How short-term rentals have changed game of real estate rehabbing

John Allen

The rehab real estate sector used to primarily focus on fix and flips — buy, repair, sell, repeat. But then a unfamiliar silicon valley startup called AirBedandBreakfast launched in mid-2008 and changed the game forever. The company, which is now known as Airbnb, manages an online marketplace for short term property rentals. Their website and mobile app combo enables homeowners to rent out their spaces by the night to consumers using a well-designed experience that offers support from start to finish. The real estate industry was shaken by this once tiny startup that filed to go public this week. Everyday households could make money from their spare bedrooms, entrepreneurs could capture margins from arbitraging leases, and real estate rehabbers could capture margin from renting out their fixed-up properties instead of selling them right away. Seemingly everyone, except for hotels, could benefit from this new real estate revenue stream.

Airbnb grew from a just few listings in 2008 to roughly 7.4 million listings as of September 2020. These listings generated a gross booking value of $38 billion in 2019 which translates to $4.8 billion in annual revenue for the 12-year-old company. Even though the pandemic nearly killed the travel industry as a whole, Airbnb was able to maintain their position as a market leader throughout 2020. The company suffered a painful blow early in the year when it had to refund $3.9 billion to customers who booked accommodations pre-pandemic, but Airbnb has since recovered to bring gross bookings back up to 80% of their position from last year; this isn't growth but it also isn't death.

Regardless of all of the stats, the point that we wanted to highlight was the impact that the short-term rental market had on the fix and flip real estate sector. We've worked with a lot of entrepreneurs at Joist, many of whom have a listing on Airbnb or have considered listing one of their fixed-but-not-flipped properties. As we dove deeper into this topic, we discovered that many real estate rehabbers follow the fix-then-rent strategy to generate some passive income for their businesses prior to selling off the properties.

The business of fix-and-rent is actually quite lucrative, even during the pandemic. Traveling is still very active in 2020; the market has shifted from long-distance air travel to nearby road travel, which means that there is still money to be made using the fix-then-rent tactic. And keeping properties that generate revenue on your books provides you with negotiating leverage for future loans that can expand your fix-and-rent or fix-and-flip business.

So has Airbnb and the greater short-term rental market harmed or helped the fix-and-flip real estate sector? Entrepreneurs have more income opportunities and rental prices have skyrocketed throughout the decade potentially because of these opportunities. Properties prices have also increased which is good for sellers but bad for buyers, though, most rehab properties have likely not been affected by the impacts of the short-term rental boom. So this newfound, 12-year-old-ish market seems to be nothing but positive for real estate rehabbers. Why not take advantage of an available income stream? If your fix-and-rent plan fails, you can always fall back on the typical fix-and-flip strategy without taking too much damage.

Finally, you may be wondering how Airbnb going public ties back to this story. We'll leave you with this: public companies are typically more well-known the private companies. Airbnb's IPO is big news for the real estate market as a whole and still significant to the rehab real estate sector. As more people learn about short-term rentals as consumers or landlords, more opportunities will arise to capture margins. So find the inner entrepreneur within you and consider this opportunity to utilize Airbnb's presence to expand your career potential.

FYI, Joist offers fix-and-flip loans and fix-and-rent loans. So hit us up if you find a good deal and need some help with the financing.

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