Hot Potato Real Estate
Irrational markets make fools of us all but also make fortunes for absolute fools. Real estate thrives on irrationality. The strength of the current market is contingent on foolish decisions. Many do not have the wherewithal to make sensible real estate investments. Sometimes we just need a place to live. Luckily this market rewards hasty decisions as the foolish buyers of 4-5 years ago look like geniuses today.
Real estate is the largest market on earth and the only one with predetermined scarcity. There is finite livable land on earth and presumably infinite people to ultimately occupy that space. Inflated currencies, as a product of modern fiat-based financial systems, have turned housing into an investment. What once was seen as a simple necessity of life has now become the most important wealth-building tool for families.
Contrary to the norm of human existence, it is not unusual for people to own multiple properties spanning across a variety of locations. Rental properties, vacation homes, and commercial lots have become viable avenues for generating wealth. The latest trendy venture comes in the form of short-term rentals. Airbnb changed the game by allowing anyone to be a hotel and rent out any type or portion of real estate. Our extra storage space has become a lucrative rental opportunity.
The Airbnb craze accelerated the perception that excess property equals financial gain. However, land and domiciles carry the burden of management. The more you have, the more you have to take care of. We used to consider someone with too many assets as being stretched thin. The cost and time needed to operate were rarely worth the profit derived from someone else’s living expense. This sentiment of basic frugality is outdated in this extraordinary market. Controlled economies endowed with cheap interest rates can and should be capitalized on.
Airbnb investing could have never started in a true free market, and it will not survive high-interest rate conditions. The cost of financing and operating must be less than the revenue potential. Otherwise, these short-term rentals will become long-term money pits. These Airbnbs will be timeshares by the end of the decade. It is inevitable.
The first round of investors that jumped on low-cost, short-term rentals in highly desirable vacation areas did very well. There were no regulations and very little competition. Most importantly, debt was extremely cheap so investors could roll profits into new properties. It was a perfect business model that could endlessly expand and pay for itself. It seemed too good to be true, as individuals could own various luxury homes all over the world with positive cash flow.
These first-mover advantages no longer exist. The market is oversaturated, townships and HOAs are cracking down on short-term occupancy, and the cost of debt has risen substantially.
Over 342 counties in America now have full restrictions on short-term leaseholders, occupancy limits, and special tax designations. Homeowners have the right to lobby for stricter laws and save their neighborhoods from unruly tourists.
There is also the obvious issue of vacancy. Tourism rates are falling substantially, and more people are opting for hotels and resorts after poor experiences with Airbnb. An overbearing or disengaged host can make vacations miserable for the guests. All the fees and additional trouble with returning the rental to its initial state have driven vacationers back to Best Westerns. Clearly, not everyone can properly run a hotel. Surprisingly, people want less hassle on vacations.
The short-term rental model still works very well for prudent investors with thoughtful management in areas with stronger tourism rates. The problem is that many investors have tried this in urban cities. They bought regular houses and apartments at prices intended for full residence. In cities like Austin and Nashville, greater than 40% of available housing units are short-term rentals. Oversaturation is an understatement.
The housing market nationwide is already experiencing a glut in supply. There have never been more houses for sale in history. Despite this oversupply and lower demand from higher mortgage rates, prices are staying stagnant. The cost of insurance, maintenance, and property taxes is keeping prices elevated, while the tendency to move is too much for those with the golden handcuffs of 2-3% mortgage rates.
Many of those Airbnb investors used risky financing strategies like home equity loans and cash-out refinancing on existing properties to afford down payments on new rentals. The cross collateralization has made these owners horribly overleveraged, especially those with variable rate financing that will now have to pay much higher interest. The worst part is they can’t even sell at a loss because no one is buying.
The era of low mortgage rates spoiled the population of existing owners and gave unreasonable expectations to potential buyers. Housing is unaffordable because everyone is irrational and feels entitled to a certain price or mortgage rate.
The Airbnb investor with 12 properties now has lower cash flow from vacancy while his/her operating costs are skyrocketing with higher interest, insurance, and maintenance. That is assuming the county is still allowing them to operate. The economic pressure derived from thousands of unsuccessful Airbnbs hitting the market will further increase the supply of homes and eventually force a drop in prices. Investors who bought at the wrong time will lose their shirts, but they are desperate to get rid of these money pits.
The real estate market moves very slowly, so these effects could take years to truly play out. Prices only move when buyers or sellers admit failure and accept the sensible price of homes at current rates. Rationality must return.
What happens to all these supposed vacation homes and intercity short-term rentals? Well, they must return to the market or be acquiesced to by the banks that truly owned them in the first place.
Real estate investing always favors the cash investor. Financing rental properties (long-term or short-term) only works if capitalization rates are positive. Otherwise, you’re paying for someone else to live in your property. Rents are strictly dictated by the rate people are willing to pay. Debt is far less elastic if interest rates are not falling. We can no longer expect nor hope for the irrational rates of the early 2020s. The market will come back to reality.
If everything is just expensive, how will people own and enjoy various vacation properties?
Timeshares.
Yes, it seems silly, but shared ownership of real estate has become far easier with new blockchain technology. The new economy will be practical and efficient. Smart contracts and secure payments will allow for easy transfer of ownership for any predetermined length of time and at flexible rates.
Imagine owning vacation homes for a specific length of time rather than renting. You would not carry the burden of managing the property and could spread out the risk between multiple owners. Ideally you would want to know and trust other owners, but it would not be required with a trusted fiduciary or management company. Subleasing would be simple, transparent, and potentially lucrative.
The following companies are already utilizing this technology to reignite the timeshare industry:
Propy: Uses cryptocurrency for title and escrow transactions. Streamlines the transfer of ownership and simplifies
Staynex: Integrates blockchain technology into hotels and timeshares, offering secure and transparent transactions.
LABS Group: Plans to launch a timeshare NFT property fund, expanding blockchain adoption in shared ownership of real estate.
Staynex: Reimagines the traditional timeshare model by tokenizing stays and embedding them into NFTs.
Timeshares are the same business model as short-term rentals, except there is actual ownership devoid of bank lenders and unnecessary middlemen. This would be a much-needed return to rational real estate investing.
The riskless credit purveyed by banks and manipulated interest rates by the Fed destroyed all rationality in the real estate market. The Airbnb craze was simply a product of this impractical debasement of currency and destruction of free markets.
Timeshares on the blockchain are the future of vacationing. Or you could just stay at a Hilton.