Is Your AirBnB Creating a Crisis in Missoula?

“Anecdotally, many Missoulians believe short-term rentals are eating up what otherwise could serve as housing to those who live and work in the city,” reported the Missoula Current. “Can’t wait to not be able to park and pay more for rent so out of state and local rich landlords with multiple rental properties can get extra AirBnB income,” said a recent public comment. 

And in fact, so much hubbub has been made about these short-term rentals (STRs) that the Missoula City Council designated funds to research the issue. Are local STRs like VRBO and AirBnB a significant contributing factor to the local housing crisis?

The Basics: How Many, How Big, and What Occupancy Looks Like

Missoula is home to approximately 500 active short-term rentals. Of those, 90% are entire home rentals, with the rest being private rooms for rent in people’s homes. The most common unit type is a one-bedroom, which makes up about 1/3 of the market. The typical unit is occupied 85% of the time. Summer months show the highest occupancy rates.

In perspective, STRs account for around 1% of Missoula’s housing stock (source: US Census). It’s a small fragment of the available housing market. But, even so there’s no doubt that the market is constrained: Missoula County estimates that the rental housing market is 2,500 units short of equilibrium. 

The Revenue: How Much Does an Owner Make?

In Missoula, the typical entire home unit brings in about $2,390 a month of revenue. This revenue does not include the costs of management fees, utilities, maintenance, and property taxes, which vary per unit. These can cut into revenue significantly, sometimes with as much as half of revenue going to operational expenses. 

It’s important to note that revenue can be seasonal. The most successful units can bring in nearly $8000 a month in August (but drop considerably in shoulder season months like February). 

Are STRs a Cash Cow?

Not quite. Looking at these numbers, one might think that owners are turning existing rental stock into STRs for higher returns. After all, no rental home is going to produce $8000 per month, no matter how nice or large, right?

While that $8k a month is head-turning, it’s also the top end of Missoula STR revenues. Looking at all Missoula STR data, they may not be more profitable than regular long-term rentals. Management expenses are typically higher for STRs due to the constant turnover, maintenance of furnishings, and utilities. Start-up costs are significant due to the purchase of furniture and other amenities.

Perhaps most importantly, some landlords balk at the idea of a new renter every weekend. Establishing a trusting relationship with a tenant can translate into priceless peace of mind for owners – and that’s lost with the revolving door of short-term renters. 

Why Convert to an STR?

Knowing that management time and expenses both mount with STRs, owners choose to convert for a variety of reasons beyond cash flow. Owners can maintain more access to their properties by managing them as STRs. That means those units can be offered to friends and family when needed, the owner can move in or use them if necessary, and owners have more flexibility to sell the asset. 

With Missoula’s rising child and elder-care prices (along with waitlists for daycares and retirement homes), some families might come out net-neutral if they choose to house family for care reasons. Grandparents might move in over the summer to help with child care. Older adults and those with chronic health conditions may move in longer term if they need additional assistance. 

Those renting an ADU or room in their house may be using the space to make their mortgage payment pencil, especially in an overheated market like Missoula. In cases like these, keeping ownership of the home is the primary motivator for renting the space. 

Why Not Convert?

Managing STRs is more expensive and labor-intensive than longer-term rentals. The typical short-term rental turns over every four days, which means it must be cleaned, linens changed, and any repairs made in a short time frame. This can be difficult for an owner to self-manage. Professional management companies charge fees starting at 20% of revenue. 

Especially for owners who hold full-time jobs and have families or other obligations, managing STRs can be prohibitively time-consuming. The threat of a negative review also looms large, with a poorly cleaned unit or non-working internet easily pushing an STR into mediocre review territory. Poor reviews can cost ownership future bookings, a robust occupancy rate, and revenue.

STRs are also at the mercy of the tourist economy. A bad fire season, another (or a continuation of the current) pandemic, and other visitor deterrents can turn a short-term unit insolvent quickly. For owners leveraging a property to make ends meet, this volatility alone can sway them away from conversion to an STR. 

Takeaway

Assuming that all STR owners are “out of state and local rich landlords with multiple rental properties” is hyperbolic at best. STRs give property owners a more flexible avenue to earn income with their spaces; if owners aren’t able to commit to long-term tenants, STRs are a great option to continue generating revenue. STR owners aren’t a homogenous bunch. Each has an individual reason for their choice to place their property on the STR market. 

A stock of AirBnBs and VRBOs also expands Missoula’s capacity to host visitors who spend money at local shops and restaurants.

But, a property owner’s decision to move to a short-term rental program can remove long-term rental housing from the market. Even if the STR stock in Missoula is extremely limited, the local vacancy rate hovering around 1% suggests that any long-term rental pulled from the market can create more challenges for renters. 

Ultimately, outlawing STRs won’t relieve the gridlock in Missoula’s rental market. With Missoula County estimating that the market is 2,500 rental markets short, the approximate 500 units in STR stock aren’t enough to tip the scales. With high housing prices and low wages, asking owners to give up critical revenue could have a negative ripple effect.

For more insights into Montana’s evolving commercial real estate landscape, contact Claire Matten, CCIM and Connor McMahon.

Sources: AirDNA, US Census