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How Short-Term Rentals Changed the Hospitality Industry—for Good

Sometimes great successes happen by accident. Far less often—but far more intriguing—happy accidents in the business world actually change the way we live our lives. The modern short-term vacation rentals business was born out of this type of situation. This time, the actions of two roommates desperate to pay their bills would result in untold opportunities for investors and individuals around the world.

When Airbnb was born (and became more popular,) the world took notice. Currently, Airbnb rentals make up a profound chunk of the vacation market, with Airbnb hosts in hundreds of countries around the world. Not long after, other companies jumped on the trend, resulting in huge conglomerates like Marriott International launching their own luxury vacation rental division in 2019 in response to the crushing demand for alternatives to old-school hotel room accommodations. Established hoteliers sensed an immediate threat to their existing market share and were forced to hard-pivot.

In Silicon Valley, mantras about changing the world are so overused they’ve become cliche. Tech start-ups are always looking for the next new thing. This time, two broke roommates would impact two gigantic industries—the hotel industry and the real estate industry—in one enormous swoop.

In December 2020, Airbnb went public, opening at $68 per share and garnering $3.7B in its initial public offering. The COVID-19 pandemic had some positive effects on the company. Travelers, especially those who needed to travel for business, were forced to get creative, and Airbnb was there to fill the void. Although the company was initially criticized for its cancellation policy during an unprecedented time in history, Airbnb responded to users and refunded certain fees. The website’s users eventually simmered down and began to recognize the benefits of staying in a short-term vacation rental during the global pandemic. Many travelers avoided air travel and flocked to Airbnb rentals to skirt the mask regulations imposed by hotels.

Following the success of their IPO, Airbnb continued to disrupt the vacation market, causing booking search engines to expand their offerings to include individual properties, in addition to the large hotel chains and resorts they usually partnered with.

The History of Short-Term Vacation Rentals

The short-term vacation rental market is not new. Formerly, this type of business model only existed in pockets of the world, usually in popular locales where tourism was already a mainstay of the local economy. Now, short term rentals of all kinds are accessible to every type of traveler all around the world.

The website VRBO launched in 1995, almost fifteen years before Airbnb, when a man named Chris launched his own website for the sole purpose of renting his vacation condo in a bustling Colorado ski town. In Red River, New Mexico, a town not far from the renowned artist colonies of Taos, motorcycle enthusiasts gather in droves for the annual Red River motorcycle rally in March. In the winter, the tiny town welcomes skiers. In areas like Taos and Red River, investors profited widely from this market, a market that was somewhat niche at the time.

Towns and cities that offer skiing, beautiful beaches, amusement parks, sporting events, national parks and other attractions already had thriving short-term rental markets. However, these rentals were largely managed by professional property management companies. In many states, the business of professional property management requires a real estate license as well as affiliation with an employing real estate brokerage. For this reason, individuals were simply not eligible to participate in the short-term vacation rental market. Not only did tech start-ups like Airbnb change the industry itself, they eventually forced states and municipalities to address legislation related to the market for vacation rentals. Community leaders were forced to adopt policies in response to a tremendous new demand for more short-term rentals of all kinds. The new demand was crushing and lawmakers had no choice but to respond. Now, individual homeowners can earn money renting their homes by applying for a short-term vacation rental license and listing their properties on their own with companies like VRBO and Airbnb.

Investors & House Flippers

In addition to property managers and vacation rental owners, Investors who profited from “flipping” homes were impacted by the rise of websites like VRBO and Airbnb. Many investors were priced out of the real estate market in recent years. These investors were forced to pivot. Outdated homes and homes in need of extensive repairs hit the market everyday but they became very expensive for investors to obtain. This factor, coupled with rising costs of construction materials, squeezed investor margins until they were, largely, no longer worth the risk.

Now, these homes can be rehabilitated and placed on the short-term rental market, making them more attractive to investors who hold large real estate portfolios. The traditional, long-term rental market only yields so much profit, whereas the short-term rental market allows investors to maximize rental income on the recently-rehabbed properties held in their investment portfolios.

The short-term rental market impacts smaller investors by allowing them to potentially accumulate profits more quickly than the traditional business model. In this way, small investors are able to invest in more properties. Individual homeowners who rent their properties on the short-term rental market are able to potentially accumulate personal wealth by potentially earning profits from short-term rental businesses in addition to the equity that they earn over time.

Overall, it was the marriage of investor creativity and technology—particularly well-designed smartphone applications—that caused the industry to skyrocket, transforming a niche industry into a global vacation real estate phenomenon.

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EQUITY CROWDFUNDING INVESTMENTS IN PRIVATE PLACEMENTS, AND START-UP INVESTMENTS IN PARTICULAR, ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND THOSE INVESTORS WHO CANNOT AFFORD TO LOSE THEIR ENTIRE INVESTMENT SHOULD NOT INVEST IN START-UPS. COMPANIES SEEKING STARTUP INVESTMENT THROUGH EQUITY CROWDFUNDING TEND TO BE IN EARLIER STAGES OF DEVELOPMENT AND THEIR BUSINESS MODEL, PRODUCTS AND SERVICES MAY NOT YET BE FULLY DEVELOPED, OPERATIONAL OR TESTED IN THE PUBLIC MARKETPLACE. THERE IS NO GUARANTEE THAT THE STATED VALUATION AND OTHER TERMS ARE ACCURATE OR IN AGREEMENT WITH THE MARKET OR INDUSTRY VALUATIONS. FURTHER, INVESTORS MAY RECEIVE ILLIQUID AND/OR RESTRICTED STOCK THAT MAY BE SUBJECT TO HOLDING PERIOD REQUIREMENTS AND/OR LIQUIDITY CONCERNS.

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