April 16th, 2018
The sharing economy is actually the rental economy, with plenty of upside to go around. But regulation (or the lack there of) and inconsistency in supply makes it hard to plan strategically. Blanket terms like alternative accommodations and vacation rentals fail to fully capture the scope and complexities of the market.
Airbnb sits at the epicenter of this green tsunami. Other marketplaces including HomeAway and now Booking Holdings are also cashing in and not waiting around for local officials to fully legitimize a clearly global phenomenon.
These platforms are transforming an otherwise cookie-cutter lodging sector into a lucrative and pervasive mosaic of relationships between hosts, guests, landlords, owners, tenants, property managers, service providers, and local regulators - sometimes compliant, sometimes not.
Look for opportunities within these folds.
Rental Economy DNA
We constructed a matrix to add some order to the chaos:
Market, Tenure, Occupancy, and Management.
These are the core four attributes that define a rental property's position relative to its host, guest, service providers, rental marketplaces, and the community in question. Out of those attributes we pulled 8 classifications.
Markets: Regulated / Unregulated
There are urban markets and resort markets. Rented spaces are new to urban markets where regulation has yet to catch up with demand. Rentals are not new in resort destinations e.g. beach, nature, and ski locales that have traditionally high visitor volumes. Some rentals are fully legitimate. Others fail to comply with local regulations. Regulated is not synonymous with restricted. Regulated markets have established rules and bylaws that allow ecosystems to mature.
Tenure: Owned / Leased
Hosts either own or lease the space. Landlords often include restrictions in their lease agreements with their tenants. In dense cities like New York, where rents and demand are both high, a large share of listings are likely leased properties. Tenants take on the risk of non-compliance with their tenant agreements. Owners have the added responsibility to abide by local ordinances and typically need to register their properties and pay taxes (as do tenants) on their rental activity. Certain property management groups lease out spaces for the exclusive purpose of running a rental business.
Occupancy: Primary Residence / Secondary Residence
Rentable spaces exist as either primary residences i.e. the host picks up his mail there, or as secondary residences serving as investment properties that accommodate guests as their primary function. Occupancy status impacts guest experience, terms of agreement between property managers and tenured individual (owner or tenant), volume of visitors and other considerations.
Management: Resident Managed / Professionally Managed
Rentable spaces are either resident managed or professionally managed. Owners or lease holders can do it themselves or contract with firms to manage the rental process including pricing, revenue management, guest services and housekeeping. Sometimes residents contract with service providers including housekeeping. A space is considered professionally managed when the process is coordinated by a third party end-to-end.
16 Rental Archetypes
1) Unregulated, Owned, Primary Residence, Resident Managed
Bill is a 30 something professional with a condo in New York City. He travels for work a lot and rents out his space while away. During certain months he can offset his mortgage payments by more than 50%. This is a classic sharing economy scenario. He might have a cleaning service come in to deal with bathrooms and laundry, but he manages the booking and guest relations on his own.
2) Unregulated, Owned, Primary Residence, Professionally Managed
John and Mary are early retired and own a modern row house in London. They vacation a lot spending up to 90 days away in Mallorca where they have their vacation home. They aren’t home enough and can’t be bothered with managing the rental process. They would also rather not lose out on lost income, so they hire a management firm that specializes in caring for resident-occupied spaces. John and Mary pay a premium for listing, housekeeping, and guest services.
3) Unregulated, Owned, Secondary Residence, Resident Managed
Jane lives in Nashville and recently decided to buy a 3-unit investment property. She leases out two of the units and keeps the third open as her office as an occasional getaway from her three kids and husband. She often rents the unit out on Airbnb and does all of the booking and guest management herself. She prefers Airbnb because she can screen her guests before accepting the booking. The women downstairs takes care of the housekeeping.
4) Unregulated, Owned, Secondary Residence, Professionally Managed
Drake now lives in Venice Beach, L.A. after having recently moved from Chicago for a sweet job in advertising. He still has his condo in Lincoln Park and pays a management company to run the whole operation. Summers in Chicago are his favorite and the company he works for has offices downtown. He blocks off a week in July and a week in September. The management firm insures the property and guarantees Drake a fixed monthly income that more than covers his mortgage payment.
5) Unregulated, Leased, Primary Residence, Resident Managed
Mable lives in Memphis and has been with his girlfriend Thea for sixth months now. They have entertained the possibility of moving in together, but have yet to make the jump - even though Mable spends most nights at her apartment. He helps Thea out with the rent. His landlord never explicitly forbade him from renting out his place, so he hosts visitors three weekends out of the month.
6) Unregulated, Leased, Primary Residence, Professionally Managed
A rare scenario, but it happens. Tim has a long-standing lease on a rent controlled one-bedroom in Williamsburg, Brooklyn. From March up through the holidays he can get top dollar for the space. His monthly rent is $1,500 but the place can easily go for $4,500 on the rental market. He works with a small rental management group to optimize pricing and to lower housing keeping costs. They split the difference. Tim lives rent free with his girlfriend in Manhattan.
