Investing in the Poconos Short-Term Rental Market (November 2024)

Interest in the Poconos short-term rental (STR) market has surged in recent years, driven by its proximity to major urban centers and relatively affordable housing options. This guide provides a comprehensive breakdown of the market’s current state, including key benefits, potential pitfalls, and actionable tips for investors aiming to enter this competitive space.

Market Overview

The Poconos continues to attract STR investors, but the landscape has shifted significantly due to increased competition and macroeconomic factors. While still considered an undervalued market relative to its location, challenges such as high interest rates and market saturation are making profitability harder to achieve. Here’s a closer look at the market dynamics:

• Growing Inventory:
  Over the last four years, there has been a rapid increase in the number of STRs, creating a crowded marketplace. Many properties are now priced with an “STR premium,” reflecting inflated expectations of rental income.
• Interest Rates and Financing Challenges:
  With mortgage rates ranging from 6% to 9%, the cost of financing has significantly impacted cash flow. Investors must be more strategic in their purchases and financial planning to ensure profitability.

Advantages of Investing in the Poconos

1. Proximity to Major Metro Areas:
   The Poconos’ strategic location within a two-hour drive of New York City and surrounding metro areas is one of its most significant draws. With over 8 million residents in NYC alone, the potential guest pool is vast. This accessibility positions the Poconos as an ideal getaway destination for weekend travelers and extended stays.
   Example Calculation:
   If a home sleeps 10 guests and averages 60 bookings per year, you would only need a tiny fraction (0.000741%) of NYC residents to book your property to achieve moderate occupancy rates.
2. Affordable Real Estate (Comparatively):
   Home prices in the Poconos remain lower than in other popular STR destinations such as Colorado, Utah, and Tennessee. While prices have increased in recent years, properties under $300K can still be found, offering potential for strong returns.
3. Accessibility for Local Owners:
   For investors living within driving distance, the ability to personally use and/or maintain the property is a significant advantage. This can reduce costs and provide greater control over operations, including handling emergencies and routine maintenance, or be able to utilize it for your own when not occupied.

Challenges and Risks

1. Market Saturation & STR Premiums:
   Many homes are priced 15-30% higher due to the perceived rental income potential. Combined with high interest rates, this makes it challenging to achieve competitive pricing and profitability.
   Key Consideration:
   Investors must carefully evaluate whether the potential rental income justifies the inflated purchase price and financing costs. The mortgage is often the most significant fixed expense, and properties with high debt service requirements may struggle to break even.
2. Operational and Maintenance Difficulties:
   • Contractor Shortages: Finding reliable contractors in the Poconos can be difficult. Many are booked weeks or months in advance, which can delay critical repairs and renovations.
   • Cleaning Services: While cleaners are easier to find, maintaining consistent quality is a challenge for some. Experienced, dependable cleaners are in high demand and can be costly.
3. Regulatory Uncertainty:
   Local opposition to STRs and shifting regulations create an unpredictable environment. Some townships have imposed permit caps or other restrictions. For example:
   • Tobyhanna Township has capped STR permits, creating uncertainty for new buyers.
   • HOAs like Arrowhead Lake and The Hideout are actively working to restrict or flat out ban STRs, adding risk for investors.
4. Economic Feasibility and Profitability:
   • High Break-Even Points: Properties with mortgages exceeding one-third of their projected income will likely face cash flow issues. A solid rule of thumb is to target properties that can generate at least 20-25% of their purchase price in annual revenue.
   • Seasonal Fluctuations: Revenue can vary significantly between peak summer and winter seasons. Accurate revenue projections should account for these fluctuations to avoid overestimating potential income. Ie, March could be $2K gross revenue while July is $8k.

Tips for Successful Investment

1. Target Non-HOA Properties with Land:
   Properties outside of HOAs reduce the risk of restrictive regulations and fees. Look for homes with at least two acres, allowing for the addition of private amenities such as pools, fire pits, or recreational spaces, which can boost rental appeal and revenue.
2. Prioritize Location and Amenities:
   • High-Demand Locations: Lakefront or lake-view properties, homes near ski resorts, and those close to attractions like water parks will command premium rates.
   • Essential Amenities: A hot tub is now considered a “must-have” for competitive listings. Properties with hot tubs can generate an additional $1,500 per month, translating to $18,000 annually.
3. Perform Thorough Due Diligence:
   • Income Estimates: Use tools like AirDNA, but also consult local property managers and request historical income statements from sellers. Be cautious of inflated claims and verify all data.
   • Financial Metrics: Ensure the property can generate at least 20% of its purchase price in annual revenue. Ideally, 25% is preferable for a stronger return on investment.
4. Consider Unique Architecture:
   Homes with distinctive designs (e.g., A-frames, chalets) stand out in a crowded market and attract more bookings than standard homes.
5. Focus on Manageable Property Sizes:
   Smaller homes are often easier to rent consistently, maintain, and sell if needed. While larger homes may generate higher per-night rates, they often face longer vacancy periods and higher operating costs.

Community Insights and Recommendations

• Communities to Avoid:
  • Tobyhanna Township: High regulatory risk and permit caps.
  • Arrowhead Lake & The Hideout: Active efforts to restrict STRs, coupled with high guest fees, limits profitability. 
• Communities with Potential:
  • Penn Estates: Basic but well-located, with easy access to major attractions.
  • A Pocono Country Place: Offers decent amenities, though late booking fees are steep for last minute bookings.
  • Lake Harmony: Favorable regulations and beautiful surroundings, though homes come at a premium.
  • Towamensing Trails: Good amenities and location, though minor restrictions exist like no fire pits.
  • Big Bass Lake: Limited data but underperforms relative to other areas.
• There are other areas of the Poconos we just don’t have data for to make judgements on.

Conclusion

For investors considering the Poconos STR market in late 2024, strategic planning and thorough due diligence are essential. Focus on smaller, non-HOA properties with land for added amenities, and ensure projected revenue can cover at least 20% of the purchase price annually. Despite challenges, opportunities remain for those who carefully navigate the evolving landscape.