Pre-pandemic, the world of short-term rentals (STRs) appeared to be a dream come true for tired landlords. With guests paying upfront without the need for eviction, and homeowners able to earn extra income from their personal residences while traveling or renting out individual rooms, the allure of this industry was undeniable. However, as the STR fever swept through and entire apartment buildings became dedicated to vacation rentals, questions arose about the sustainability of this trend and the future of hotels.
The narrative around short-term rentals has shifted amidst market saturation. Post-pandemic, there has been a 23.3% increase in vacation homes in the U.S. In the peak of the STR booking season, approximately 80,000-88,000 new short-term rentals were added to the market monthly. With bookings dropping and landlords feeling the pressure, hoteliers found relief. Despite the challenges in recent years, the short-term rental business is projected to grow steadily. Conversely, the U.S. hotel industry is expected to experience an annual growth of 3.8% with a market volume of $133.3 billion by 2029. This begs the question: which makes a better investment for those looking to scale their hospitality business – hotels or STRs?
Short-Term Rentals: Pros and Cons
- Tenants pay upfront
- Potential for higher revenue than long-term rentals
- Flexibility to rent properties on the owner’s terms
- Ability to scale at a personalized pace
- Diverse buildings can be utilized as rentals, catering to various preferences
- Popular destinations attract high traffic
Despite the benefits, there are challenges associated with STR ownership:
- Requires labor-intensive management
- Dependent on STR algorithms for market visibility
- Negative reviews can impact business
- Risk of property damage or misuse by guests
- Difficulty in scaling with residential comps for appraisals
- Outlawed in some cities
While the luxury STR market has seen success with high-end properties, scaling with smaller units proves to be more challenging. Apartment building usage faces increased restrictions, making the acquisition and management more complex.
Hotels, on the other hand, are embracing changes to mirror the offerings of short-term rentals. The evolution of hotels to include a more open, customizable, and office-friendly design is evident. Extended-stay hotels with kitchenettes and larger living spaces bridge the gap between traditional hotels and short-term rentals. Major hotel chains are recognizing this shift with the introduction of new brands like MidX Studios from Marriott and LivSmart Studios by Hilton. Moreover, upscale rental services like Onefinestay, acquired by Accor Hotels, cater to travelers seeking a high-end experience.
Investing in hotels requires deep pockets and a keen understanding of the market. The case study of Sathiyan Kadhiwala, who transitioned from working at a Super 8 hotel to owning multiple hotel chains, highlights the intense labor and dedication needed to succeed in the hospitality industry. While hotels offer the potential for greater profits, they also require significant investment in terms of time and resources. For investors, carefully weighing the pros and cons of both short-term rentals and hotels, considering financial capabilities, and risk tolerance is essential for making informed decisions in the competitive hospitality space.
In conclusion, navigating the real estate industry, especially within the realm of hospitality, requires diligence, commitment, and strategic planning. Whether choosing to invest in short-term rentals or hotels, understanding the intricacies of each sector and aligning investments with personal goals and resources is crucial. As the market continues to evolve, adapting to changing consumer preferences and industry trends will be key to success in this dynamic landscape.
