HomePassive IncomeLuxury Short-Term Rentals Are a Uniquely Powerful Investment Opportunity, Here’s Why

Luxury Short-Term Rentals Are a Uniquely Powerful Investment Opportunity, Here’s Why

My investment journey with short-term rentals (STRs) started around three years ago. I’ve never looked back. 

STRs, especially large luxury short-term rentals, have remained a sustainable option for generating real estate passive income. Their bespoke quality makes them the go-to option for vacationers and travelers looking for something more memorable than a cookie-cutter hotel experience. 

At first, it seemed like a big, scary decision to me because I was brand new to STRs. But the learning experience was well worth it. Since that initial investment, and now that I know what’s what, I’ve fully bought in. With the right deal, STRs can turbocharge your real estate portfolio. 

So get ready! In the next few minutes, we’ll learn about large luxury STRs and why they are shaping up to be the next great investment opportunity in real estate.

Table of Contents

What Are STRs?

Popularly known as Airbnb’s, STRs are any residential home, unit, or accessory building that can be rented for a short period of time. What is a short period? Generally, that means anywhere from one night to a month. The maximum length is often determined by state or local guidelines—so make sure you know before investing. 

Around twenty years ago, the STR industry barely existed. In terms of popularity and scale, it’s seen exponential growth in the last few years. 

STRs experienced strong pre-COVID growth. But then they exploded onto the scene during COVID by offering folks the ability to vacation without worry. Post-COVID, the market continued to rise in value, which resulted in the emergence of professionalized and amenitized large luxury STRs. In fact, some forecasters believe the industry will nearly triple in size and value within ten years. 

This shift to luxury STRs follows a shift in consumer behavior. Customers are traveling in larger groups for social and affordability reasons while seeking out customized experiences that avoid touristy areas (where the hotel chains usually hide).

All of this means that luxury STRs are looking like the next excellent investment moving forward. Let’s break down five more reasons why.

STRs or Airbnb's

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Luxury STRs Offer a Uniquely Powerful Investment Opportunity, Here’s Why

Continued Growth

Luxury STRs are evolving alongside consumer behavior and therefore experiencing skyrocketing demand—something that can’t be said of regular STRs. In fact, in the last twenty-four months, standard Airbnbs have struggled to grow or have plateaued. Yet the use of luxury STRs has increased 79% since 2019. Since then, the annual demand for luxury STRs was almost twice that of standard options.

Consumer behavior is driving this growth, but new developments in dynamic pricing, packaging, seasonal strategies, and other business models ensure that the industry is priced perfectly to keep growth trending upward.  

More Space, More Amenities, More Options

There are more STRs in the world than all the major hotel chains (Hilton, Marriott, Hyatt, and so on) combined. That fact creates a simple truth: Hotels can’t compete with more space, more amenities, and more options. 

High-end amenities like spas, fitness rooms, and integrated smart devices like automated lighting and climate control systems have proven important when attracting travelers. With disposable income increasing, folks are willing to spend the money—even though it’s not much more than a hotel—on amenities that push their experience over the edge and into a dream vacation.

Superior Returns

Luxurious STRs are an excellent real estate investment opportunity due to their superior returns. Where the average long-term rental property is successful if the returns are anywhere between 5 and 10%, STRs tend to yield 10 to 15%. And large luxury STRs can even double on return comparison: double distributions, double cash on cash, double cap rate, double IRR, etc over long-term property rentals.

Even better, luxury STRs still offer all of the same investment benefits such as passive income, tax benefits, and portfolio diversification. Speaking of which…

A Proven Hedge Against Risk

So far, luxury STRs are economy proof. What do I mean by that? The growth patterns with luxury STRs have remained constant despite the recent market slowdown, high interest rates, slower rent growth, and other headwinds facing the traditional real estate market. 

I always talk about the importance of diversifying investments to hedge against risk, and luxury STRs can make an excellent hedge if for no other reason than they don’t seem to correlate to traditional market movements. They are still performing well across the board in every high-return metric out there.

The Advantage of Early-Adopter Firms 

There are many early-adopter firms who specialize in large luxury STRs. These companies have done the legwork for investors. Their expertise and experience helps them navigate investment options in a way that cuts competition—ensuring you’re getting the biggest return on your investment. They can identify deals and produce high-yield returns without you needing to take on the risk typically associated with STRs.

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Next Steps to Get Started

Longtime readers know I’m all about setting and taking actionable steps; they are necessary not only to build successful investments but also in securing financial freedom for your future. 

You’ve taken one step today: learning the value of luxury STRs as an investment opportunity. But you may be asking yourself, “What do I do now?” My first rule is that before you dive into any investment, you have to determine whether or not it’s right for your financial plan. When it comes to STRs, I’ve written a guide to help you determine if STRs are just the thing to add to your portfolio. But you should also take them to your CPA and team of professionals. 

When you are ready to move forward, think about joining communities of like-minded people to further your education, get accustomed to STR deals, and dip your toe into the water of experience. That could mean getting on the waitlist for the Passive Real Estate Academy, attending one of our many events and conferences, or joining our Leverage & Growth Accelerator Community. 

As you get your feet wet, you’ll realize the advantages of working with companies that specialize in luxury STR investment and operation. Approximately three years ago, a colleague from Wandery Capital advised me on my FIRST STR purchase, and it’s been an incredible ride ever since. I cannot recommend them enough.

Wandery Capital is a real estate fund that focuses on investing in and operating large luxury STRs in vacation hotspots and travel destinations. With over fifty years of combined real estate experience, it is currently offering Fund II, which is targeting 8 to 10% distributions and an initial rate of return of 25%. They do this by focusing on high-barrier and entry properties, such as luxury homes and boutique motel conversions. 

Full disclosure: I was an early investor and currently sit on the board of Wandery Capital as a financial advisor. They’ve proven to be an excellent investing partner. Even better, Wandery Capital is offering early bird incentives, favored terms, and VIP pricing for all PIMD investors.

Click here to schedule a meeting with Wandery Capital to find out more. 

Until I see you next, keep taking actionable steps toward financial freedom and the life you’ve always dreamed of. Grow and scale your wealth. Go from being passionate and optimistic about your future to taking the tangible steps toward that future. That’s my hope for you. 

As always, thank you for taking time out of your day to visit us here at Passive Income MD. See you soon!

Peter Kim, MD is the founder of Passive Income MD, the creator of Passive Real Estate Academy, and offers weekly education through his Monday podcast, the Passive Income MD Podcast. Join our community at the Passive Income Doc Facebook Group.

Further Reading