The concept of fracking has moved beyond the oil and gas industry and into the real estate industry. The word fracking evolved from the phrase “hydraulic fracturing,” a process where energy companies use high pressure to fracture underground shale rock in order to extract oil and gas. Learn how savvy property owners are leveraging the concept of fracking in order to take advantage of unique benefits and market opportunities.
What is Real Estate Fracking?
In the context of commercial real estate investing, fracking involves breaking up properties into smaller pieces in order to shift the business model and increase revenue. Experts leading the discussion around real estate fracking are encouraging intrepid entrepreneurs to explore its many possibilities.
“Real estate use is getting broken up into smaller bits and reconfigured in higher valuations,” explains Steve Weikal, Head of Industry Relations at the MIT Center for Real Estate. “Companies are taking underutilized or unutilized real estate and monetizing it — in ways we never thought were possible.” He cites co-working companies as one example.
Airbnb and other short-term rental concepts also exemplify the potential benefits of real estate fracking done right. One property owner in Atlanta transformed a traditional rental property into a short-term vacation rental and was able to earn an extra $500 monthly net income when compared to collecting monthly rent from a long-term tenant. And that was just a one-bedroom apartment. Imagine the potential in a large multi-family property.
How Real Estate Fracking Creates Value for Property Owners
Real estate fracking creates value by breaking a property up into smaller pieces. This can mean smaller units — fewer square feet per unit can allow for more units in a building, more tenants and more income. In comparison, the “We Living” trend is leveraging this idea with a co-living concept.
Another option for breaking properties into smaller pieces is shifting from a traditional long-term lease to a short-term rental model. For example, a building with five units may have $5,000 gross monthly earning potential if each unit earns $1,000 monthly. If a property owner transforms the same units into short-term rentals and charges $50 per night, that monthly earning potential increases to $7,500.
Of course, there are risks and expenses associated with operating a short-term rental property, but the benefits often outweigh the negatives.
Real Estate Fracking Case Study: WhyHotel
WhyHotel is a startup company that operates short-term vacation rentals in new luxury residential apartment buildings. WhyHotel partners with property owners to take advantage of the building’s “lease-up” phase. These buildings transform into pop-up hotels, generating income with short-term guests before long-term residents move into the building.
WhyHotel is able to generate income from units that would otherwise sit vacant. And by avoiding risks typically associated with buying a vacation rental property, this concept leverages the real estate fracking potential in a profitable, sustainable way.
Is Buying Vacation Rental Property a Good Investment?
Buying a destination rental property is not a requirement to experience the benefits of real estate fracking. Many creative commercial real estate concepts, such as “we living,” allow for property owners to break properties up into smaller, higher-value pieces with short-term leases. However, buying a vacation rental property can be an excellent investment. Depending on factors such as location, property size and local laws, listing a property for rent on a site like Airbnb or VRBO can earn more income than traditional long-term rental properties.
Is Buying Destination Rental Property a Good Investment for YOU?
Whether you choose to invest in long-term or short-term rental properties (or both!), you will have the opportunity to find success and generate income. If you have questions about buying a vacation rental property or any other topics related to investing in commercial real estate, reach out to our team of experts at (515) 639-0145. Learn more about how to buy a rental property, and browse our listings to find commercial properties you can buy to rent out.