We've been working in desert hospitality since 2015. Since then, we've witnessed the industry's evolution and know that when it comes to buying a vacation rental in Palm Springs, CA, there are a few important factors to consider before pulling the trigger.
In this post, we'll look at some of the advantages and disadvantages of buying an Airbnb in this market, and how you could (potentially) benefit from doing so.
The city has passed what we call the regulatory 'hump.' This means they've already established vacation rental regulations and gotten past the hard part of deliberating on what's fair, how to balance local growth and transient visitors, and the requirement structure for operators.
In cities like Joshua Tree or Big Bear, where STR regulations haven't been given the time of day, county regulations preside and can make or break your investment in a matter of a day. For example, San Bernardino county recently froze (paywall) new STR applications without any notice.
Can you imagine if you had just closed on a new short-term rental investment property and then got that email the following day?
When we help investors choose the market they want to invest in, one of the first things we tell them is to look for those cities which have already passed the hump so that the risk of new rules being imposed after they buy is at a minimum.
Palm Springs has long been recognized as a premium drive-to location.
Its proximity to other major cities is a strong advantage against markets which are only accessible by flight. With Los Angeles, San Diego, Las Vegas, and Phoenix all within a short drive, Palm Springs is close enough to enough to make travel demand more reliable.
This was especially evident through the economic dip in 2018 and after pandemic lockdowns in 2020. If you think about, it makes sense: travel costs are much less when you don't have to purchase airfare for the entire family. This makes the city much more accessible to the residents looking for a weekend getaway.
Vacation Rentals play an important role in the city's tourism and hospitality business. Both the citizens and the city's leaders recognized this early on, which is why they were one of the first to pass the hump in the U.S.
There's also a powerful advocacy group (VRON) that's established itself as a voice to contend with. These kinds of groups usually only exist in areas where there's a strong STR presence.
This is more obvious in smaller towns near tourism destinations (like national parks). However, some of the more obscure attractions are city-wide events like Coachella, Stagecoach, and Modernism Week, as well as sporting events like golf or tennis.
In the last 18 months, the country's real estate market has surged which has resulted in an increasingly high barrier to entry for Palm Springs.
This is especially true for Palm Springs, where the median home sale last month exceeded $1m. It shouldn't be an issue if you've got a stockpile of cash and good credit, but if you're considering buying a vacation rental in Palm Springs, you're going to need to know this ahead of time and make sure financing is lined up. Otherwise, there may be other markets better fit for your situation.
Speaking of which, we've noticed that good investment properties barely last a few days on the MLS. Many are selling before they ever make it online. And it's not uncommon to see buyers offering six digits over asking. In fact, one of our investors just closed on a new vacation rental only because they offered $200k over asking.
Before buying a vacation rental in Palm Springs, there's one crucial consideration to understand: there's a limited number of reservations you can host at your property each year. Vacation rental owners can only host 32-36 bookings in a calendar year, which has huge implications on your bottom line.
Whereas in other markets like Nashville, TN or Kingston, WA—which allow an unlimited number of bookings—the Airbnbs in Palm Springs must be booked using a more thoughtful approach. You can't just fill your calendar by accepting every booking request that comes in. You have to create a sound revenue management strategy that optimizes your limited number of reservations.
This also means that each property has a revenue ceiling, which we've learned takes 2-3 years to reach. Translation: every property has a set number it will earn. This is good in that it makes your returns more predictable but bad in the sense that the upside is limited.
Another consideration to be wary of before buying a vacation rental in palm springs is the strict regulations.
Yes, you read that right—regulations are both a pro and a con in this city. A pro because they've already been established; a con because they're some of the strictest in the country. Besides the booking limitations mentioned above, there are a few more crucial rules to be aware of.
First, that there's a lengthy application process for getting a vacation rental permit. Before you can even apply, you need to submit paperwork, obtain the right kind of insurance, and complete certain safety inspections. Then after your application is submitted, you'll wait up to 2-3 months before the city department even looks at it. Take these carrying costs into account when you analyze a tentative STR investment property.
You should also know that a local host is required to conduct what's called a "Live Check-in." This means you must meet and greet all guests on-site in order to comply with STR regulations. This can be difficult to do if you don't live locally.
Another strict rule has to do with outside noise. The city has a very low tolerance for this and can issue a violation with a single call from your neighbor. Too many violations and they revoke your vacation rental permit so you can no longer host short-term rentals.
Click here to learn more about STR regulations in Palm Springs.
Our first short-term vacation rental in Palm Springs launched in January 2019. Since then, we've seen an average year-over-year growth of more than 40%.
This is due partly to the operational ramp-up of a new property as well as the ever-increasing interest in Palm Springs as an ideal city to invest in short-term rental properties.
So if you're thinking about buying a vacation rental in Palm Springs, we'd say go for it!
Here are a few case studies we put together that prove how lucrative it can be to purchase an Airbnb in this market (when done right)...
A single-family residence purchased for $600k in an average neighborhood earns an average of $5,000 net operating income per month. This income is used to pay the mortgage and utilities (usually $2,500-3,000 depending on the month), and the leftover becomes cash in the owner's pocket.
A new real estate investor bought his first rental property in Palm Springs but he started off doing long-term rentals (12+ month leases), earning $200-300 in monthly cash flow. He self-managed and brought in bad tenants that forced him to use his earnings to fix up the place after they left which basically left him with a net return of null.
He heard about Airbnb through a friend and decided to give that a try. Now he earns thousands every month after all the bills are paid. And in the two years since he made that switch, he's purchased two more vacation rental properties.
A single luxury estate near Downtown Palm Springs generated $50,000 in revenue in a single month. The owner not only did zero work (because he hired a management company), but he also got to stay in the home a few nights with his family, benefitted from property upgrades inside and out, and received a check for more than $30k.
These are just a few success stories. But as we tell every investor looking to buy an Airbnb: "If you want a guarantee, buy a toaster."
Investments never come with a guarantee, especially when it comes to real estate. So it's vital that you conduct due diligence and work with someone who knows what they're doing. If you want help from a professional you can trust, call or submit the form below and we'll make sure you get the most from your investment!