Multifamily Short Term Rentals: The Three Bears
Author: Steve Lefkovits
On nights and weekends, guests rent my 1,000 square foot office for meetings, presentations and parties. It’s a live-work loft with street access. In a good month, I can net $1,600 using Peerspace to advertise and book it (Peerpsace is the “Airbnb for office space.”) And since my office mortgage is $1,600, Peerspace’s day rentals are a powerful tool in keeping it affordable, as well as activating my otherwise dormant space.
If I owned apartment communities, I’d be looking at applying the same principles to my portfolio. Many options have emerged to monetize short term rentals fit different tolerances for risk, operational complexity and exposure to the lodging market. Here are three small/medium/large scenarios where short-term rentals can add income to multifamily properties. We’ll be discussing all of these and more at the inaugural Flexible Rentals Investment Conference (flexrentals.org) presented by Lyric, Airbnb and Niido on October 22-23 in San Francisco.
1. Resident-Initiated Short Term Rentals occur when lease-holding residents re-rent their units during periods that they aren’t home. When sanctioned by the property owner, this creates:
a. Additional income for the renter, making it more affordable to live in one apartment versus a competitor;
b. The property owner typically earns a percentage of the lodging rate; and
c. A sizable incentive for resident retention, and allows renters to experiment with job changes or sabbaticals without giving up their homes.
By my calculations, in a 200 unit building, if 8% of the renters share their homes 5 nights per month at a $125 per night, that generates $2,000 per month additional revenue for the property or $480,000 in asset value at sale. And for the renters, the extra $500 per month is a substantial boost to affordability and a wonderful retention and renewal incentive.
2. Suite Short-Term Rentals step up the intensity. Many properties experiment with using a furnished unit as casual lodging for community residents who need extra space to accommodate visitors. Astute owners have realized that in many markets, these suites and additional units can be kept full using Airbnb or VRBO. This is not a passive program, it requires access, unit turn service, furniture, Internet access, TVs, environmental controls and access to shared amenities.
If short-term rentals can move a community from 91% economic occupancy to 94% economic occupancy, owner/operators owe it to investors to better understand how to achieve this. Units that may not rent easily for a 12-month lease term may be prime candidates for overnight lodging. The bigger question becomes “how many empty units should a community offer to short-term guests?” Renting three units just eight nights per month (weekends) and netting $150 per night after expenses generates $3,600 per month or $43,240 per year in new NOI - $864,000 in asset value.
3. Master lessees such as Lyric, Sonder, WhyHotel, The Guild, and Kasa rent blocks of units from multifamily property owners and developers for multiple years in order to transform these units/floors/properties into lodging experiences that surpass traditional hotels for their targeted guests. These new experience companies are creating a hybrid class of real estate, and enables consumers to rent at a single location by the night, the month or the year. Some benefits include:
a. Locking in rental rates with credit tenants for multiple years;
b. Leasing up a new property much faster than natural absorption;
c. Diversifying the pool of users and gaining a tool to manage market exposure;
d. Attracting temporary guests who could become permanent residents;
e. Creating possibilities for investment and development using two pools of user demand.
At the February 2019 Multifamily Innovation Conference Atlanta, (micaconf.com) Jason Kamen, Vice President of West Coast Operations for WhyHotel presented a case study in which they rented units for a “pop-up” or temporary, licensed and permitted hotel in a new development. The units were turned back to the developer as the property leased up. The pop-up hotel generated $2 million of incremental income for the developer during the 17-month lease up period when cash is hardest to come by.
Goldilocks chose between too hot, too cold, and just right. With short-term rentals, there is more at stake, and far more complexity than we’ve outlined here. Please come and immerse yourself in the possibilities at FLEX – flexrentals.org – October 22-23 in San Francisco.