March 30, 2020
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Post type:
Industry & Regulations
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Author:
Boris Mordkovich

Dealing With The Impact of COVID-19 on Short Term Rental & Real Estate

Dealing With The Impact of COVID-19 on Short Term Rental & Real Estate

The spread and consequences of COVID-19 can’t be described by anything other than tragic. It is also a black swan event that, while is not entirely unpredictable, was not something that most of us were prepared for — especially with the speed and intensity with which it developed.

That said, it’s worth taking a moment to reflect the impact that the pandemic has had on real estate investors and short-term rental operators. Many of us (ourselves included) are individuals with a significant financial stake in these holdings, so it has a significant financial impact on us today and in the coming months.

As such, I wanted to talk about 3 things that we’ve had to consider in the few weeks since this has begun to unfold: 1) the impact, 2) how to do the best you can under the current circumstances, and 3) considering the long-term impact and opportunities.

The Impact

Almost no one is spared. That’s probably the most shocking element of it all. No matter what city you’re in, you’ve likely been negatively hit by the impact of the virus — although possibly at different levels.

Unless you’re running an off-the-grid, remote cabin in the woods that is suddenly in high demand by those seeking to isolate themselves, you’ve likely seen your revenue go through a dramatic drop and are understandably concerned.

It’s not uncommon to hear of hosts who have been fully booked for the upcoming few months two weeks ago only to see the occupancy go to nearly 0% within a few days.

It’s made even more challenging by the policy that Airbnb implemented that took away the control that hosts have had over their listings and cancellation policies and offered a blanket refund to everyone.

I understand their thinking and I understand the position of the guests in that they are not able to travel — and for good reasons. That said, there were better ways to handle this — that we’ll discuss below. As is, Airbnb essentially pulled the blanket from underneath all of the hosts.

In short, the overall accommodations industry has suffered a significant blow. Fortunately, unlike hotels with a singular business model, Airbnb holdings offer a bit more flexibility and can be repurposed if the circumstances require it.

Making Lemonade From Lemons

As the situation unfolded, most hosts had to figure out how to deal with the new reality. The objective for most is simple — cover all of your holding costs and hold on until the situation begins to improve.

Focusing On Cashflow

We currently own or co-own 6 properties with 36 bedrooms* between them in several different cities, so we’ve had a unique perspective of seeing how this unfolds throughout the country.

Most of our properties are also in cities and urban areas, rather than traditional vacation markets. While our revenues took a nosedive as well, we’ve fared all right so far — relatively speaking.

Our goals were to cover all of our holding costs (mortgage, interest, insurance, property taxes), as well as keep all of our housekeepers on through this time and ensure they maintain a stable income.

We’ve done it through a handful of actions:

  • The first and foremost is that we’ve cut price, which is to be expected.
  • We’ve provided the housekeepers with new instructions on how to sanitize the property daily and highlighted it in the listings to let the prospective guests know.
  • Since all of the groups have canceled full house reservations, we’ve focused even more on renting out our properties by the bedroom.
  • We’ve increased the maximum duration that guests can stay from 5 nights (our regular limit) to about 90 nights or 3 months.
  • We’ve added additional discounts on monthly stays to encourage longer stays.
  • We’ve begun to explore additional channels outside of Airbnb, such as FurnishedFinder.com.
  • We’ve cut down all unnecessary expenses, such as snacks, welcome gifts, etc. to bring down our costs.

Fundamentally, what we’ve done is shifted focus from pure short-term rentals (average stay of 2–3 nights) to a mid-term rental model (average stay of 2–6 weeks).

There are no shortage of people that have been displaced suddenly, be it students who have been kicked out of their dorms, airline employees who are caught in limbo between cities, people who had their travel plans abruptly cut and need to stay in place longer or people who are looking to isolate themselves more.

Although the RevPAR (Revenue Per Available Room) becomes smaller with these reservations, it’s still higher than traditional long-term rentals and allows us to adapt quickly.

Moreover, whatever gaps exist between longer reservations are still booked by short-stays here and there, so our occupancy remains above 90% in virtually all of the markets.

Support Your Team

The next step that we’ve took on is to communicate to our housekeepers that we’ll continue to support them through this and instituted a floor pay.

Whereas before, their pay was typically dependent on the number of turnovers or days worked, we’ve let them know that when we’ll have more longer term stays, we’ll ensure that they still get paid each week at roughly at least 80% of their regular pay if the number of the turnovers drops.

I think it’s important to remember that these relationships are key to the long-term success and the people on the other end are the most vulnerable to the crisis.

So while it may be tempting to cut their work as booking revenue comes down, I think it’s wise to provide them with the stability until things begin to return to normal — if you expect to continue to operate in the short-term rental space.

Dealing With Refunds

The last point worth addressing is how the refunds are treated. In many cases, refunds become automatic as per the new Airbnb policy, but in other cases — if they are outside of the auto-refund window or booked via VRBO or other platforms — they are at the discretion of the host.

It’s tough to find the balance. Guests understandably want a refund (as would you, if you were in their shoes). Hosts still have sizable mortgage payments to make, not to mention a slew of other expenses.

Lastly, cancellation policies are something that both parties essentially agree upon before booking, so the risk should be spread out.

The approach that we generally took was this. Any guest that asked for a refund could either:

a. Get credit towards the same number of nights anytime in the future. No expiration date and can be used at any time, or

b. 50% refund right away, or

c. In some cases, a 50% refund and a 50% credit towards future stays.

About 70% of the guests were fine with the options, while the rest asked for other options.

In some cases, we’ve made further exceptions and tried to accommodate as much as we could, but as a whole, I think it maintained a fair balance between all parties.

Long-Term Impact & Opportunities

It is my opinion that the consequences of this crisis will be felt for some time to come.

I think that under the best of circumstances, we’re looking at a year or so until this is more under control.

In the meantime, we’re likely to see economic pain continue to depress the hospitality industry and the real estate market.

That said, for real estate investors, it represents an opportunity as well in a couple of different ways:

a. Real estate prices have been unsustainably high to the point wherein many markets, it would be nearly impossible to buy and cashflow a small multi-family property. Yes, short-term rentals made it possible, but ideally, any property should have also be able to work as a long-term rental.

For better or for worse, I think we’re going to see a significant impact on the real estate market in the coming months as the sellers begin to be more anxious to get cash out of the market and the buyers are more hesitant with larger acquisitions.

b. We’ll likely see a significant number of short-term rental properties be converted to long-term options. This may both further lower long-term rentals, as more inventory will come online, as well as lower the supply of short-term rentals.

Many existing hosts will either suffer a significant financial blow or decide that they don’t want to deal with it anymore and simply convert their listings to long-term rentals.

What are we thinking ourselves? Well, a couple of things:

First, now even more than before, are fans of the multi-purpose real estate approach. In other words, we’re continuing to look at properties that can be rented on a short-term or mid-term basis, that can be rented as full houses or subdivided into per-bedroom rentals, and so on.

While we’re certainly not expecting a pandemic to occur again in the next few years, I think it illustrates that these investments should always have a Plan B or even a Plan C.

Secondly, we’re not in a rush. While we may see some opportunities come up in the next few weeks, we will likely wait towards the second half of the year before beginning any additional acquisitions. There’s just no need to rush too much, especially since the short-term rental revenue will likely be depressed for a couple of months at least.

Lastly, in the next few months, we’ll continue to develop relationships with investors and make sure that we’re all on the same page to act together when we do, in fact, begin to move forward.

If you need any help with running an analysis on one or multiple properties, we’d be glad to help! Feel free to reach out at any time at hi@buildyourbnb.com.

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