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My investing journey with short-term rentals (STRs) began about three years ago. I never looked back.
STRs, particularly large luxury short-term rentals, continue to be a sustainable option for generating passive real estate income. Their tailored quality makes them the first choice for vacationers and travelers looking for something more memorable than a simple hotel experience.
At first it seemed like a big, scary decision to me since I was a complete newbie to STRs. But the learning experience was worth it. Since that initial investment and now that I know what's what, I've fully bought in. With the right offer, STRs can supercharge your real estate portfolio.
So get ready! In the next few minutes, we'll learn more about large luxury STRs and why they're becoming the next great real estate investment opportunity.
Table of contents
What are STRs?
STRs, also popularly known as Airbnbs, are homes, units or outbuildings that can be rented for a short period of time. What is a short period of time? Generally that means between one night and a month. The maximum length is often determined by state or local guidelines – so make sure you know this before investing.
About twenty years ago, the STR industry barely existed. It has experienced exponential growth in recent years in terms of popularity and scale.
STRs were experiencing strong growth pre-COVID. But then they came onto the scene during the COVID-19 crisis, offering people the opportunity to vacation worry-free. After the COVID-19 crisis, the value of the market continued to increase, leading to the emergence of professionalized and user-friendly large luxury STRs. In fact, some forecasters expect the industry to nearly triple in size and value within a decade.
This shift to luxury STRs follows a shift in consumer behavior. Customers are traveling in larger groups for social and affordability reasons, while seeking individual experiences that avoid tourist areas (where hotel chains typically hide).
All of this means that luxury STRs look like the next great investment for the future. Let’s break down five more reasons why.
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Luxury STRs offer a uniquely powerful investment opportunity, here's why
Continuous growth
Luxury STRs are evolving in line with consumer behavior and are therefore seeing rapidly increasing demand – something that cannot be said for regular STRs. In fact, standard Airbnbs have struggled to grow or plateaued over the past twenty-four months. Still, usage of luxury STRs has increased 79% since 2019. Since then, annual demand for luxury STRs has been nearly double that for standard options.
Consumer behavior is driving this growth, but new developments in dynamic pricing, packaging, seasonal strategies and other business models ensure the industry has the right pricing to sustain the growth trend.
More space, more amenities, more options
There are more STRs worldwide than all major hotel chains (Hilton, Marriott, Hyatt, etc.) combined. This fact leads to a simple truth: hotels cannot compete with more space, more amenities and more options.
High-quality amenities such as spas, fitness rooms and integrated smart devices such as automated lighting and climate control systems have proven important in attracting travelers. As disposable income increases, people are willing to spend the money – even if it's not much more than a hotel – on amenities that make their experience a dream vacation.
Superior returns
Luxury STRs are an excellent opportunity for real estate investment due to their superior returns. While the average long-term rental is successful when the return is between 5 and 10%, the return on STRs tends to be between 10 and 15%. And large luxury STRs can even double in return comparison: double distributions, double cash-on-cash, double cap rate, double IRR, etc. compared to long-term real estate rentals.
Even better, luxury STRs still offer the same investment benefits such as passive income, tax benefits, and portfolio diversification. Speaking of which…
A proven hedge against risks
So far, luxury STRs are economical. What do I mean by that? Growth patterns in luxury STRs have remained consistent despite the recent market slowdown, high interest rates, slower rental growth and other headwinds facing the traditional real estate market.
I always talk about the importance of diversifying investments to hedge against risk, and luxury STRs can be a great hedge, if only because they don't seem to correlate with traditional market movements. They still do well in all high-yield metrics.
The advantage of early adopter companies
There are many early adopter companies that specialize in large luxury STRs. These companies have done the groundwork for investors. Their expertise and experience help them leverage investment options in a way that reduces competition – ensuring you get the most return on your investment. You can identify trades and generate high-yield returns without having to take on the risk typically associated with STRs.
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Next steps to get started
Longtime readers know that my main concern is determining and taking actionable steps. They are necessary not only to make successful investments, but also to secure financial freedom for your future.
You took a step today: you learned the value of luxury STRs as an investment opportunity. But you may be asking yourself, “What do I do now?” My first rule is that before you make any investment, you must determine whether it is suitable for your financial plan or not. When it comes to STRs, I've written a guide to help you figure out if STRs are right for your portfolio. But you should also bring them to your CPA and your team of experts.
When you're ready to move forward, consider joining communities of like-minded people to educate yourself, acclimate to STR offerings, and dive into the waters of experience. That could mean getting on the Passive Real Estate Academy waitlist, attending one of our many events and conferences, or joining our Leverage & Growth Accelerator Community.
As you take your first steps, you will see the benefits of working with companies that specialize in luxury STR investments and operations. About three years ago, a colleague at Wandery Capital advised me on my FIRST STR purchase, and it's been an incredible ride since then. I can't recommend them enough.
Wandery Capital is a real estate investment trust focused on investing in and operating large luxury STRs in vacation hotspots and destinations. With a combined total of over fifty years of real estate experience, the company currently offers Fund II, which targets a distribution of 8 to 10% and an initial yield of 25%. They do this by focusing on properties with high barrier and entry barriers, such as luxury homes and converted boutique motels.
Full disclosure: I was an early investor and currently sit on the board of Wandery Capital as a financial advisor. They have proven to be an excellent investment partner. Even better, Wandery Capital offers early bird incentives, preferential rates and VIP pricing to all PIMD investors.
Click here to schedule an appointment with Wandery Capital and learn more.
Until I next see you, continue to take actionable steps toward financial freedom and the life you've always dreamed of. Expand and scale your assets. Move from a passionate and optimistic view of your future to taking concrete steps toward that future. That is my hope for you.
As always, thank you for taking the time to visit us here at Passive Income MD. See you soon!
Peter Kim, MD, is the founder of Passive Income MD, creator of the Passive Real Estate Academy, and offers weekly training through his Monday podcast, the Passive Income MD Podcast. Join our community in the Passive Income Doc Facebook Group.
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Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
