How to pivot with rising interest rates (turn from traditional rentals to short term rentals)

- Written by Garret Froese, Froese Corp Group.

Ouch – that’s the word I think about when I look at my shrinking cashflow, which is a direct result of rising interest rates.  In fact, compared to only just a year ago, I’ve seen reductions up to 75% in cashflow in some properties.

As I see it, I have 2 options before me:

(1)  Keep buying properties that either don’t cashflow or cashflow very minimally

This option can work if you’re doing real estate over the long term and if you’ve properly allocated for all your expenses including vacancy, property management, small repairs and capital expenses.  However, if you have an active real estate company with employees, I wouldn’t recommend this as you need strong cash flowing assets to pay for your salaries and other expenses.

(2)  Pivot and try a new strategy

One thing I’ve noticed in the market is an explosion of growth in short-term tenancy market through platforms such as AirBNB.  In these markets, if you have a nice property, in a nice area, and with nice furnishings then you have the potential to substantially increase your cashflow.  While there is certainly more risk and more management with this, if you do your proper research, pricing and advertising then there is a clear path to increasing your profitability despite the interest rates.

Although some of our suites don’t fit this model as we do invest heavily in more blue collar working class areas, some of our suites do fit this nicely, and we’ve already converted them and furnished them.  So far we have experienced a significant boost in cashflow; especially during the summer months when people are travelling.  One thing to remember is that you will not cashflow as well during the winter months due to less people travelling so be sure to budget for that.

As we enter into this next stage of the real estate cycle, it’s important to be able to recognize that sometimes long-term tenants can help a building to cashflow well, and there will be times that they don’t.  So try to have some properties or suites in your portfolio that allows you to have short-term tenants with higher cashflow to offset your income during these tougher times.