Short-Terms Rentals and the Effects on Value
September 4, 2019
Northwest Real Estate Services
It’s all the rage – hopping on a website like Airbnb or VRBO, and staying in a home, apartment, or condo owned by an individual or an investment group. Users of these services are discovering the convenience of renting an entire home for the same price as a hotel room or condominium in a great location.
The numbers are astronomical – and growing! It is estimated that Airbnb has over 5 million listings in over 80,000 cities. Reports show over 78,000 fans booked through Airbnb for the 2016 Rio Olympics. As the numbers climb, and more properties are offered, profitability has been touted as a reason to buy more properties with potential for short-term rental. This is a shift from an individual renting their personal residence for a few days to assist with their mortgage payment. It’s becoming an investment strategy.
Owners are discovering that a short-term rental may generate more revenue than a more traditional rental term. But there is a downside – the short-term rentals are typically more expensive to operate since cleaning and maintenance expenses and replacement of furnishings will run higher.
It’s also become a hot topic as problems stem from short-term rentals, often in a residential neighborhood where rentals are few. There have been reports of houses being trashed, tenants having noisy parties, or parking issues that irritate neighbors. Some communities try to out-law these rentals with zoning restrictions or condominium bylaws. In other cases, short-term rental permits are now required and an “occupancy tax” may be charged.
The demand for short-term rentals is opening up a new market for lenders, as well as investors looking to purchase properties with similar goals in mind. Often the short-term rental income is much higher than what could be charged for a traditional rental term. In some cases, owners can pay all or part of their mortgage with this income. The looming question for lenders is whether or not these properties are good credit risks.
As buyers attempt to finance purchases for short-term rental purposes, appraisers are being asked to appraise these properties based upon their short-term rental income, rather than the market rent they would generate from a longer, more traditional lease. This is leading to discussions among appraisers as to the correct methodology to appraise these properties.
Ryan Lundquist, a noted blogger and respected appraiser, notes that Airbnb rent and market rent may not be the same. He notes that
“Typically, lenders are going to ask residential appraisers to use market rent in appraisal reports instead of short-term transient rent (‘hotel rent’).”
He also states that “sellers trying to sell a property with a short-term rental would be wise to recognize that not everyone wants to run a short-term rental business. This means buyers are going to be looking at market rents instead of just “hotel rent” when assessing whether a deal works or not.” Another concern he notes is, “How do you deal with the highest and best use?”
Does this mean that appraisers are going to be “under-valuing” properties that lease under short-term rental agreements? If a property’s short-term rental profit is much greater than the profit generated by traditional rental terms, an appraisal which leans on traditional market rents will likely produce a lower value. Another concern for appraisers is the difficulty to estimate vacancy rates for these properties.
The appropriate way to appraise short-term rental properties will be widely debated as the market for these properties continues to increase. Lenders will likely be developing lending guidelines for this niche market as well. Stay tuned as this growing market continues to generate discussion in both appraisal and lending circles going forward.