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Maintaining profitability on vacation rentals in today’s surging housing market

by | Dec 1, 2021 | Hospitality & Vacation Rentals

Introduction

As a result of the conditions, restrictions, and reality of Covid-19, the U.S. housing market and vacation rental management industry has had enormous changes and growth. Short-term rental demand has increased drastically due to the lifestyle changes imposed on the general public. 

With stay-at-home orders and feeling trapped in place, people looked to locations they could get away, avoid masses of people, have more space and freedom, and still work or learn remotely. The conditions both enabled and incentivized a big shift. 

Beyond just “getting away” and staying in rental homes – and doing so for longer durations – those interested in owning a second home got to work buying up homes. Both to have a place to visit as well as capitalize on the growing demand for rentals. The growth in sales and home prices have been stark.

Is there a concern?

With changes like these, questions arise about maintaining profitability for your properties as both an owner and a vacation rental management company. 

Historically, managing vacation rentals has been a low-margin business. While certain markets tend to do better, the added inputs of market conditions after Covid-19 may introduce some mid-term challenges for new home-buyers, vacation rental managers, and investors in build-to-rent homes.

Demand and occupancy in vacation rentals is growing

This year, we’ve seen a large demand increase in the U.S. short-term rental market. Looking at the change from 2019 to 2021, the occupancy has increased country-wide by around 24%. While suburban locales and the 50 largest cities have decreased, small cities and rural areas have increased by 67%; destination and resort locations have increased by 25%, and mid-sized cities are up by 8%. 

Average Daily Rates country-wide have seen a big jump from $214.30 in 2019 to $248.06 in 2021. Similarly RevPAR for the nation has increased from a 2019 average of $114.59 to $146.22 for 2021. The differences here highlight how eager the market is to get away from home and stay in a short-term rental. 

It’s projected that these average values will normalize in 2023, but not because rates will fall – but rather because small-sized units in larger cities will start taking market share and drive the averages down (rather than the large homes in destination areas that were popular in 2021). 

But the growth in nightly rates has been an outcome that makes this vacation rental space quite attractive.

The industry grows

In fact, this business model and industry as a whole is seeing massive growth. 

A forecast by research firm Technavio indicates that the global vacation rental market is expected to grow by $62.97 billion during 2020 to 2024. 

We’ve seen increases in demand due these recent circumstances, but the reduction in hotel availability also introduced new customers into the market who would have previously booked hotel rooms. Additionally, media coverage has also increased general public awareness of the space and the option to travel and get away more locally and with the special personalized touch that vacation rental companies include in the experience.

Home prices and home sales are on the rise

However, in addition to the increase in demand, there’s also an enormous swing in housing prices. The growth has been so great that some individuals speculate a potential housing bubble, although that is not substantiated.

A CNN article helps to color the picture here by summarizing some figures. “Vacation home sales rose by 16% in 2020 from the year before, outpacing overall growth in existing-home sales last year which was 5.6%, according to a report from the National Association of Realtors.” 

This trend of increased sales has continued to grow drastically, rising by 33% as of a few months ago from 2020 into 2021.

This rise in sales indicates many buyers looking to either live or invest in vacation home counties in the U.S. As a helpful nugget, the National Association of Realtors defines “vacation home counties” as a county that has at least 20% of the housing stock as vacant housing for seasonal, occasion or recreational use.

In the last year, a handful of states rounded out the top 10 vacation counties: Florida, Maryland, Massachusetts, Michigan, and North Carolina. 

Let’s look at a few examples of the changes in the markets across some different U.S. counties. “In Lee County, Florida … in 2020, home sales rose 10% there and properties sold 45 days faster than in 2019. Many homes are in a mid-price range there, but increased last year with the median sale price up 12% to $247,000.

Some more expensive markets are experiencing big growth as well: Nantucket saw the median home price rise 42% from last year, and Martha’s Vineyard showed “home sales [rise] 14% last year with the median sales price jumping 64% to $1.4 million.”

Two mountain regions in North Carolina – Alleghany and Swain – have median prices under $250,000 but have seen home sales increase 248% and 141%, respectively. The Blue Ridge Mountains and Great Smoky Mountains are proving to be quite desirable! 

Homes are selling for higher, and are getting taken off of the market much more quickly by buyers. The inventory of available homes is down from 12 months ago; as of April 2021 there was 21% lower home supply.

Large amounts of vacation rental counties had both large increases in sales as well as median home prices. Buyers are ready to buy more, doing so more quickly, and paying higher sums. 

While many of those buyers will use them as a second home, lots of new owners will also utilize the properties for income as vacation rentals – using an existing vacation rental management company to operate their second home. Some ambitious investors will even scoop up several homes and enter the VRM space, listing their properties on Airbnb where they start earning revenue within a matter of weeks.

What is the effect on vacation rental profitability?

So what is the outcome of all this growth and change? What can we extrapolate?

