STR Revenue Target vs Purchase Price

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Jonathan DempseyBusiness Member
Rental Property Investor · Pocono Pines, PA · Member since 2018 · 153 posts · 117 votes
4y

@Pretty Khare

These are great numbers, awesome to hear about the niche in Tampa.

To quickly sift and compare apples to apples, the minimum a property gross to purchase price ratio needs to be 1.67% in markets I underwrite in.

So for a 500K house, gross rent would need to hit at least $5000x1.67%, or $8,333 gross.

Generally I see STR expenses to be between 35-40% of gross if you have management in place, cleaning revenue, maintenance, utilities, etc.

Being conservative this leaves 60% of gross as NOI typically. If you want 1% rule on NOI (a minimum standard for a good deal in STR), then you'll need 1.67% gross (1/.6).

I know @Josh Messinger is seeing this in the Poconos as this is a market I invest in heavily, and I’m sure most of those Tampa rentals mentioned are in a similar boat.

STR is my sole focus, always ready to chat STR if you reach out!

Live Free,

JD

7Reply
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  • Pretty Khare
    Investor · Austin, TX · Member since 2021 · 83 posts · 80 votes
    4y
    Quote from @Zane Abner:

    For a STR is there a target % of purchase price that generally equates to a successful STR property? Similar to the 1% rule.

    Gross revenue to purchase price is a good indicator. 10% is the minimum you can use for quickly screening properties. Anything above 15% could do well and above 20% will be a jackpot. Of course in STR, your income depends primarily on how well you manage the property, so your miles may wary.
    3Reply
  • James Neal
    Investor · San Diego, CA · Member since 2019 · 10 posts · 6 votes
    4y

    I was thinking about this recently (since I'm about to close on a STR). I was thinking ADR = 0.1% purchase price at about 70% occupancy could be a good rule of thumb, but then you're dealing with multiple variables. That might just be confirmation bias though cause I just spent $210k on a place that should pull a little less than ~$200/night ADR. Would love to see what others' rules of thumb are!

    1Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    4y

    This quote, above. Your miles will vary...

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y

    The average short-term rental occupancy rate is 50%. Some markets will do better, but you should know the market well enough to make that determination before buying a property.

    Here's the most current information I could find with occupancy rates by City. Significantly lower than 70% and 2020/2021 were banner years.

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    0Reply
  • Jimmy Bell
    Member since 2022 · 34 posts · 10 votes
    4y
    Quote from @Pretty Khare:
    Quote from @Zane Abner:

    For a STR is there a target % of purchase price that generally equates to a successful STR property? Similar to the 1% rule.

    Gross revenue to purchase price is a good indicator. 10% is the minimum you can use for quickly screening properties. Anything above 15% could do well and above 20% will be a jackpot. Of course in STR, your income depends primarily on how well you manage the property, so your miles may wary.

    Hi I saw your post an was wondering if there is a formula for the gross revenue to purchase price?


    0Reply
  • Joshua MessingerBusiness Member
    Property Manager · Poconos, PA · Member since 2020 · 443 posts · 264 votes
    4y

    Hey @Zane Abner! 

    My team and I currently only buy properties that have a 20% CoC return or greater with conservative rates. Anything below that we see as a poor investment for an STR.

    Another one I like using is finding properties that cost $100/sqft or less than that. These ones are usually good for value-add/renovation projects. 

    I hope this helps and if you have any questions please don't hesitate to reach out! 

    All the best,

    Josh

    [email protected]484-986-5012
    2Reply
  • Jimmy Bell
    Member since 2022 · 34 posts · 10 votes
    4y
    Quote from @James Neal:

    I was thinking about this recently (since I'm about to close on a STR). I was thinking ADR = 0.1% purchase price at about 70% occupancy could be a good rule of thumb, but then you're dealing with multiple variables. That might just be confirmation bias though cause I just spent $210k on a place that should pull a little less than ~$200/night ADR. Would love to see what others' rules of thumb are!


     Hey James what is ADR

    0Reply
  • Jimmy Bell
    Member since 2022 · 34 posts · 10 votes
    4y

    Josh

    Thanks very much for your comment. will look for those but how do you determine cash on cash?

