Math for short term rentals

[Archimedes Jao]

How do I do the math for short term rentals on the bigger pockets calculator? I am stuck on what to put down for the monthly rent part of the calculation. Thank you.

[Kevin Pillow]

I know it’s tricky because STRs are seasonal but I just use AirDNAs rentalizer. Then I multiply the occupancy rate the rentalizer tells me but the total number of days in a year. For example: occupancy rate x 365 = total days rented. If the estimated occupancy rate is 65% then total days rented is .65 x 365 = 237 days retendes. The last step for me is to multiply 237 days x Average Daily Rate. 237 days x $450 = 106,650.

[David M.]

@Archimedes Jao

You need to determine your average monthly rent for the year...

[Kevin Pillow]

I know it’s tricky because STRs are seasonal but I just use AirDNAs rentalizer. Then I multiply the occupancy rate the rentalizer tells me but the total number of days in a year. For example: occupancy rate x 365 = total days rented. If the estimated occupancy rate is 65% then total days rented is .65 x 365 = 237 days retendes. The last step for me is to multiply 237 days x Average Daily Rate. 237 days x $450 = 106,650.

[Luke Carl]

Rent minus PITI = what's left over.

Use the enemy method to really drive yourself nuts. Enemy method dot com 

[Alexander Szikla]

Be sure to budget for higher utility expenses (think about how you use AC or water when you go to a hotel), repairs due to wear and tear as well as cleaning expenses.  

[Paul Sandhu]

You don't rent them by the month.  You rent them by the night.  I'm an exception though, I rent them by the week and prorate the final week.  I rent them to traveling workers at an industrial plant.  Refinery ruffians.  Big burly guys driving jacked up 4x4s that chew tobacco for breakfast, smell like diesel fuel and have neck tats.  That describes me, except for the neck tats.

[Kevin Pillow]

Quote from @Alexander Szikla:

Be sure to budget for higher utility expenses (think about how you use AC or water when you go to a hotel), repairs due to wear and tear as well as cleaning expenses.  

 This is why I love condos with HOAs that include water and and electricity. You end up with fixed costs.

[Robin Simon]

A good general rule of thumb if you are trying to do back-of-the-envelope calculations is about 2X the long-term market rent

[Eric Yu]

Your underwriting is going to be the most important part of any deal for Airbnb. Don't rush into it or just do napkin math. 

Utilize AirDNA, Rabbu, AllTheRooms, etc. Aggregate as many data sources as you can to make an informed decision. I have a separate Airbnb pro forma that I use to estimate cash flows. In addition to the property itself, you want to look at the larger trends in the area. Are you seeing a Y/Y growth in revenue? How does seasonality impact the location? What are the 25th, 50th, and 75th percentiles?

My rule of thumb is that when I'm quickly looking at a property, if it doesn't hit at least 15% of the purchase price in yearly income, I won't do more in depth analysis. (At that rate, you'll see pretty healthy cash flows). Hit me up if you need more advice when it comes to underwriting these deals. 

[Jeremy Horton]

Quote from @Kevin Pillow:

I know it’s tricky because STRs are seasonal but I just use AirDNAs rentalizer. Then I multiply the occupancy rate the rentalizer tells me but the total number of days in a year. For example: occupancy rate x 365 = total days rented. If the estimated occupancy rate is 65% then total days rented is .65 x 365 = 237 days retendes. The last step for me is to multiply 237 days x Average Daily Rate. 237 days x $450 = 106,650.

 I like this method as well - the thing I run into is this:

Say we have a beach condo 2/2 across the street from the beach and we have another beach condo 2/2 on the beach with balcony views. Seems to me you'd see a 10-20% drop in revenue moving right across the street. AirDNA from what I understand will essentially take the average of these condos to come up with their numbers. Now the one on the beach costs 100k more. So which is better? Which has the better ROI? That's the hard part for me - and I may be overanalyzing this, but I'm still used to buying 75k-150k houses, not 600-700k condos. One hurts a little if it turns out bad, the other hurts a lot and would potentially set me back a good deal.

That is my sticking point with the STR market right now. That and a lot of them are still asking 2021 prices (although I've seen a decline lately) at current interest rates. The other thing that makes it hard is you have these big companies that own say 30-50% of the units in the complex - this can be both a blessing and a curse. A lot of these places cashflow more like LTRs at this point but you've got the STR risk due to seasonality, computer algorithms ranking your profile, self management, cost etc.

Don't get me wrong, I still LOVE the idea of STRs, you get an cool place that will likely appreciate well that you can go on vacation to. Awesome perks. Although I think there are a lot more intricacies with them and you really need to understand exactly what you're signing up for, the best location, the workload, special assessments etc. You'll also likely buy a place that was previously a vacation rental - this means you'll need the 20% down - there's likely not going to be a BRRRR/place you can force much equity into at a resort style location. So you'll be buying a turnkey place at market price.

[Kevin Pillow]

@Jeremy Horton I hope you can tell I wrote that post at 1 AM half asleep with all those spelling errors 😂. I like that method as my back of the envelope analysis. If I need to really drill down on a condo or a neighborhood for a situation like you mentioned I will go into Pricelabs. It has some tools that you can manipulate to get specific data on occupancy rates and what the rates it is currently listed for. I’ll DM you to show you how it’s done. Think of it as using Pricelabs to do the “enemy method”. 

[Archimedes Jao]

Thank you so much. That is so helpful. I love this forum.

[Archimedes Jao]

Thank you. I will study the enemy method.

[William Anderson]

Create a spreadsheet and break it down.  The one I use is divided into four weeks for each of 12 months.  One set of numbers for the nightly rate

The next set for the number of rental nights and the last is the total.  This permits adjustments by week.  On the Mississippi Gulf Coast, our season is year-long with bumps in June and July.  We have lots of events that can raise the rates and occupancy for three to seven days at a time.  Then we have the holidays.  For my market, there are no averages.  You can grab the total revenue for the year and enter it into the BiggerPockets calculator or others.  If your rate is the same all of the time, that's easy. 

You must see the monthly picture to see if you have to shore up your bank account for low volume and rate months.  The more data you have the better you will be as a business manager.  I am revising my sheets for my course now, when it's finished, I will make them available.  

[Paul Sandhu]

Quote from @Eric Yu:

 if it doesn't hit at least 15% of the purchase price in yearly income

 Raise your standards.  My rule of thumb is that 6 months of rent should cover the purchase price.

[Jeremy Horton]

Quote from @William Anderson:

Create a spreadsheet and break it down.  The one I use is divided into four weeks for each of 12 months.  One set of numbers for the nightly rate

The next set for the number of rental nights and the last is the total.  This permits adjustments by week.  On the Mississippi Gulf Coast, our season is year-long with bumps in June and July.  We have lots of events that can raise the rates and occupancy for three to seven days at a time.  Then we have the holidays.  For my market, there are no averages.  You can grab the total revenue for the year and enter it into the BiggerPockets calculator or others.  If your rate is the same all of the time, that's easy. 

You must see the monthly picture to see if you have to shore up your bank account for low volume and rate months.  The more data you have the better you will be as a business manager.  I am revising my sheets for my course now, when it's finished, I will make them available.  

 This sounds like a very thorough way to do it - I may steal your idea. A good bit of work, but will work great once you have the property size/type/exact location pinned down. Gives you a lot more confidence and assuredness when it comes to the revenue assumptions for STRs