Property inventory is getting more expensive, which means that higher nightly rates will be required to make the investment work financially

The increase in demand will increase rates, but there are more players entering the VRM space to try to capitalize on that demand. This increased competition may end up pulling rates back down a bit. 

However, even with increasing rates, is it at a pace that can keep up with the increasing home prices across the country? 

It may become more of a challenge to maintain profitability in this new world, especially in areas with new players, new buyers, and high expectations of return on investment. 

The investors who buy houses and want to list them with an existing vacation rental company will want to ensure they’re getting a margin, putting pressure on VRMs to perform exceptionally well.

It only adds complexity with the current state of the country’s decreased workforce – which increases payroll cost. Not to mention the inflation underway as a result of the economic disaster of Covid-19. 

How can vacation rental managers focus on profitability under these conditions?

Resolving profitability challenges

Let’s start by breaking down the major categories that have an impact on profit margin.

Increasing revenue: what can you do to raise the top line? The two big categories we’ll identify under this point are 

  • A) to maximize the revenue and profit on each booking via optimization tactics, and 
  • B) increasing occupancy rates by filling as many units as possible for as many days of the year as you can, subject to minimum ADRs.

Decreasing costs: what available levers can you pull to reduce expenses for your property management and business operations? The big drivers here are

  • A) improving your operational efficiency,
  • B) offloading units that perform poorly, cost more, create more issues and wasted time (and stress) and ultimately have very low margin,
  • C) renegotiating terms with suppliers and vendors, and 
  • D) analyzing major cost centers of the business and getting creative with ways to drive change.

How technology helps with profitability

So how can you attack some of these key areas using technology?

Well first let’s state the obvious: technology – whether software or hardware – can cost quite a lot, so it’s not worth investing in unless you’re truly getting your return on investment. Whether in the increased revenue, decreased costs, or added efficiency and time savings.

I recently heard a thought leader discuss new technology their vacation rental business is using to massively improve their laundry operation efficiency. It has saved them an incredible amount of time and requires fewer hours from providers. The direct output is a big reduction in the cost of managing laundry requirements. It also frees them up to focus on other ways to improve the business and drive better results from other functional areas of the company.

Investing in some basic software to make data visualization and analysis extremely easy can actually highlight many low hanging fruit areas where costs are high on some given properties that may be candidates to offboard. 

This simple visualization of complex underlying data can also highlight areas where you are overspending without results (e.g., paying for certain types of ads or search engine keywords that cost a ton but don’t lead to any bookings), or where you are doing well that you can reinvest in. 

On the revenue side of the profit equation, software tools like Jarvis ML can drive change in several ways, addressing both the profitability as well as the occupancy.

First, Jarvis ML can maximize your profit margins for each booking by identifying the right price and the right property for each guest, personalizing the pricing based on the preferences and buyer journey, other similar guests’ history, and market conditions.

The technology acts like a team of data analysts that are calculating the best prices, promotions, and properties to put in front of each prospective guest. It bases this on all of the data stored across your existing tools and systems. The machine learning algorithms find the correlations that maximize profitability goals.

In short, by introducing this type of technology, you’ll get the best price to ensure profitability. It personalizes the guest’s booking experience in such an intimate way that it influences their buying decisions.

Second, Jarvis ML’s machine learning also ensures the additional goal of filling units. If you maximize the profit for each booking It doesn’t do you much good to maximize the profit for each booking if occupancy is extremely low and there are few bookings.

The machine learning involved optimizes for this second goal, not only getting the most revenue per booking, but also targeting the right customers at the right time based on your open inventory to ensure the highest conversion rates and occupancy.

You need to maximize both objectives: filling as many units as possible for as many days of your fiscal year, and getting the best rates for each reservation. Powerful software is able to do this multifaceted analysis to help you crush your goals.

In closing

We’re excited about the growth of the industry, but with big movement in the market there are side effects to make sure are accounted for. 

If profitability is feeling like a challenge to overcome, you’re not alone. Not only are peers a powerful way to learn and brainstorm solutions, utilizing the technology available to you can help to automate some of the groundwork.

However, we also need to remember what makes this industry special: providing a high quality and special experience for guests that adds meaning and joy to their lives. So as much as we need to run a business and make tough decisions sometimes, we should make sure to always have fun!

If you’re interested in learning about how Jarvis ML can help with your profitability and revenue growth in this dynamic market, check us out here.

 

Sources:
https://www.airdna.co/blog/2021-us-short-term-rental-outlook-report
https://www.rentalscaleup.com/2021-2023-us-short-term-rental-market-trends-according-to-airdna/
https://www.cnn.com/2021/06/17/homes/vacation-home-sales-increase-covid-feseries/index.html
https://www.prnewswire.com/news-releases/vacation-rental-market-to-grow-by-almost–63-billion-during-2020-2024technavio-301315239.html

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