Simple Rule to Analyze Short-Term Rentals
Real Estate Agent · Orlando, FL · Member since 2019 · 59 posts · 90 votes
Simple Rule to Analyze Short-Term Rentals
Most Popular Reply
Investor · Nortnern Colorado · Member since 2020 · 170 posts · 132 votes
4yHere are some metrics I use:
GRM. Gross Rent Multiplier. This is gross rent for a year x _____ = purchase price. We aim for 8.5 or lower. It's getting much harder to find. This is most often only useful when comparing properties in a given market (say Orlando vs. Orlando). Not super useful when comparing a cabin in the woods vs. a ski resort condo, as the condo will have much higher HOA fees, thus the net may be very different.
Cap rate. NOI/purchase = cap. This one is more useful to me because although STRs are not sold on a cap rate, it does tell me how the property is performing. And the NOI portion tells me how it'll do if there is no debt service. Most will call me crazy, but I do not plan to carry debt on all properties forever.
60/40 "rule." It's not a rule at all, but GENERALLY on my properties I find that 40% of the gross goes to expenses (not including debt service). So out of the roughly 60% remaining, that goes to debt service, CapEx savings, and cashflow. My Tennessee properties hit right around 40, while my Colorado properties hit closer to 35% (due mostly to lodging tax difference on gross).
It's important to note that GRM can change if rents go up after purchase (a good thing). And cap rate has two lines: purchase cap and current cap. Current cap looks terrible on some of mine because their current market value has gone double purchase price. The 60/40 thing holds pretty steady regardless of the home value. I use this span of metrics (in addition to CoC) to keep pulse.
Hope this is helpful as folks analyze.
10 Replies
- 4yRyan MoyerBusiness MemberProperty Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 996 posts · 1k+ votes
Investors seem to generally be looking for at minimum 15%-20% of the purchase price in gross income (IE $1mil property should net at least $150k annually). Sellers/realtors are trying to set the market at 10% (so 10x gross income = home price). If you look in Destin every house is listed at 10x gross income. So if income is $150k it will probably be priced around $1.5mil.
As an investor I'd want more than $150k gross out of a $1.5mil home.
My place in Disney I am projecting (and on pace for) $160k for $568k purchase so 28%, but I put $65k into theming.
My place in Southern Utah I should do a little over $100k on $515k purchase so around 20%.
But those homes were purchased in early 2021 and prices have increased such that those numbers are different in those markets now.
People that bought pre-covid in a vacation market should be killing it right now. Like 30-50% of purchase price in gross revenue doable.
Cosmic Vacations4.9174 Reviews - Scottsdale, AZ · Member since 2018 · 22 posts · 36 votes4y
For Orlando are all your homes in resort communities or non HOA? Wondering if the high costs to be in a resort equates to higher gross revenue to offset the cost?
- Rental Property Investor · Algonquin, IL · Member since 2019 · 55 posts · 63 votes4y
@Ryan Moyer - I'm looking to get my first STR in the Kissimmee area. I'm actually headed down this week to take a look at the different resort communities. Wanted to say thanks for the post! Question on the theming: did you use any financing for that $65k or just come with it out of pocket and include it in cash into the property for CoC?
- 4yRyan MoyerBusiness MemberProperty Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 996 posts · 1k+ votes
Quote from @Christle Stezskal:
@Ryan Moyer - I'm looking to get my first STR in the Kissimmee area. I'm actually headed down this week to take a look at the different resort communities. Wanted to say thanks for the post! Question on the theming: did you use any financing for that $65k or just come with it out of pocket and include it in cash into the property for CoC?
We paid it with cash and count it against our CoC.
Cosmic Vacations4.9174 Reviews - Real Estate Agent · Tampa, FL · Member since 2018 · 464 posts · 452 votes4y
@Serena Kim - As an investor and agent in the Destin/PCB market, the ratio of gross revenue to price is definitely the most common factor used to filter properties initially. You have to determine some sort of filter, otherwise you'd be doing deep analysis on every new listing! lol The bigger question is really how are you determining that initial value to use for potential gross revenue? You could take the more time consuming (but effective) approach of the enemy method, leverage tools like Mashvisor or AirDNA, look at rental history, check out local PM projections, etc. Ultimately, I typically recommend connecting with a local real estate professional to help you filter properties based on your goals and desires.
As for average gross revenue to price ratios in the Emerald Coast? 10% is also very common, with most investors landing between 12-15% (and obviously everyone hoping for 30%+, which does still happen occasionally).
Good luck!
