Here's How to Profit Off Of Short-Term Renting In Luxury Markets
With the arrival of summer, many snowbirds have departed to head north for the warmest months of the year. But that beautiful condo in Broward or Palm Beach counties need not stay vacant until their returns. The rise of the sharing economy has made it easier than ever to turn a well appointed second home into a working asset and income stream.
There are many platforms to choose from when it comes to short-term rentals. Talk with friends who are renting their condos and chances are they’re using HomeAway, Airbnb or ThirdHome. Of the current major players, HomeAway has been around the longest, since 2004. Currently, it operates 50 websites with more than 2 million vacation rentals globally. In the United States, VRBO was its most notable acquisition in 2006, and Expedia purchased HomeAway in 2015 for nearly $4 billion. Homeowners pay a subscription fee to be listed on the site, or they can choose to pay a percentage of the rental fee for each booking.
Airbnb launched a decade ago in San Francisco and is the most popular platform among millennial travelers, thanks to its handy mobile app and marketing campaigns encouraging travelers to live like locals. Both guests and hosts pay a service fee with each booking and hosts can also offer excursions—such as a food tour or glassblowing lesson—to guests, of which Airbnb also takes a commission. More than just a rental platform, it’s a travel lifestyle brand, going so far as to launch a print magazine in partnership with Hearst last year.
The rise of short-term rentals can pose safety concerns for permanent residents in larger buildings.
As opposed to Airbnb, where spare bedrooms and urban apartments are frequently listed, ThirdHome focuses exclusively on luxury properties. Listings in this home exchange club average $2.4 million and must be valued at a minimum of $500,000 to be accepted. Real estate developer Wade Shealy founded the company in 2010, starting with 120 properties, and now the site has more than 10,000 homes available to rent. Homeowners need to be approved for membership, and they then list the weeks their home is available for other members to use. In this home exchange model, homeowners are not paid in cash but instead receive credits when someone uses their home that they can then apply to stay in other homes when traveling. ThirdHome charges members an enrollment fee as well as a fee per stay, although renters can avoid fees associated with listing their home by depositing two weeks into the exchange.
Because ThirdHome is truly a house swap, it avoids some of the local tax and lodging regulations that have gotten HomeAway and Airbnb into trouble in various cities, including Miami. “With the exchange, when you invite a guest to stay at your home, you are inviting a guest—not a renter,” says ThirdHome CEO Shealy. “Think of it as similar to hosting a friend.”
The rise of short-term rentals can pose safety concerns for permanent residents in larger buildings, not to mention that some commercial landlords have used Airbnb to run illegal lodging businesses while dodging taxes. Last May, Miami-Dade County passed new Airbnb tax regulations to legitimize the platform, and within the first several months had collected more than $2 million in taxes. The new ordinance also addresses many of the safety concerns, as hosts must register for a certificate of use and vacation rental license in addition to screening for sexual offenders. Hosts are expected to be available 24/7 to handle guest issues and must maintain a register with dates and names of all guests.
Although there are a lot of options out there, many developers still firmly believe that the risks outweigh the rewards when it comes to short-term rentals. In Fort Lauderdale, X Las Olas is a new riverfront project by Property Markets Group that’s slated for completion in 2020 with two apartment towers and 1,200 residential units. Their lease will explicitly forbid short-term rentals and management plans to monitor listings on sites like Airbnb and serve notices of lease violations if owners are caught.
“Transient roommates and short-term residents disrupt the sense of community we foster,” says Brian Koles, the director of brand experience at PMG. “There are also security risks with unvetted individuals entering residents’ personal spaces, using our shared spaces, and attending community events.” Likewise, new projects like Akoya Boca West in Boca Raton and Paramount Miami Worldcenter will not allow short-term rentals. Prices for condos in both of these properties start at close to $1 million.
Milushka Alvarado is all too familiar with the restrictions on rentals. The Ecuador native owns units at Centro in downtown Miami and Axis in Brickell in addition to her primary residence. “I can’t rent those on Airbnb, VRBO, or anything other than a yearly rental,” she explains. “I got a realtor and rented them out, but I’d love to rent it out through other means and be able to use the apartment for myself or for my family and friends when they’re in town.”
