Is There an Airbnb Bust?

One of the very best vehicles for growing wealth is real estate. In recent years, short-term rentals have proven a lucrative strategy within the real estate category. Since the boom of 2022, however, things haven’t been as ducky as old Cubert would like.

After several months of lower-than-expected bookings, I’m left wondering if there’s a real Airbnb bust going on. Let’s dive in!

From Airbnb Cash Cow to Skinny Cow

The chart below illustrates the beginning of “the slide”. Granted, it’s too early to be a trend, but the numbers so far in 2024 don’t bode well for even matching 2023. As of this post, we’ll be lucky to hit $28,000 – the low bar set in 2019 – 2020.

We started the Airbnb at the beginning of 2018 and got off to a great start. We welcomed a long-term guest family from Brazil during the low season winter and spring, and kept our calendar super flexible throughout the rest of the year. Most established rentals require week-long stays, but in order to generate reviews and revenue, we had to offer 2 night minimums in the beginning.

From 2019 onward, high season bookings during summer months required a 5 or 6 night minimum stay. Revenue hovered around 28K in 2019 and 2020, with COVID having a nominal impact in a year filled with lockdowns and uncertainty. Revenues were the last thing on our minds with the virus taking its toll on so many lives and livelihoods.

2021 and 2022 witnessed the summertime boom that unleashed pent up demand for vacations. Consumers were done with staycations and lockdowns, and with lots of travel dollars to burn and vaccines in arms, Airbnb hosts, including me, benefited big time.

So… What Happened?

For starters, in the Michigan area where we host, the number of Airbnbs has surged by 24% from 2022 to 2023, with no signs of letting up. Michigan isn’t alone. Nationwide there is an over-saturation of vacation rentals.

Can you blame these new hosts? Not at all!

Not when the summers of 2021 and 2022 saw record-low vacancy rates and a newly forged work-from-home population ready to bolt from the big city to cute vacation towns. The appeal makes sense. Instead of paying to use someone else’s vacation rental, why not buy your own, and make a ton of money in the process?

To compound the problem, you’ve got bloggers and influencers like me (yes, even the mildly influential have some influence) gushing about how amazing it is to rake in real estate cash from hosting.

Still to this day, I am happy to share the abundance. There is still plenty of room on the block for new Airbnb hosts. But maybe not all at once…

Some very real cautions lurk for anyone thinking about launching a short-term vacation rental in the current environment.

Why It May Not Be Wise to Start an Airbnb in 2024

Let’s start with the over-saturation problem. It will be that much harder for a new host to differentiate their pad in a field that has 50% more options than just a few years ago in a given market. You’re not only competing against other new owners, you’ve also got established hosts, many of whom are Super Hosts. They will earn the lion’s share of bookings as they have built a reputation for providing an excellent experience for their guests.

Is anyone here a fan of market dynamics? As supply has risen in understandable reaction to gangbuster seasons, sadly, demand has tapered off.

Inflation affected travel budgets these past couple of years, but travelers have also widened their scope to international trips with COVID seemingly behind us. It truly has become a guest-favorable market with plenty of options and last-minute deals to consider.

The next reason to pause before jumping into Airbnb is that the housing market is the PITS. Interest rates are still hovering around 7% and prices have only modestly come down from historically high levels. When is the right time to invest in real estate? That’s right – when prices are depressed and rates are reasonable (4% – 6% might qualify as reasonable — Do not expect rates of 2% – 3% to be the norm).

We were fortunate to buy our condo in late 2017 for $120K with a mortgage rate of 4%. Units are now selling for as much as $290K. How much revenue would you need just to break even on a $290K purchase at 7% interest? $28,000.

This is about par for us since starting the business in 2018. We would be hard-pressed to justify the amount of effort needed to manage the upkeep and guest service aspects of the Airbnb simply to break even.

Backlash!

Finally, there is a growing backlash against short term rentals and Airbnb in particular. Many municipalities have had it up to their eyeballs with disruption that comes from short-term guests. A number of towns, big and small, have simply banned Airbnbs altogether, or limited their use to rooms only (the original business case for Airbnb).

I’m not entirely sure these bans are the best answer to the problems faced by communities. Tourism dollars flow in large part from attractive accommodation options. If travelers are forced into hotels, families (and families with pets) will look elsewhere to stay and spend their dollars. Bans may not even solve the problem, as many hosts will simply list on Facebook or other social media platforms as a “gray market” of sorts. This is when you wish you had Airbnb around to vet questionable guests.

A final and very important note to would-be hosts: There are serious housing shortages to consider in many communities experiencing an over-saturation of short-term rentals. Families that need to live full time in holiday towns as teachers, etc. cannot afford the limited supply of housing that remains after the STR hosts have gobbled up all the stock. I can’t be a hypocrite on this – I am contributing to the problem.

Again though, the solution isn’t to ban Airbnbs, but there should be incentives and credits for workers to be able to afford housing in these communities. Building more and new housing is one option. And with any new housing development, communities should require covenants with 12 month minimum leases.

The best solutions will provide good, affordable housing for year-round workers and families, while also allowing hosts to accommodate guests who bring in millions of tourist dollars that support local economies. A win-win approach is essential.

Tactical Moves to Differentiate Your Airbnb

I’m not one to sit on the sidelines and let some fancy upstart with pithy word-art wall hangings and gray color tones steal our thunder. We’ve doubled down on improving our space since last summer. There are several little upgrades that will add up to a better overall guest experience.

On the pricing front, I’ve made the switch from Beyond to PriceLabs. Although Beyond is easier to get started with and has a bit more of an intuitive feel, I’m elated to have switched to PriceLabs. Once you get the feel of how the “PL” system works, the various customizations coupled with a powerful algorithm make PriceLabs the engine of choice for hosts.

I can now set minimum stays far out on the calendar that slowly reduce as you get closer to the date. I can control for orphan day stays where I have a few nights open between week-long stays, in case I want to offer these shorter stays to guests. There are also options to set market-driven far-out prices, like airlines do, and aggressive discounts when occupancy is low.

I could go on, but I think PriceLabs deserves a dedicated post shortly. Suffice it to say, “PL” has steadied the ship for us despite the headwinds in our market.

In addition to upgrading our space and pricing engine, we also hired a pro photographer last fall and he did a fantastic job. Here are just a few examples of his work:

Although I can’t prove a direct correlation, we did see a spike in late fall bookings after the new photos went live on our Airbnb listing. I’m big on DIY, and maybe a bit stubborn to boot, but I realized my photos just weren’t cutting it in a space becoming ever-crowded with new and increasingly sophisticated hosts.

More to come as the high season looms – just a few months away.