A Look at the Real Estate Market and How It Affects STRs
Learn More To Elevate Your STR
Vacation rental owners should not underestimate the connection between the real estate market and the short-term rental industry. For example, during the post-pandemic travel surge, the supply of short-term rentals increased sharply as investors capitalized on historically low interest rates to buy properties, significantly affecting the vacation rental industry as a whole.
If you’re a short-term rental owner who is hoping to learn more about the impact the real estate market has on the vacation rental industry, we’ve got a great resource for you. Read on to learn how interest rates, and home prices in the real estate industry can have a significant effect on the short-term rental industry as well as our thoughts on whether or not an STR is still a good investment.
The Relationship Between Interest Rates and the Vacation Rental Market
When you’re looking at the relationship between the real estate market and the short-term rental industry, one of the most important factors to consider is the current federal interest rate. In 2020 and 2021, for example, interest rates dropped to record lows of 3.38% and 3.15% respectively. This means that those who purchased property during this time found their mortgages to be significantly lower than they would’ve been if they’d purchased even a year earlier, when interest rates were almost an entire percentage point higher.
These low interest rates made it more attractive for property owners to get into the short-term rental industry, and in 2022, we saw a huge increase in supply due to the previous two years of low interest rates. Now, in 2023, we’re seeing the long-term effects of this jump, with occupancy rates for much of this year falling below the last two years. Similarly, this year saw a large increase in interest rates, which should be expected to cool off the increases in supply that dominated 2022.
How Home Prices and Real Estate Inflation Affects the STR Market
Another factor of the housing market that has a large influence on the short-term rental industry is the current price of property. During times of high inflation, for instance, average home prices will soar, as we’ve seen over the last few years, and this can often price prospective STR owners out of buying property. However, during recessions and economic downturns when the dollar begins to lose power, home prices will often sink in response, such as during the 2008 recession when homes lost much of the value that had been gained during times of economic prosperity.
Because short-term rentals are not a necessity, but a luxury that people can cut out of their budgets if their wallet is looking a little empty, the industry is heavily affected by changes in current economic conditions and the changes in the housing market that come with that. During and immediately after the pandemic, a pent-up demand for travel and economic conditions created the perfect situation for a boom in the short-term rental industry. This was coupled with a boom in the real estate market as people took advantage of low interest rates and supply began to reach a tipping point.
The relationship between home prices and the STR industry is a complicated one, but once you begin to observe them closely in tandem, you can begin to form an understanding of the patterns that dictate current winds in the market.
Are Short-Term Rentals Still a Good Investment?
The question remains, then: despite all of the current doom and gloom in the real estate market, are short-term rentals still a profitable investment for owners? The answer depends on a variety of factors, but one of the biggest ones that will affect the answer to this question is how large your profit margin is. Can your home demand a high enough rate to support your operating costs? Or maybe your short term rental is just an auxiliary source of income? Either way, the answer to this question is a personal one. If you ever need help deciding, you can reach out here for professional support.
Find a Property Management Company That Can Help You Weather Changes in the Real Estate Market
As a short-term rental owner, you may have felt some recent shifts in the real estate market over the last few years that have had a significant impact upon the vacation rental industry. With a little bit of context, it becomes clear that there are certain patterns that both the STR and real estate markets follow, each of which overlap with one another.
Looking to learn more about the short-term rental industry and how to succeed as a business owner? Check out our blog on how to minimize costs to keep your margins low and take a look at our guide to creating an unforgettable listing title.