Enter a new property rethinking rentals in a whole new way: Smart Brickell. Santiago Vanegas, developer and founder of Habitat Group, says the property will embody three primary tenets: smart design, smart technology and smart use. He considers the new mixed-use residential project that’s friendly to short-term rentals one of his greatest career milestones thus far.
“We want to lead the pack for futuristic living in [South Florida] and provide a smart solution to residents and guests who frequently travel back and forth for work and leisure,” Vanegas says.
Alvarado wasn’t in the market for a third apartment, but she was intrigued when a friend told her about Smart Brickell. She’s purchased a unit in the project’s first tower with delivery planned for the end of 2020.
“I love the flexibility with Smart Brickell,” she says. “I can block out dates on my own for when I want to use the apartment.” The apartment is smaller and less expensive than the other two she owns, but it comes fully furnished and finished, which Alvarado found appealing. “Right when the apartment keys are handed to me I can start renting,” she says.
With three towers, Smart Brickell will have a total of 170 condos and 150 hotel rooms operated by Habitat Management, a subdivision of Habitat Development. Condo units are priced from the low $300,000s to around $600,000 with one- and two-bedroom floor plans ranging from 558 to 1,117 square feet. More than half of the units, spread across all three towers, will be available for home sharing through Airbnb. Homeowner documents specifically outline short-term lease options, allowing owners to rent out their units up to 24 times annually. This newfound flexibility has been appealing to both local and international buyers. South Florida has been a longtime hub for international buyers, but many of the existing luxury buildings are rigid in their use policy.
A key tool in bringing the vision for Smart Brickell to life has been Pillow, a well-funded short-term rental management start-up. “Our partnership with Pillow allows residents the ability to securely allow others to lease their unit with ease,” Vanegas says. “It’s super convenient and a smart utilization of space.”
Pillow’s software provides transparency and control over short-term rental services for the entire building, from managing occupancy rates to knowing which units are being rented out at what times. Short-term renting becomes less of a burden for on-site property managers with their automated turnover tools. Plus, landlords can limit the number of nights or percentage of the building that can be rented at any given date, quickly see which guests are in residence and easily contact residents and guests.
Pillow is currently working with 8,000 units across 25 cities in the United States including San Francisco, Los Angeles and Dallas. Greystar and Lincoln Properties, the two largest property managers in the country, both use the rental management service.
“We see short-term rentals as a standard amenity for the future, one that all tenants will want,” says Sean Conway, CEO and founder of Pillow. “We’re a high-value perk for potential renters, giving owners a competitive edge.” With more urban residents traveling for business, Pillow anticipates a future of more digital nomads.
Smart Brickell is being built from the ground up with home sharing in mind. And while the property will be Pillow’s first client in Miami, the technology has already begun working with an apartment building in Fort Lauderdale called The Exchange Lofts.
At The Exchange Lofts, Conway says that residents using Pillow are making an average of $1,500 each month. “The Exchange Lofts has quickly become one of the high performing buildings with Pillow,” he says. The property has high booking rates thanks to amenities like a rooftop pool, full gym and convenient downtown location. “The Exchange Loft residents can now pay for a weekend jaunt to Miami Beach or the Florida Keys by opening their home.”
Over the next year, Pillow hopes to roll out new features including a rent guarantee program. “Our data algorithms are able to provide a daily rental income guarantee to residents depending on the location, apartment type and occupancy rates,” Conway explains. “Let’s say a resident is gone 72 nights a year (six nights a month) and Pillow will backstop with a guarantee of $100 per night ($600 a month).” Thus, residents who might be paying $3,000 in rent per month will be effectively paying $2,400 each month.
“The residential landscape is constantly evolving, and residents are seeking a more convenient and affordably priced option while still living in the heart of a major downtown area,” Vanegas says. “South Florida has seen a growing number of residents traveling back and forth for work and leisure, and developers need to accommodate the needs and wants of those residents.”
It remains to be seen if Florida’s wealthiest homeowners are willing to trust strangers in their pied-à-terres, but developers like Vanegas have a chance to prove the viability of a new business model. If it takes off, the concept of smart living could spread up Florida’s coast—and throughout the country.