    0Reply
  • Pretty Khare
    Investor · Austin, TX · Member since 2021 · 83 posts · 80 votes
    4y
    Quote from @Joshua Messinger:

    Hey @Zane Abner! 

    My team and I currently only buy properties that have a 20% CoC return or greater with conservative rates. Anything below that we see as a poor investment for an STR.

    Another one I like using is finding properties that cost $100/sqft or less than that. These ones are usually good for value-add/renovation projects. 

    I hope this helps and if you have any questions please don't hesitate to reach out! 

    All the best,

    Josh


     Josh - In which markets are you finding properties to buy at hundred dollar per square feet or less? Just curious

    0Reply
  • Ryan MoyerBusiness Member
    Property Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 993 posts · 1k+ votes
    4y

    There a relatively agreed upon answer to this.  10% of purchase price for annual gross revenue is what the market has decided is the baseline.  That is to say if a property is $1M, it should gross at least $100k annually.

    Personally my own tolerances are tighter than that (I would want 150k on a $1M purchase so 15% to even start digging in deeper) but the closest thing to an accepted 1% rule in LTR's is the 10% rule in STRs. In many markets where STRs are popular the majority of homes will be listed for 10x annual gross revenue, just like a business would. If the property grossed $92k last year, they will list it on the MLS for $920,000.

    Obviously expenses differ by market (property taxes, HOA, etc) so that will change a lot of things. But if you're looking for a way to quickly weed out listings that aren't even worth considering like the 1% rule does then the 10% rule is the standard. You can adjust it up from there if you are only interested in better returns.

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  • Joshua MessingerBusiness Member
    Property Manager · Poconos, PA · Member since 2020 · 443 posts · 264 votes
    4y

    @Pretty Khare in Poconos PA - came across a couple of them today lol 

    [email protected]484-986-5012
    1Reply
  • Josh GreenBusiness Member
    Realtor · Tampa/St Pete/Clearwater/Bradenton · Member since 2020 · 396 posts · 353 votes
    4y

    @Zane Abner

    I'm in the greater Tampa Bay Area and I'd say most properties me and my clients pursue have the following criteria:

    PP: $250k-$400k

    CoC return (1yr): 25-45%

    ~15-25% gross revenue to PP ratio

    ~15-25%+ cap rates

    Mostly turnkey (other than furnishing)

    Those values go up or down based on the area and creativity/comfortability of my clients as far as how they want to run their business. As you can see by the numbers, they might not be the #1 top market returns in the US, but they are very good in my opinion. You get an "all-around" investment with good forward appreciation projections, buffer against recession (lots of business, amenities, events, vacation, education, healthcare, etc), and exit strategies (high rent to price ratios generally speaking for a desirable metro). PLUS a great place to also vacation yourself 😎

    [email protected]801-441-8891
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  • Pretty Khare
    Investor · Austin, TX · Member since 2021 · 83 posts · 80 votes
    4y
    Quote from @Josh Green:

    @Zane Abner

    I'm in the greater Tampa Bay Area and I'd say most properties me and my clients pursue have the following criteria:

    PP: $250k-$400k

    CoC return (1yr): 25-45%

    ~15-25% gross revenue to PP ratio

    ~15-25%+ cap rates

    Mostly turnkey (other than furnishing)

    Those values go up or down based on the area and creativity/comfortability of my clients as far as how they want to run their business. As you can see by the numbers, they might not be the #1 top market returns in the US, but they are very good in my opinion. You get an "all-around" investment with good forward appreciation projections, buffer against recession (lots of business, amenities, events, vacation, education, healthcare, etc), and exit strategies (high rent to price ratios generally speaking for a desirable metro). PLUS a great place to also vacation yourself 😎


    Josh are these properties in Tampa city or in the beach? Trying to understand what area would attract STR guests

    0Reply
  • Josh GreenBusiness Member
    Realtor · Tampa/St Pete/Clearwater/Bradenton · Member since 2020 · 396 posts · 353 votes
    4y

    @Pretty Khare

    These are inland, but still in the Tampa Bay area and within 20-40 min to most beaches. Beach front property is tricky for the higher PP, typically HOAs, and flood insurance costs. Not saying that you can't make enough revenue to offset all that and more, but most my clients are better served looking elsewhere 👍🏼

    [email protected]801-441-8891
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  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    4y

    @Pretty Khare I totally agree with your post. I shoot for at least a 15% annual gross revenue to purchase price ratio. I recommend this but admittedly it’s getting more difficult to find.

