Homebuyers Face New Competition from Short-Term Rental Investors

Have you ever had the feeling that you can’t catch a break? American homebuyers are definitely starting to feel that way. In addition to rapidly rising interest rates and a lack of affordable inventory, a new potential obstacle makes it harder for them to buy a home — short-term rental investors. 

Property in cities like New York, San Francisco and Los Angeles was already notoriously unaffordable. The average home price in Los Angeles is over $1 million. About 25 years ago, $1 million would have bought you a nice house in Malibu in a city where you’d be rubbing elbows with the stars. Now, it buys you a fixer-upper in an emerging neighborhood — if you are lucky. 

That’s created a mass exodus, and when people leave these cities, they are flocking towards sunbelt states like Florida and locales on the Gulf Coast. The problem is that the sunbelt was already a popular vacation destination. As more affluent buyers visit these areas, the demand for short-term rental housing goes up. After all, their families and friends need a place to stay when they visit, right?

The Airbnb Effect

When Airbnb Inc ABNB launched as a home-sharing app for vacation travelers who wanted an option more comfortable than hotels, it seemed like a godsend. Suddenly, travelers could rent out an entire house for a week, a weekend or even a month for a price comparable to what they’d pay to be cooped up in a hotel room with none of the comforts of home.

In a classic case of imitation being the sincerest form of flattery, Airbnb’s business model was copied by a number of other companies. It went from the pioneer in house-sharing and short-term rentals to just one operator in a sea of competition. Here’s a partial list of the other nationally recognized short-term vacation rental providers:

• Vrbo
• Homeaway
• One Fine Stay
• Vacatia
• FlipKey
• 9Flats

This list is in addition to numerous property management companies in vacation destinations that specialize in short-term housing. It’s become an industry that’s worth over $1 trillion annually. This trend is having an unforeseen effect on the housing market by shrinking available inventory for traditional homebuyers. 

The Mom and Pop Investors

Single family homes as short-term vacation rentals used to be a niche market. But after the success of home-sharing platforms, sharp investors began to take notice. It wasn’t long before homeowners and investors alike realized that they could make money from their houses by renting them out in the tourist season. 

In sunbelt states, which have tourist seasons in the summer and winter, $10,000 per month for six to eight months per year on a house that might have cost $150,000 to $200,000 started to look like a winning proposition for investors. Soon, you had everyday home owners using their home equity to buy houses in vacation destinations for the sole purpose of converting them to short-term rentals. Then the investment funds got involved. 

The Funds and Institutional Investors

Historically, most institutional investors and real estate investment trusts (REITs) focused on multi-family commercial properties, industrial buildings (medical, manufacturing), retail properties and hotels. These large investments offered solid revenue and pretty steady returns. 

However, when the short-term housing book took off, the same funds realized they could make huge returns by buying up large tranches of single family homes and converting them to short-term rentals. For example, a portfolio of 200 vacation homes averaging $10,000 per month in rents equates to $2 million per month in rental revenue. 

Institutional investors and funds are too smart and flush with capital, to ignore those kinds of returns. One prominent example is Ohio-based ReAlpha, which is raising capital to buy $1.5 billion in housing across the sunbelt with the express intention of operating that real estate as short-term vacation housing. By some estimates, the capital they’re investing will allow them to buy 5,000 homes. 

They’re not the only players either. Aside from institutional funds and REITs, online investing platforms like Here and the Jeff Bezos-backed Arrived Homes have jumped into the game and are making fractional ownership of short-term housing an investment opportunity for everyday Americans. 

The Squeeze

As you might imagine, investors moving aggressively into purchasing single family homes and converting them to short-term rentals push home prices up rapidly. Complicating matters further for prospective homebuyers is that these funds make all-cash, non-contingent offers. They don’t need to wait for appraisals and loan approvals to close a deal. 

That’s great for home sellers, but for home buyers who are looking for a starter home instead of an addition to their portfolio. Before, those buyers were just competing with other purchasers like themselves. Now, they are competing with large funds who are looking to close hundreds or thousands of deals in one fell swoop.

This trend has the effect of making many prospective home-buyers feel like they’re stuck between a rock and a hard place. At the same time when financing is getting more expensive and lending standards are being tightened, they find themselves competing against buyers with a seemingly limitless supply of cash to throw around. 

It's a Complicated Problem

The truth is that buying a home has always been hard. Even in the glory days of FHA financing and no competition from institutional funds or investors, buying a property was an affair that was full of challenges and many disappointments before a prospective buyer found success. But the new situation is adding a layer of complexity to something that was already difficult. 

Complicating matters further is the fact that most cities in America are primarily zoned for single family homes of a lot size that’s larger than it needs to be by modern standards. All those yards add up to a lot of space that could have accommodated more affordable houses. That's why the solution to the issue of rising home prices will have to be worked out through cooperation with public and private interests. 

What Should Prospective Homebuyers Do in the Meantime?

So, what’s the solution for traditional home buyers trying to buy single family homes in a market full of investor cash? You could try to increase your buying power with solid real estate investments. If the $50,000 you saved for a down payment doesn’t get your foot in the door, you can try to grow that money. 

Fractional real estate investing offers retail investors a simple option to buy equity shares in income-generating properties like short-term rentals, long-term rentals and even commercial real estate. 

Looking for ways to boost your returns? Check out Benzinga's coverage on Alternative Real Estate Investments:

• Like Dividends? Then You’ll Love These High-Yield Investments
• This Little Known REIT Has Produced Double-Digit Annual Returns For The Past Five Years
• You Can Become Part-Owner Of This Cash-Flowing Multifamily Real Estate Portfolio

Or browse current investment options based on your criteria with Benzinga’s Offering Screener.

Photo by Mark Winfrey on Shutterstock