The pros & cons of the top five multifamily short-term rental models

ShortTermRentalz speaks to Mickey Kropf, the co-founder and CEO of Vector Travel Inc, a tech-enabled multifamily short-term rental fee management company, about the pros and cons of each multifamily short-term rental model and their applications.

Multifamily short-term rentals are here to stay. Consumer demand for alternative accommodations via platforms like Booking.com, Expedia, HomeAway and Airbnb is increasing relative to demand for hotels. The admixture of short-term rentals in multifamily has also spawned various companies looking to meet consumer demand via multifamily companies’ real estate and the mega platforms.

Short-term rentals can produce up to three times the revenue of long term rents, so they are of course on the radar of nearly every multifamily company today. Short-term rental consumers want value (e.g. lower price per square foot, kitchens, extra beds), locations proximate to the draw that brought them there (business or leisure), unique access and experiences, and amenities. These consumers are also far likelier to trust in online bookings and self check-in procedures, which creates new efficiencies for multifamily operators not typically available to hotels. Multifamily properties have been available for rent for millennia, yet platforms like Airbnb are little more than a decade old. Needless to say, the business models associated with positioning apartments as residential short-term rentals are nascent, but they are all gaining traction within the $3.4 trillion multifamily industry.

Once a multifamily company decides to embrace the short-term rental industry, it is then left with the decision of which model(s) to exploit given their inventory, product and credit lifecycles, financial goals, and risk preferences. There are some potential cons common to all approaches, such as high guest turnover and its potential impact on resident perception of community, but we will ignore those since this piece is focused on how to capitalise on short-term rentals only after a multifamily company has embraced short-term rentals as a revenue source.

Here are the top five multifamily short-term rental models.

  1. Fee Management / Revenue Share Model 

Multifamily short-term rental fee management is ironically the newest model despite it being the default business model for traditional apartment management companies as well as traditional vacation rental management companies. Vector Travel might be the first multifamily short-term rental fee management company, but there will surely be others to follow. 

Pros:

  • Short-term rental manager provides turnkey service including setup, online distribution, revenue management, guest communications, housekeeping, and reporting
  • Supermajority of revenue is paid to multifamily company (Vector’s standard split is 75 per cent to multifamily company) with the 25 per cent covering all of our expenses (e.g. we do not charge our personnel costs to the multifamily provider like a traditional manager might do, albeit with a lower percentage rate overall). Multifamily company may experience return premiums on an annual basis 
  • Multifamily company gains a captive hospitality partner without having to invest directly in hospitality itself, thus allowing each party to focus on its core competencies
  • Can operate across many markets and various asset classes
  • Can handle small footprint per building (e.g. five units) up to hundreds per property dependent upon the property’s needs in terms of vacancy loss and ancillary income
  • White label opportunity for multifamily company to brand the hospitality operation powered by its short-term rental management partner
  • Guest suites amenity; leasing office opportunity to give prospective tenants “try before you buy” stays

Cons:

  1. No rent guarantees and variable returns month to month
  2. Multifamily companies cover the expenses of furnishings and utilities
  3. Potentially more financial exposure should local short-term rental regulations change after units are operational
  4. Partner is a third party, so the company must be chosen carefully

2. Corporate leases

Multifamily corporate leases by short-term rental operators are the most common model today. Operators lease blocks of units at or near market rents, setup the units per their standards, then market them to short-term rental guests. In so doing, they take the risk on the leases and furniture costs while seeking to arbitrage long term rents versus short-term rental revenues.

Pros:

  • Opportunity to lease multiple units per building at a time, and potentially lease units across a portfolio to the same operator
  • Absorb units faster in a lease-up
  • Short-term rental manager is a corporate tenant and thus can be evicted
  • Short-term rental manager furnishes units and pays utilities

Cons:

  • Multifamily party has no upside in the arrangement
  • Limited application to anything but the best properties in the best locations (i.e. B or lower properties in anything but urban core need not apply)
  • Default risk concentrated in a single entity

3. Hotel

Another approach involves obtaining a secondary zoning designation on a property and upfitting the units and overall building as a compliant hotel structure. While this can take six months or longer and have material costs associated with it, legal “hotel” apartment units can be a great boon for new developments battling slow absorption rates or facing long lease-up terms. Furthermore, legal nightly stay units can thrive in submarkets that have banned or tightly regulated residential short term rentals.

Pros:

  • Secondary zoning allows residential units to be marketed and run legally as hotel units
  • Vacant inventory can produce income during lease-up or permanently 

Cons:

  • The rezoning process can take months
  • The process can be costly, so the location and upside potential is critical
  • It may require a significant percentage of the building’s inventory to be viable, which can impact finance covenants

4. Platforms

There are at least two online platform businesses that focus on enabling multifamily residents to rent their homes while sharing data and revenue with owners. This approach allows multifamily companies to market units for lease to residents who can then short-term rent their units as a feature of their leases. Multifamily companies may see increased total returns from the approach, though the units will be operated by amateurs and onsite staff may have facilitate it with short-term rental guests and vendors.

Pros:

  • Residents can earn extra income that also facilitates apartment affordability
  • Owners receive a small share of the revenue generated from short-term rentals
  • Owners and residents have data insights into short-term rental activity via the platforms

Cons:

  • Many unprofessional operators running short-term rentals under one roof
  • Owners receive only a small fraction of the short-term rental income
  • Variable and limited returns from short-term rental activity
  • Onsite staff may be required to perform some hospitality functions to facilitate the operation

5. In-house Management

Many multifamily owners and traditional management companies probably see the growth of the short-term rental industry and think, “why don’t we do this ourselves?” In theory, they should. They have the most valuable portion of the equation: the real estate. They can furnish units and get professional photos uploaded to Airbnb, for example. But how even that is done sorts the wheat from the chaff, and that does not even take into account additional distribution, revenue management, hospitality professionals (versus property managers), short-term rental technology, specialised accounting, and high turn housekeeping management. Most multifamily companies would likely see greater returns by hiring a short-term rental fee manager or corporate leasing to a professional operator. 

Pros:

  • Multifamily company keeps all of the short-term rental income
  • Manages according to their policies and preferences alone
  • Brands and presents the units to residents and consumers as they see fit

Cons:

  • Multifamily company must invest directly in new short-term rental talent, tech, insurance, and processes
  • Not core competency and likely tiny fraction of their inventory, so could be a distraction and will likely result in suboptimal returns
  • Hospitality is 24 hours per day, 365 days per year
  • There are many pitfalls in execution, including design, supply management, photography, distribution, pricing, guest communications, and housekeeping management

Of the five top short-term rental models for multifamily, the two approaches that best align with traditional practices are undoubtedly the fee management model and the corporate lease model. Both require the least change of multifamily companies while providing professional short-term rental management and solid returns. Fortunately, multifamily companies can choose different models for different properties within their portfolios. 

For more information, visit the Vector Travel website here.