Rules of thumb for STR acquisitions?

Question

TLDR; What are the "Rules of Thumb" for STR acquisitions?

In long-term rentals, there are plenty of rules of thumb that help you quickly decide if a listed property is worth pursuing. 2% rule, positive cap rate spread, etc.

What are they for STR?

Ryan Moyer · Answer

I think it sounds like he probably understands that each deal will have to be analyzed on its own merits, but was just wondering about broader more high level things people follow (like the 1% rule in LTR) that can tell you right off the bat if a deal is even worth running the numbers on before you spend a bunch of time on it.

The answer I think is it depends on who you ask, buyers or sellers.

Sellers - The 10% Rule

In a vacation rental market where a high percentage of homes are STRs and home values are essentially based on STR revenue (they still appraise as residential homes but the market sets their values based on what works for investors), a home is typically listed for 10x its gross annual revenue.

If you go look in the Smokies or in Destin or markets like that, if a home does $120k gross annual revenue then it will be listed somewhere around $1.2M. Obviously this varies somewhat property to property and yada yada yada, but that's kind of the starting point.

Buyers - The 15% Rule

On the flipside, especially now, most savvy investors look for something a bit better than that. At current interest rates, even with self management it can be hard to cash flow with the 10% rule. And the margins are tight which leaves a ton of risk as travel spending is still at record highs and there are no guarantees that will continue in a straight line upwards.

It still works for large companies that are buying these properties as a long term inflation hedge and for appreciation, but for your typical cash flow STR investor the 10% rule doesn't really get the job done, especially at current interest rates.

So a lot of smaller, savvy investors look at 15% as a good starting point. That is, if the purchase price divided by the gross annual revenue is less than 15%, it's probably not a deal worth looking into. These can be hard to find in established vacation markets, where you might have to accept smaller margins.

Again, these things vary from market to market depending on property taxes, etc. But like the 1% rule in LTR it's kind of a starting point some people use to thin out the list before diving deeper into properties and figuring out the specifics of all of the expenses unique to that property.

John Underwood · Answer

1. Don't lose money

2. Refer to rule one.

Tyler Solomon · Answer

Not necessarily specific to STR's, however I think it is more applicable as people often get wide eyed by projected revenues.1. Underwrite Conservatively

2. Refer to rule 1.

Do not assume top end revenue when running numbers/underwriting deals on your own, as this only sets you up for potential failure. Make sure the numbers make sense on a STR EVEN if you were to see a 10% or greater decline in overall bookings. This gives you room to breath if the market decides to contract.

Lake Lutes · Answer

For the Florida panhandle, we've been using the 15-20% rule for a number of years now. That is, the gross rental income for the year should be approx. 15-20% of the purchase price. For example, if the purchase price is $400K, we're looking for $60K-80K of rental income. As properties have appreciated rapidly, we're now looking for 12-15%. For example, a $400K property that does $50K-60K is achievable.

Where are you looking for an STR and what sort of income numbers are you seeing, @Easton Hill?

Michael Baum · Answer

So each deal is different. More than a LTR really. So much goes into the STR investment that there isn't really any hard fast rules.

Location of course is the most important but what does that mean? An oil refinery town like Coffeeville, KS? A log cabin in Pigeon Forge? Overlooking Red Rocks in AZ? Lake front in Idaho?

All of those are successful STRs but vastly different things.

Scott E. · Answer

1. Location location location

2. After underwriting the deal, do you forecast it to achieve a minimum 15% cash on cash return?

*Underwriting the deal includes looking at comparable sold homes, reviewing comparable short term rental listings, determining average nightly rate, occupancy rate, high season, low season, whether rehab is needed, whether furnishing the home is needed, cost of local cleaning crew, cost of local handyman, etc.

Leslie Anne Morris · Answer

Calculate cash on cash, it is deal specific. As a part of cash on cash you will also need to calculate NOI or net operating income. Deal Check is a free app that you can utilize!

Easton Hill · Answer

I'm seeing similar prices. I haven't looked at Florida at all so I can't comment on those markets, but in general I'm looking for 20% or above

Easton Hill · Answer

Thank you for the detailed response. Price to Revenue Ratio seems to be a consistent theme for "filtering through properties"!

Carlos Ptriawan · Answer

I was trying to decipher what people wrote here but I found the methodology to be inaccurate if not say very confusing. The same with LTR too.

Here's the thing.

Every city's LTR and STR has its own cap rate, it's hidden cap rate.

I took all the statistics from the whole united states based on aggregated data and demands.

Then I just shorted it from top to bottom, which place has the best cap rate for STR.

Here's what I say about why the 10% 20% 50% rule would not work, everything is extremely location-specific and extremely time specific. You can't find an STR that has 10% CashOnCash if your neighbour could only yield 3% CashOnCash. It's just impossible.

Rules of thumb for STR acquisitions?

Rules of thumb for STR acquisitions?

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