7) Unregulated, Leased, Secondary Residence, Resident Managed
A rare but increasingly common scenario. Carl lives in Long Island City and sees a future for himself in the rentals industry. He talks it over with the building landlord and agrees to lease out the unit across the hall at a premium. The space typically goes for $2,000 a month, but Carl dishes out $2,500 for the right to rent it out at full capacity. He manages the entire rental process himself, including the laundry, to maximize his margins. In a typical month he clears $3,500. Realizing the potential to make real money, Carl is open to the possibility of leasing out another flat in the building across the street. Carl is on his way to becoming a professional rental property manager.
8) Unregulated, Leased, Secondary Residence, Professionally Managed
Joe is the CEO of Super Lofts, a successful rentals management firm based out of Denver. They focus exclusively on upscale properties in popular urban destinations. Super Lofts signs long-term leasing agreements, giving it rights to their inventory year round. The company has a proprietary channel management and pricing solution that has helped them scale beyond Denver. The staff full-time partially but also subcontract with cleaning and maintenance crews. Super Lofts turns a healthy 15% operating margin and recently broke into Los Angeles.
9) Regulated, Owned, Primary Residence, Resident Managed
Travis is a retired transplant from New York and now lives on Martha's Vineyard year round. He bought a beautiful three-bedroom Victorian just outside of Edgartown. He doesn't really need the money but as a hobbyist, he hosts guests in his spare bedroom during the summer months. Local officials are in the process of restricting rentals, but Travis needn't be concerned about his part-time operation.
10) Regulated, Owned, Primary Residence, Professionally Managed
John and Jane are well-to-do snowbirds residing half the year in Hollywood, Florida and the other half in New Jersey with their daughter and grand children. They work with Brand P Property management group to manage the rental process. Brand P gets most of its hits from HomeAway and families from Chicago's suburbs looking for week-long beach getaways. The operation complies with local bylaws. John has the family accountant settle their tax obligation, keeping in mind the "Masters" rule that gives them a 14-day tax exemption within the calendar year.
11) Regulated, Owned, Secondary Residence, Resident Managed
Maggie is a life-long resident of Key West, Florida. She owns two homes, lives in one and keeps herself busy renting out the other to weekend warriors coming in from Miami. The city of Key West signed ordinance 02-06 back in 2002, which capped the number of transient rental licences. Maggie lucked out and grandfathered in her rental two years prior to the ordinance passing. She now pays the $27.30 tax every year and enjoys helping her guests navigate the island.
12) Regulated, Owned, Secondary Residence, Professionally Managed
Harry and Sara own a beautiful property around Kaanapali Beach in Maui, Hawaii. They travel between there and their home in San Francisco. Right after the holidays, they fly off to spend the colder months in Maui, before returning back to Sonoma just in time for the vineyard bloom. Harry and Sara have an exclusive contract with Kaanapali Beach Properties, a management group recently acquired by Vacasa. KBP takes care of the entire process and sends Harry and Sara a check every month. Vacasa pulls in roughly 30% of KBP's bookings through their booking portal. The rest mostly come through HomeAway and more recently Booking.com for their European guests.
13) Regulated, Leased, Primary Residence, Resident Managed
Jake is a retiree living in Orlando. The city commission recently approved an ordinance that officially allows locals in residential neighborhoods to rent out their homes on Airbnb and other sites. Technically, Jake needs to be present while visitors are in town, but takes the risk and stays with his girlfriend down the road on select weekends. He doesn't own the place but the landlord doesn't mind as long as Jake works within the law.
14) Regulated, Leased, Primary Residence, Professionally Managed
Brian lives in Ellijay, Georgia a popular destination for hikers and outdoors folk. He leases out his home and works with a XYZ Property Group to maximize revenue during peak months. XYZ is a two-man operation with roughly 15 properties under management. They're just getting started and take contracts with both owners and lease holders to build their reputation in the community. Brian gets a deal and foregoes all of the hassles associated with the rental process. He's not a people person and would rather have XYZ deal with guests. The absentee landlord lives in Atlanta.
15) Regulated, Leased, Secondary Residence, Resident Managed
Walt recently moved to Virginia Beach, after a long career working in the pharmaceuticals industry out of Atlanta. He recently purchased a home, but still has six months left on the lease that he took out while looking for the perfect retirement home. He couldn't find anyone to fill the remaining lease and now rents the space out to visitors.
16) Regulated, Leased, Secondary Residence, Professionally Managed
Donna and Dan moved to Aspen, Colorado 18 months ago. After falling in love with the town they decided to stay year round and invest in a condo. They were lucky enough to find a great deal right off Main Street. After moving in to their new space they transitioned over the rental to TRR Management Co. TRR agreed to cover the lease in exchange for exclusive rights to management. Donna and Dan recover their obligations on the lease. TRR walks away with their due and proper.
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