in syndication with others. This creates leverage, as it allows your $25,000 in savings to go further. Instead of investing in one property, you can invest in several with the help of experts. Your portfolio grows faster and you generate more rental income, allowing you to make further investments.
You Create More Time
Think of all the hassle that comes with purchasing short-term rentals on your own.
You have to start with research. The United States saw 6.9 million property sales in 2021, with each of those sales requiring research on the part of the buyer. This number also shows how many options you have when purchasing STRs. So, you have to analyze every property and location thoroughly before buying. And with so many options available, it’s easy to feel overwhelmed—or even paralyzed—by the research.
If we assume you find the right property, you then have to go through a laborious purchasing process. Once you take ownership, you’re responsible for marketing the property. You also have to find tenants, handle bookings, and deal with maintenance.
It’s a lot of hard work that requires a significant time investment.
By working with the right passive investment company, you can hand all that work over to people who have much more experience. You dictate your financial goals, and then your partners find and manage properties that suit your needs.
You’re exposed to a lot of liability when you invest on your own. Every mortgage you take out is a huge loan that’s secured against your property. If you default on that loan, the bank takes possession of the property and you’re left with a big black mark on your credit report.
With passive investing, the liability rests with the company you partner with. It arranges mortgages and other loans. That means your only responsibility is to provide the money you wish to invest into the strategy that you create with your partner.
A Reliable and Predictable Cash Flow
When done right, passive investing generates a reliable cash flow from multiple income sources. Your partners distribute your investment across a range of short-term rentals, each of which generates income every week. You know how much your partner charges per night for each property. In turn, you can predict how much revenue you’ll generate on a weekly, monthly, and even annual basis.
Predictability in your cash flow makes it easier for you to budget your personal expenses. It also helps you determine whether you can invest further into STRs or any other asset classes in which you have an interest.
Techvestor is the first data-backed short-term rentals fund available to passive investors. Our industry-specific team was founded by a pair of ex-techies. They’ve combined over a decade of experience working for companies like Facebook and Apple to create a platform designed for people who want to invest in real estate.
So, how does it work?
Techvestor makes short-term rental investing as simple as possible. We take your investment and turn it into a predictable and secure cash flow by investing in the next great asset class. Best of all, Techvestor handles all the hard work for you. You get an end-to-end solution that covers everything from research and purchasing to property management and reporting. Techvestor helps you create your wealth strategy and manage your revenue. And we handle all the legal challenges that come with property ownership.
Let’s make it even simpler:
You invest your money. We turn that investment into predictable returns.
Techvestor finds short-term rentals, designs them, furnishes them, and handles the management on your behalf. Since our launch, we’ve worked with over 500 investors and launched more than $30 million worth of STRs. Our efforts have raised almost $20 million for our investors. That works out to 42% high revenues and 52% more occupancy than our nearest competitors. With us, you can generate an annual return on investment of over 20% while enjoying annual cash flow yields ranging from 10% to over 15%.
We also serve as partners in your investing journey. Techvestor has as much skin in the game as our investors, which means we ensure our goals are aligned with your best interests. Our guarantee of 100% transparency means that we share the good (and the bad) related to your investments every single quarter. You’ll always know where you stand, and we’ll make sure you understand our strategy every step of the way.
At Techvestor, our goal is to make property investment as simple as possible for all our partners. If you’d like to learn more about what we do, visit our website or get in touch with our team. And if you’re ready to start investing in short-term rentals, schedule an intro call with our experts to get started.