A Review of AirDNA's Report: Best Places to Invest in STR in 2023

Garnering insights from AirDNA's latest report for short term rental investing.

One of the short-term rental industry data clearing houses released their best of report for where to buy a short-term rental in 2023 earlier this week. The report highlights what we've been talking about in recent months with supply and demand in the short term rental market, providing data to show how we are experiencing oversupply in most markets. I always caution anyone to take these reports with a grain of salt, because the average cost of housing used in the report reflects the average for the market, not the average for homes that would make good vacation rentals within the market. But it begs the question - with supply clearly outstripping demand, are their opportunities to invest?

The top markets in this report are all very small markets mostly centered in the Midwest. As someone who lives in the Midwest, I am familiar with several of these but I would be very skeptical of the ones I am familiar with actually cash flowing. In large part these are highly seasonal markets with only a modest regional draw. A couple of weeks ago I published my own analysis that provides data for 34 markets in Coastal West Michigan. This report, for me, highlights the ongoing trend of oversupply, demand, and underscores the pinch being felt across the industry by owners.

So what does this mean if you're in an acquisition phase?

If you are currently looking to acquire your next short term rental, you are already aware that oversupply has deeply impacted many markets. I recently chatted with a few STR hosts
about our current experiences and acquisitions; there was some consensus among all of us that our review of the market focuses on identifying if there is a micro market within the macro market if so, are there still opportunities? It has been my experience that the market analysis that I used to do two years ago and the market analysis that I do today are very different.

It was also a consensus for the few of us having that discussion - and other discussions I've had around the industry, that the properties that are in the top 20% maybe sheltered from the oversupply issues because they tend to be their own micro market. Economic principles suggest those in the bottom 20% are likely to exit sooner than later as the market begins to correct itself. So that leaves the middle 60% truly competing within their markets.

So again what does this mean if you're in acquisition? I am currently in acquisition phase. I alluded to how I evaluate a market has changed markedly and I confess I do spend most of my time looking for homes that would sit comfortably in the top 20% of a market. That's my comfort level, anybody in acquisition is going to have their own criteria depending on their goals. And while I do believe it is more difficult to get into the market, I look at deals everyday that work for some of my clients. A successful investment looks different for different people based on having different goals - so what works for one person may not work for someone else specifically because their goals are different.

Last weekend I was working with a friend who is just leaning into the short-term rental space and we spent some time looking at a couple of markets she had identified as potential markets that would work, but by the time we actually looked at the market through the eyes of supply and demand and discovered how many more rentals were in the market and how that had negatively impacted overall revenue she realized that their investment strategy needed to shift to look at other markets. Not to say there couldn't be an opportunity, but finding that property that sits within the top 20% was likely a pricer investment than they were thinking to make.

My take away from that is that there are lots of people who don't necessarily have the expertise to really evaluate whether or not a market makes sense in the current environment and I would note if this is a concern for you this is precisely the kind of work that we do in my Concierge Coaching Program - so make sure to check that out if you'd like to have expert help for your short term rental goal.

What does this mean for your revenue strategy?

While not directly related to the report - the supply versus demand issue is squarely highlighted within this report. I've seen a lot of promoting, selling and/or talking about what to do to be competitive in an oversaturated market. There are many strategies that may be helpful, but none are helpful if they're not connected to understanding your specific market and what the levers are in your market that are going to cause somebody to book your place over someone else's. I want to note this because I don't want anyone to get sold a bill of goods about how updating your listing every day or painting an accent wall is going to get you more bookings because if the problem is you are priced wrong or the issue is that within your market it is way oversaturated and there are just too many properties like yours - those strategies may not work.

It is important to understand the numbers in your market to identify what your specific market is within that and to also understand that there are some homes in the market that are naturally going to continue to do well and be a top performer as long as they're well managed because they offer the creme de La Creme of what perspective guests are looking for.

What about the markets suggested in this report?

I always appreciate having these reports available, but always caution they should be taken with a grain of salt. When I am working with a client who isn't sure what market they want to lean into, I always suggest reports like this are a good place to start - but it still requires us to do the work to analyze the market. A couple of years ago I took a similar report issued by a different vendor and I did my own analysis of each of the markets on that list. Ultimately I updated the average cost of housing to reflect the average cost of housing that would make a good vacation rental and came up with a formula to figure out property tax costs and insurance costs in that market and of the 25 on the list only two rose up as strong contenders. I did go on to purchase in one of the two markets. So I do believe lists like this can be helpful in allowing us funnel down into potentially profitable markets. That said, as a midwestern I am familiar with many of these markets on the most recent AirDNA list I'm not sure there are deals to be found but that doesn't mean I'm not going to look twice anyway.

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Hey Boss! Looking to get into short term rentals, but not sure? I work with people just like you everyday through my Concierge Coaching Program. As I've pivoted my career to focus fully within the short term rental industry, one of my absolute favorite parts of that pivot is working individually with clients who are taking action to attain their short term rental goal. This isn't a master class, group coaching or even a membership. Its just you and me focused on your short term rental goal(s). So if that sounds like something that works for you I invite you to hop on a call with me to discuss it or check out more information at The CEO Host.

Categories: : kpi, metrics, self management, short-term rental investing, vacation rental investing