Would you ever buy a STR if you know it won't break even on cash flow?

Question

I'm looking in the Palm Springs area which is highly regulated and limits STR bookings to 26 a year. I've done the math and the property I like won't break even and will not be positive for cash flow. But the tax benefit in year 1 is strong and if I assume some appreciation (3-4%), the ROI in 5-7 years is good.  Wondering if this is too risky though-  prices may come down further in PS.

Basit Siddiqi · Answer

What do you plan to do with the property for the other days?

If you live in the property for more than 14 days, the property may be deemed personal and you wouldn't be able to utilize the losses.

If the property is vacant for the other 330 days, you have to worry about squaters and still possibly having to maintain the property.

A STR has risks and more work required than a long-term rental. I personally wouldn't buy a STR unless it would give me atleast 10% more than the return I would get on a LTR.

Eric Fernwood · Answer

Hello @Melissa J.,

Whether buying a short-term rental (STR) that doesn’t break even makes sense depends on your goals and financial situation. If you want to become a real estate professional, an STR can be the easiest way. Still, consider whether first-year tax benefits are enough to outweigh long-term losses.

Also, I don’t recommend buying a property only for short-term rental. Choose one that works as both a short- and long-term rental, so you won’t need to sell if you switch strategies.

Location matters. California is known for laws that favor tenants, and evictions can take up to a year. In other states, you can remove problem tenants in 17 to 45 days. Always research the legal environment before you invest.

Appreciation is crucial for financial independence. With steady appreciation, you can grow your portfolio using cash-out refinancing and minimal extra cash. Many of our clients and I have used this strategy, so it’s great you’re factoring in appreciation.

In summary:

• Buying a property for first year tax advantages depends on whether the tax savings offset long-term losses and the amount of time and effort you'll have to invest.
• Location is the most critical investment decision you'll make. You should invest in a city where existing home prices and rents consistently outpace inflation.

James Hamling · Answer

I don't understand @Melissa J., why would you ever even entertain such a buy?

STR is a hospitality business. The investment aspect is a very small part of the picture. The aspect that the asset used to operate the business can appreciate is xtra credit to the business NOT primary motive.

If buying STR now, or in immediate future, and ok to buy bad financials in the now, because focus is forward long-term lens, hands-down I'd be looking in the Smokies, Gatlinburg TN, that area.

The fundamentals are rock-solid.

But it was over built, novice flooded, out-state dumb-$ flooded, creating opportunity.

You detail the WORST negatives for operating a hospitality business; a hostile regulatory environment.

STR is NOT real estate investing. STR is a hospitality business with an aspect of investment returns via the assets used to operate the business. It's a lot more like buying a hardware store that comes with ownership vs a lease of the store in which it operates.

Running a STR business is so vastly more complex, time intensive, detailed and costly than running a standard tenancy business (aka landlording).

A huge disservice has been done with the popularization of misrepresentations that STR is anything remotely passive, cheap or simple.

Allan C. · Answer

I would buy a LTR in high cost market with negative CF, but buying STR with negative CF doesn't make sense. Most markets generally price between LTR economics or owner occupied, so if you can't achieve positive CF on a STR then you paying way above market value. Yes, benefits of accelerated depreciation on STRs is motivating, but you need to still buy at the right valuation. Check it the PS market is oversaturated with STRs - if so, I see higher downside risk than upside potential.

V.G Jason · Answer

STRs need to have different leverage than a traditional LTR purchase as you are really running a business. You buy the house valued as a house, but the loan is to make it a business. 20-40% leverage, max. This will let you deal with the headwinds of STRs.

Don't let the volatile cash flow confuse you. If you view this as an area you can see yourself using later in life, you can work it at the further end of that LTV.

It's not just about the math, it's also about the risk and stress. You got to live life, so if it's for pleasure the compromise is closer to 40%.  Otherwise, you're better off investing in something else and re-purposing the investment here when you're more fit financially.

As for prices coming down, no one knows. No one knows also the sporadic cash flow you'll receive for this. All you do know is how much is coming out of your pocket, and how you'll sleep at night if things get hard. You won't sleep. Prepare accordingly.

Denise Supplee · Answer

Hi @Melissa J. Your asking the right questions, and it’s great that you’re looking at both the short-term numbers and the long-term potential. Palm Springs is definitely a unique market—highly desirable but also heavily regulated, which can cap income potential for STRs like you mentioned. If the property won’t cash flow and you're relying more on appreciation and tax benefits to make the numbers work, then yes, it does carry more risk—especially if prices soften further or if regulations tighten even more.

That said, if you’re comfortable with the downside scenario (modest losses or break-even for a few years), and the property is in a strong location that should hold long-term value, it could still be a solid play over time. Just be sure you’re not stretching too thin up front, especially if the numbers depend on assumptions like steady appreciation. You might also consider if there's a mid-term rental strategy that works within the 26-booking cap. It could offer a little more flexibility while you ride out the early years.

Julius Vincent · Answer

Hey @Melissa J. - If you can qualify as a material participant under IRS rules with only up to 26 bookings per year, it could be a huge upfront tax win depending on the property value. Just make sure you can still hit the hour requirements with the rental cap. Otherwise the losses might be passive and carry forward instead of offsetting W-2 or other active income. That first-year write-off can be great, but it has to be weighed against the cash flow gap until appreciation or tax savings make up the difference.

AJ Wong · Answer

Very difficult to cash flow (at current rates with minimal down) in that area due to taxes and operational costs such as higher utility bills...example in-season pool heating bill. With that said - with the right amenities there is some impressive overall production (sometimes as high as 20% of valuation in gross annual income.) Cash flow is critical - however should align with your overall investment goals and strategy..is it a property you intend to utilize personally or an area that you visit frequently? Is the area on your retirement radar? In general throughout Palm Springs, Desert Hot Springs and Joshua Tree the prospect list and negotiations need to be very tight for optimal ROI. Coachella Valley Getaways is a GREAT PM for support and projections. Good luck!

Mike Klarman · Answer

How much money will the deal cost you?  It's a question of trading that liquidity for this scenario which is not good in the short - term it seems.  But 5/10 yrs from now who knows.

In a situation like that I would not put my entire liquidity situation, so it really depends what % of the cash requirement is of your total liquidity.

Melissa J. · Answer

Why consider?  Huge tax benefit.  The STR regulations mean it would, at best, cover the cost of our monthly expenses or be slightly negative. But the tax benefit + likely appreciation equate to a good ROI. Then I would do a 1031 when I am semi retired to buy a property that requires more active management and generates cash flow. In the meantime, we can use it a few weekends a year. I fully understand the time and energy it takes to have a successful STR.

Would you ever buy a STR if you know it won't break even on cash flow?

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