This article and data analysis are provided to SDI Society members by Daniela Andreevska, marketing director at real estate data analytics company Mashvisor. Daniela specializes in real estate, economic policy, and fundraising.
Buying a money-making investment property requires three steps:
1) Choosing the right location for investing in real estate;
2) Researching available properties for sale to find a high-potential one; and
3) Picking the optimal rental strategy.
Both short-term and long-term rentals come with numerous advantages and disadvantages and selecting the right rental strategy depends on a number of factors. First, you have to rent out your property in a way that suits your personal preferences, investment goals, and business plan. Second, you have to analyze your property to check which strategy will yield a higher return on investment (this is where investment property analysis tools come into place). Third, you have to consider the local housing market including the demand for Airbnb-style as well as traditional rentals and the local regulations on rental properties.
The vacation-home rentals industry has been booming in recent years since the emergence of Airbnb.com and other similar platforms. Property investors in already hot real estate markets such as San Francisco, Los Angeles, New York, Miami, Boston, and others were quick to adopt and adapt the new home-sharing model and turn it into a full-time real estate investment business. Instead of renting out a room in their home, investors started buying properties for the sole purpose of renting them out on Airbnb and similar platforms. Unsurprisingly, soon short-term rentals faced major opposition from both the hotel lobby (which finds it hard to withstand the competition) and local residents (who were annoyed by an increase in the level of unruliness and insecurity in residential areas). This led to major restrictions and even bans on vacation rentals in some of the top performing Airbnb markets across the country.
As a result, investors in many cities which used to reach double-digit cap rates for Airbnb properties had to “flip” their rental strategy from short-term to long-term rentals. Here are five of these cities:
#1: Los Angeles
It comes as no surprise that Los Angeles quickly emerged as one of the hottest Airbnb markets in the US. However, in December 2018, the City Council approved new regulations to go into effect in July 2019 which allow owners to rent out only their primary residence on short-term basis. This law will put an effective end to the vacation rental business in LA as a real estate investment strategy. Investors will be faced with one of two options: Either sell their property or “flip” their strategy and rent out the traditional way. According to data from Mashvisor, an advanced real estate data analytics tool, long-term rentals are a viable option in Los Angeles as they yield an average cap rate of 1.2% at the city level. While this may not sound like a lot to experienced real estate investors, it is worth mentioning that certain neighborhoods have much higher levels.
#2: Las Vegas
Sin City is another market which is seeing a “flip” from short-term rentals to long-term ones. In December of last year Las Vegas voted to prohibit renting out properties other than primary residencies for a period shorter than 31 days. A booming Airbnb industry will have to give way to traditional rental properties. This is not necessarily bad news for investors as the traditional cap rate in Las Vegas is 3.1%, much above the level in other hot rental markets.
A couple of years ago Anaheim had one of the highest rates of return on investment for Airbnb rental properties in the US. However, this changed after new legislation phased out short-term rentals, which are illegal as of February 2018. For those investors who decide to “flip” their strategy, Anaheim traditional rentals have a cap rate of 1.8%.
While investing in vacation homes in Atlanta is not illegal, it has become very costly and demanding. In order to rent out on Airbnb or other similar platforms, you have to obtain both a business license and a hotel license in addition to paying hotel occupancy taxes. Experts consider that Atlanta has one of the most restrictive Airbnb laws among US metros. This adds Atlanta to the list of hottest real estate markets which are “flipping” rental strategies. Traditional rentals yield a cap rate of 2.4%.
#5: New Orleans
Short-term rental regulations have been a hot topic in New Orleans as well, and the quarrel is expected to continue in 2019. This creates a volatile and risky environment for real estate investors, which brings about a “flip” in the optimal rental strategy there. Currently New Orleans long-term rentals have a cap rate of 1.8%.
Regardless of how much research you do before you decide where to invest in real estate, you have no control over the future of short-term rental legislation. That’s why the key to success with rental properties is to choose a market which will bring you high return on investment and profit with either rental strategy. In such a case, you don’t have to be afraid of “flipping” your strategy.
To start looking for lucrative rental properties in these five markets or any other, enjoy a 25% discount from your first subscription to Mashvisor with promo code SDI25.
Contributor Bio: Daniela Andreevska is Marketing Director at Mashvisor, a real estate data analytics company which finds investors find lucrative traditional and Airbnb rental properties. She has been writing about real estate investing for a number of years after previously working in economic policy research and fundraising. Daniela holds a Master's degree in Middle East and Mediterranean Studies from King's College London.