- Real Estate Agent · Orlando, FL · Member since 2019 · 59 posts · 90 votes4y
Quote from @Christy Flora:
For Orlando are all your homes in resort communities or non HOA? Wondering if the high costs to be in a resort equates to higher gross revenue to offset the cost?
Hi Christy - 3-4br homes are in non-resort communities with no HOA or low HOA fees. 6BR house is in a resort community. As long as your house looks great/attractive it will do well either in resort or non-resort communities. For non-resort homes you definitely want to have other amenities to attract guests (e.g., oversized private pool, lake/conservation views, pet friendly with the big backyard/fence, etc.).
- Investor · Nortnern Colorado · Member since 2020 · 170 posts · 132 votes4y
Here are some metrics I use:
GRM. Gross Rent Multiplier. This is gross rent for a year x _____ = purchase price. We aim for 8.5 or lower. It's getting much harder to find. This is most often only useful when comparing properties in a given market (say Orlando vs. Orlando). Not super useful when comparing a cabin in the woods vs. a ski resort condo, as the condo will have much higher HOA fees, thus the net may be very different.
Cap rate. NOI/purchase = cap. This one is more useful to me because although STRs are not sold on a cap rate, it does tell me how the property is performing. And the NOI portion tells me how it'll do if there is no debt service. Most will call me crazy, but I do not plan to carry debt on all properties forever.
60/40 "rule." It's not a rule at all, but GENERALLY on my properties I find that 40% of the gross goes to expenses (not including debt service). So out of the roughly 60% remaining, that goes to debt service, CapEx savings, and cashflow. My Tennessee properties hit right around 40, while my Colorado properties hit closer to 35% (due mostly to lodging tax difference on gross).
It's important to note that GRM can change if rents go up after purchase (a good thing). And cap rate has two lines: purchase cap and current cap. Current cap looks terrible on some of mine because their current market value has gone double purchase price. The 60/40 thing holds pretty steady regardless of the home value. I use this span of metrics (in addition to CoC) to keep pulse.
Hope this is helpful as folks analyze.
- Rental Property Investor · Oklahoma City · Member since 2021 · 108 posts · 103 votes4y
Quote from @Ryan Moyer:
Investors seem to generally be looking for at minimum 15%-20% of the purchase price in gross income (IE $1mil property should net at least $150k annually). Sellers/realtors are trying to set the market at 10% (so 10x gross income = home price). If you look in Destin every house is listed at 10x gross income. So if income is $150k it will probably be priced around $1.5mil.
As an investor I'd want more than $150k gross out of a $1.5mil home.
My place in Disney I am projecting (and on pace for) $160k for $568k purchase so 28%, but I put $65k into theming.
My place in Southern Utah I should do a little over $100k on $515k purchase so around 20%.
But those homes were purchased in early 2021 and prices have increased such that those numbers are different in those markets now.
People that bought pre-covid in a vacation market should be killing it right now. Like 30-50% of purchase price in gross revenue doable.
The home that you purchased, I know you say you dumped 65k into theming after down payment. Was the property you purchased fully furnished? And if so, did you keep everything or did you have to spend money replacing things or buying more dishes, etc?
I've also thought of the question, if people are doing so well with airbnb why are they selling their fully furnished properties? Can you answer that? Quote from @Wilson Vanhook:
Quote from @Ryan Moyer:
Investors seem to generally be looking for at minimum 15%-20% of the purchase price in gross income (IE $1mil property should net at least $150k annually). Sellers/realtors are trying to set the market at 10% (so 10x gross income = home price). If you look in Destin every house is listed at 10x gross income. So if income is $150k it will probably be priced around $1.5mil.
As an investor I'd want more than $150k gross out of a $1.5mil home.
My place in Disney I am projecting (and on pace for) $160k for $568k purchase so 28%, but I put $65k into theming.
My place in Southern Utah I should do a little over $100k on $515k purchase so around 20%.
But those homes were purchased in early 2021 and prices have increased such that those numbers are different in those markets now.
People that bought pre-covid in a vacation market should be killing it right now. Like 30-50% of purchase price in gross revenue doable.
The home that you purchased, I know you say you dumped 65k into theming after down payment. Was the property you purchased fully furnished? And if so, did you keep everything or did you have to spend money replacing things or buying more dishes, etc?
I've also thought of the question, if people are doing so well with airbnb why are they selling their fully furnished properties? Can you answer that?They are selling their properties because their properties have appreciated at an insane rate and by selling they can take out as much cash on the sale as they would have in rent over the next 10 years.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.