The Party’s Over: The Short-Term Rental Mess#

Let’s talk about short-term rentals, like the ones you find on Airbnb. It’s a massive market, worth $100 billion. It really shook up travel globally, made the housing situation worse in many places, and helped some folks make a ton of money early on.

But now? People – that’s customers, the government, the general public, and even the hosts themselves – they’re starting to turn away from it. This whole thing started as a cool, different way to stay somewhere instead of boring hotels, but for many, it’s become a symbol of what’s gone wrong with real estate today.

Just yesterday, Airbnb announced that their temporary rule banning parties and big, noisy events? Yeah, that’s now permanent.

You hear from hosts saying things like, “I put all my savings into my unit. I’m following all the rules, paying all the taxes, got the business license.”

Then you hear from others with a different view, like, “Ultimately, our goal is to get more housing back into the housing market for people to be able to rent.”

And there are serious claims about the company’s finances, too: “I just uncovered a massive amount of debt that Airbnb hasn’t paid on the books that they’re hiding. Tens of millions, hundreds of millions, possibly even a billion dollars plus of debt that they have not paid.”

So, officials are looking around saying, “What can we do right away that makes more homes available?”

How It All Started#

The short-term rental market really took off thanks to Brian Chesky and Joe Gebbia. They just needed to rent out a spare room with an air mattress back when a conference had booked up all the hotel rooms. They called their service Air Bed and Breakfast. Later, it got shortened to the app you know today as Airbnb.

Now, get this: Airbnb is worth more than hotel chains like Hilton and Windham combined. It’s the biggest short-term rental company by a long shot. It’s managed to get into markets all over the world, succeeding where other similar online platforms like Uber, DoorDash, Lyft, and even Amazon haven’t been able to take much business away from local competitors.

At first, it seemed like a really good idea.

• Customers liked it because it was a cheaper alternative to older, maybe stuffier hotels.
• Hosts liked the chance to make extra money from a spare room or even a whole separate property.

But the four main groups involved in the short-term rental market – the customers, the hosts, the public, and the platforms themselves – are now all facing unique problems. These problems are seriously threatening the market and could even impact other real estate investments along with it.

Problems for Hosts (The People Who Started It All)#

The first set of problems is with the hosts. Honestly, they’re sometimes the hardest people to feel sorry for in this situation.

Airbnb and other platforms gave people a new way to make money from real estate. Renting out a spare room (having a roommate) wasn’t new, but the platform let homeowners rent spare rooms to travelers. These travelers might pay up to triple what a long-term roommate would.

Sure, the extra money was great, but the biggest draw for many was the added flexibility of a short-term arrangement.

• If you had a spare bedroom, you could find a long-term roommate. But then you might get someone messy, loud, who pays rent late, or just doesn’t get along with you.
• With a short-term tenant, any problems are only going to last for their short stay.

Other early advantages included:

• Payments were handled through the Airbnb platform.
• There was a rating system that helped control bad behavior.
• Want the place to yourself for family or just quiet time? You could easily block out dates on the app.

That was the initial draw, the early pitch of Airbnb.

Why Short-Term Rentals Got So Big (And Why Customers Are Turning Away)#

Let’s take a quick detour to understand why short-term rentals blew up.

Traditional hotels had become overpriced and didn’t really offer what many vacationers wanted.

• Hotels have lots of amenities: housekeeping, room service, restaurants, concierges, meeting rooms, gyms, spas, pools, valet parking, 24-hour security.
• These are nice, but they cost money, either hidden in the room price or charged extra at a high markup.
• Crucially, these services don’t always fit what vacationers want, which is often just a place that feels like home in a different city.

Airbnb cut out many of the amenities that business travelers might use. For vacationers, it offered:

• Their own kitchen.
• Multiple bedrooms (great for families).
• An element of privacy you couldn’t get at a hotel chain.
• It felt like a home away from home, because often, it was just someone’s home.

Airbnbs were also much cheaper, especially if several friends or family members shared a larger home instead of needing separate hotel rooms.

A study by the University of Waterloo and Daniel Guttentag Hospitality Research surveyed people booking Airbnbs and hotels. They found:

• 61% said they chose Airbnb because it was a budget-friendly alternative, even compared to budget hotel chains.

Despite Airbnb’s marketing about sharing the experience with a local host, most people surveyed did not care about this aspect.

• 70% stayed in a home they had all to themselves, preferring not to share space with a stranger.

Even though people mostly prefer not to share their rental with a host, Airbnb still spends billions every year promoting the “stay with a local host” idea. There’s a really important reason for this, which we’ll get to later. (Hint: It makes regulation harder).

Anyway, the things that made Airbnb popular are now either disappearing or being offered by competitors in three key areas:

Problems for the Public (The Unwilling Participants)#

But there’s another group that’s had it even worse, a group involved whether they like it or not. This is the third reason for the Airbnb bust: The public is sick of it.

• Customers can choose where to stay. The threat from Airbnb has actually pushed hotels to improve.
• Hosts were investors. Investing has risks. Most hosts still own a home (or several) that they can now rent out long-term (in what is often an expensive rental market) or sell (likely for a profit). Unless they were really careless, these groups haven’t necessarily lost financially overall.

The people who really lost are those who were priced out of their homes. It became more profitable for property owners to rent to vacationers than to long-term residents who needed a place to live.

Poor renters don’t have any power over the platform itself. But the problem of unaffordable homes in certain cities is getting so bad that politicians are stepping in.

• New policies are being introduced to limit how many short-term rentals are allowed.
• They’re charging hosts additional taxes for running what are essentially unregistered hotels.
• Legislation requires platforms like Airbnb to take down listings if hosts aren’t following the rules.
• Some cities have just made short-term rentals illegal without the same licensing as a regular hotel, making it too expensive for hosts to bother.

Problems for the Platform (Airbnb’s Losing Control)#

And that’s the fourth cause of the Airbnb bust: The platform is losing its grip on guests, hosts, and the public.

Airbnb has always had competitors like VRBO. But now, major travel companies like Trip Advisor, booking.com, and Expedia are launching their own short-term rental platforms (like TurnKey) or adding rentals to their existing websites. These sites already combine listings from hotels, and now they include rentals too.

How does Airbnb make money?

• They charge hosts a 3% fee to list properties.
• They charge guests a 14% service fee.
• That’s about a 17% cut overall.

Some hosts have found it’s cheaper to advertise locally and split the savings with guests, bypassing Airbnb fees.

Think about it: Airbnb has similar tech costs for a vacation stay as Uber does for food delivery or rideshare. But Uber only makes a few dollars per transaction. Airbnb can make hundreds of dollars from their 17% cut.

This fee structure made Airbnb very profitable, which is a big plus in today’s environment with high interest rates. But it also painted a big target on the company.

Why? They don’t really have a competitive advantage (a “moat”) around their business model other than their brand name. There’s nothing stopping newer companies from entering the market and taking business away by offering better service or lower fees.

The Bonus Fifth Reason#

Here’s a little extra reason behind the Airbnb bust: The platform was never really designed to last forever. It made billions super fast, and for the founders and early investors, anything else is just extra. That’s not necessarily a bad thing!

(Quick plug: If you’re interested in businesses built for the long haul, check out my video on History Works to see what it takes for a company to survive 1,000 years).

(And hey, if you want to see these videos a day early and get articles I don’t post on YouTube, sign up for my email newsletter, Compounded Daily. Keep learning how money works!)