What is STR?
If you’re unfamiliar with short-term rental (STR), it’s an investment strategy where you buy a property, but instead of renting it out to long-term tenants, you offer the property up on Airbnb, VRBO, or any other vacation rental website.
The benefits of STR
This strategy has grown really popular recently, and it’s easy to see why. First, it offers something that is pretty tough to find right now: cash flow.
Cash flow is becoming increasingly hard to get, primarily because home prices are rising so much faster than rents. But STRs still offer great cash flow potential. Of course, you need to have a good property in a good market—just like with any investment—but STRs have proven to offer cash flow even in markets that typically don’t have cash flow, like Denver, Austin, and Seattle.
Second, the markets that tend to do well for STRs are also high-appreciation markets. Think about where people go on vacation, like ski towns, lake houses, or big cities like Miami. There are markets that have grown immensely over the last several years. STRs offer the options to get cash flow and be in great markets that have big potential for property appreciation.
So there’s good reason why a lot of investors are getting into this strategy—and it looks likely that things are going to get even better.
How is the STR market performing?
To be honest, at the outset of COVID I was pretty worried about my STR. I thought that travel would come to a grinding halt and the property would sit vacant for months. Instead, the opposite happened, and COVID actually accelerated the existing trend of people shifting away from hotels and toward STRs.
To back this up, I got some data from AirDNA. Looking at this data, there are two terms you need to know: 1) occupancy, which is how many nights in a month your STR is rented out, and 2) average daily rate (ADR), which is basically the average amount that guests pay to rent your property.
To figure out your cash flow, multiply your occupancy by your average daily rate. As an investor, you want both your occupancy rate and your ADR to be high. The data from AirDNA shows that both are up significantly over the last few years.
Occupancy is up
The chart below shows that 2021 has been the best month for occupancy on record—or at least dating back to 2018. So despite all of the restrictions and limits on travel during the pandemic, the demand for short-term rentals is up significantly over both 2020 and 2019 numbers. Look at the difference between the yellow and green lines throughout this year. Demand and occupancy are up.
What’s even bigger news is that the average daily rate across the U.S. is up 22% when comparing July 2021 to July 2019. That is enormous growth.
If you put these things together—increased occupancy plus huge growth in ADR—that means a lot more cash flow for STR investors.
Small cities and rural areas are popular
Of course, not all STRs are the same. It’s no surprise that some types of properties and some markets are going to fare better than others—and AirDNA has provided some data to help shed light on what’s going on.
The chart below shows that there is a big difference in demand between location types. Make sure to note the y axis on this chart. You’ll see that 0% is right in the middle, so the lines below that all saw declines and the lines above saw growth.
To me, the big takeaway here is that small cities and rural towns are exploding along with destinations and resorts, while large cities have really taken a hit. Those large cities are recovering, but they have yet to return to pre-COVID levels. On the other hand, small city demand remains very high and is way over 2019 levels. As an investor who owns an STR in a mountain town, I can confirm from my own experience that demand is super high.
Larger units are in demand
Guests are also choosing larger units. The following chart shows that big units are way up, while shared and private rooms remain down. This is common sense to me given the world right now—no one wants to share a room during a pandemic, and many families have been renting big houses for longer periods of time as a way to get everyone together. The data suggests that as of now, the bigger the better, and I think this trend will likely continue.
Finally, the data shows us that demand is highest for luxury properties. Maybe people are spending their extra money on vacations more than they did in the past. Maybe more people are finding value in staying in a nice place after a year being at home. Regardless of the reason, the data is clear: The more upscale the property, the higher the demand growth.
A bright future for STRs
All told, this data is super encouraging for STR investors. We’ve seen that occupancy rates are up and ADR is up, meaning there is more cash flow coming into the market. We’ve also learned that large, luxurious properties in small cities or vacation destinations are performing the best right now. So whether you’re a current STR investor or you’re looking to get into the market, these could be sweet spots to look at for your next purchase.
If you’re thinking about making an STR investment, I have two resources for you. First is AirDNA, which honestly has the best STR data on the market; I use it myself and it has been extremely valuable.