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Zane Abner:

    For a STR is there a target % of purchase price that generally equates to a successful STR property? Similar to the 1% rule.


    This is from 2021 data. The highest cap rate for STR in US is only at smoky mountain, it's around 12-14% cap rate gross.
    In other places, the average cap rate is about 4-5% ; not much different than the SF counterpart.

    The vacancy is about 65-70%. The lesser the number of the room unit, the higher is the cap.

    0Reply
  • Jonathan DempseyBusiness Member
    Rental Property Investor · Pocono Pines, PA · Member since 2018 · 153 posts · 117 votes
    4y

    @Pretty Khare

    These are great numbers, awesome to hear about the niche in Tampa.

    To quickly sift and compare apples to apples, the minimum a property gross to purchase price ratio needs to be 1.67% in markets I underwrite in.

    So for a 500K house, gross rent would need to hit at least $5000x1.67%, or $8,333 gross.

    Generally I see STR expenses to be between 35-40% of gross if you have management in place, cleaning revenue, maintenance, utilities, etc.

    Being conservative this leaves 60% of gross as NOI typically. If you want 1% rule on NOI (a minimum standard for a good deal in STR), then you'll need 1.67% gross (1/.6).

    I know @Josh Messinger is seeing this in the Poconos as this is a market I invest in heavily, and I’m sure most of those Tampa rentals mentioned are in a similar boat.

    STR is my sole focus, always ready to chat STR if you reach out!

    Live Free,

    JD

    7Reply
  • Zane AbnerPro Member
    OP
    Member since 2021 · 20 posts · 12 votes
    4y
    Quote from @Jonathan Dempsey:

    @Pretty Khare

    These are great numbers, awesome to hear about the niche in Tampa.

    To quickly sift and compare apples to apples, the minimum a property gross to purchase price ratio needs to be 1.67% in markets I underwrite in.

    So for a 500K house, gross rent would need to hit at least $5000x1.67%, or $8,333 gross.

    Generally I see STR expenses to be between 35-40% of gross if you have management in place, cleaning revenue, maintenance, utilities, etc.

    Being conservative this leaves 60% of gross as NOI typically. If you want 1% rule on NOI (a minimum standard for a good deal in STR), then you'll need 1.67% gross (1/.6).

    I know @Josh Messinger is seeing this in the Poconos as this is a market I invest in heavily, and I’m sure most of those Tampa rentals mentioned are in a similar boat.

    STR is my sole focus, always ready to chat STR if you reach out!

    Live Free,

    JD


    To quick clarify, the 1.67% you’re referencing would be per month correct?

    1Reply
  • Dale BertrandPro Member
    Member since 2021 · 41 posts · 17 votes
    4y

    Great conversation! I'm curious how the financing affects your deal filtering rules. Assuming debt keeps getting more expensive, how does that affect your screening of properties?

    - Dale

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Jimmy Bell:

    ADR = Average Daily Rate. ADR x OR (Occupancy Rate) = Revenue

    https://www.investopedia.com/t...

    0Reply
  • Pretty Khare
    Investor · Austin, TX · Member since 2021 · 83 posts · 80 votes
    4y
    Quote from @Zane Abner:
    Quote from @Jonathan Dempsey:

    @Pretty Khare

    These are great numbers, awesome to hear about the niche in Tampa.

    To quickly sift and compare apples to apples, the minimum a property gross to purchase price ratio needs to be 1.67% in markets I underwrite in.

    So for a 500K house, gross rent would need to hit at least $5000x1.67%, or $8,333 gross.

    Generally I see STR expenses to be between 35-40% of gross if you have management in place, cleaning revenue, maintenance, utilities, etc.

    Being conservative this leaves 60% of gross as NOI typically. If you want 1% rule on NOI (a minimum standard for a good deal in STR), then you'll need 1.67% gross (1/.6).

    I know @Josh Messinger is seeing this in the Poconos as this is a market I invest in heavily, and I’m sure most of those Tampa rentals mentioned are in a similar boat.

    STR is my sole focus, always ready to chat STR if you reach out!

    Live Free,

    JD


    To quick clarify, the 1.67% you’re referencing would be per month correct?


     Yes that 1.67% is monthly which translates to 20% annually.

    0Reply
  • Richardd Barran
    Flipper/Rehabber · Johnson City, TN · Member since 2020 · 26 posts · 49 votes
    4y
    Quote from @Jonathan Dempsey:

    @Pretty Khare

    These are great numbers, awesome to hear about the niche in Tampa.

    To quickly sift and compare apples to apples, the minimum a property gross to purchase price ratio needs to be 1.67% in markets I underwrite in.

    So for a 500K house, gross rent would need to hit at least $5000x1.67%, or $8,333 gross.

    Generally I see STR expenses to be between 35-40% of gross if you have management in place, cleaning revenue, maintenance, utilities, etc.

    Being conservative this leaves 60% of gross as NOI typically. If you want 1% rule on NOI (a minimum standard for a good deal in STR), then you'll need 1.67% gross (1/.6).

    I know @Josh Messinger is seeing this in the Poconos as this is a market I invest in heavily, and I’m sure most of those Tampa rentals mentioned are in a similar boat.

    STR is my sole focus, always ready to chat STR if you reach out!

    Live Free,

    JD

     I LOVE this. 

    This post provided a quick tool for analysis. Saving this. 

    1Reply
  • Kristina Kuba
    Tampa, FL · Member since 2021 · 383 posts · 389 votes
    4y

    2020/2021/beginning of 2022 were exceptional times and and the majority of my investors were buying and operating at 20% gross annual income of the purchase price for a SFR in Tampa

    Now that the STR market is softening, my investors are targeting 13% on the low end and 17% on the high end

    2Reply
  • William Anderson
    Rental Property Investor · Mississippi Gulf Coast · Member since 2022 · 206 posts · 168 votes
    4y

    The first thing I tell my clients is to determine the ROI from the investments they would pull the cash from to fund their purchase. If they are getting 10-15% and their investments are fairly safe, they should avoid buying an investment property that does not generate at least that amount. It's all about the utilization of cash.

    Kristina nailed it, COC and ROI are dropping with every new purchase at a higher price with higher interest. The current administration sent new guidelines to HUD requiring higher down payments for vacation homes. Lenders have already made some adjustments. If the buyer is buying a vacation home for their "own use" they can still get a 90% LTV loan. If a VA buyer is buying a duplex and will live on one side they can buy with zero down.

    These are exceptions for first-time investors. For those of us who are professional investors, we need to put more down now. 70 and 75% LTV loans are more common now. So higher down's on higher priced homes. The result is lower returns.

    Sounds bad right?  Not so fast, I tell my clients they have to buy right.  In the right place, at the right time.  There are always deals to be had but you can not be in a rush.  If you have 1031 burning up time, it may be a bit tougher now.    Hang in there, the elections are a short time away and may bring some relief or not.

    0Reply
  • Pretty Khare
    Investor · Austin, TX · Member since 2021 · 83 posts · 80 votes
    4y
    Quote from @Carlos Ptriawan:
    Quote from @Zane Abner:

    For a STR is there a target % of purchase price that generally equates to a successful STR property? Similar to the 1% rule.


    This is from 2021 data. The highest cap rate for STR in US is only at smoky mountain, it's around 12-14% cap rate gross.
    In other places, the average cap rate is about 4-5% ; not much different than the SF counterpart.

    The vacancy is about 65-70%. The lesser the number of the room unit, the higher is the cap.

    This is very interesting. Thanks for sharing. Where is this data from? AirDNA? How are people making money in markets other than Smokey’s if the average vacancy is 65-70%
    0Reply
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