Need Opinions: STR Deal: Go or No Go: What would you do?

[Chad Acerboni]

Hi All, 

My business partner and I own small multi-family properties (2-4) and are currently under contract for an STR in Orlando. This is our first one, hence the outreach. The quick snapshot below is for context but I'm looking for some feedback as we are unfamiliar with this space. Curious as to whether you would GO or NO-GO on this opportunity. 

Keep in mind we are both W2'd in the Tech Sector and our goal is to build up our cash flow. This investment will be handled by a PM company so, yes, aware that is cutting greatly into our returns but right now we are looking to be hands-off. 

Asset: SFH (9 bedrooms and 7 baths)

City: Orlando, FL (Kissimmee) 

Purchase Price: $925K --> A similar house in the neighborhood just sold this week for $1M and has one bed/one bath less and fewer house amenities. 

Projected Returns based on multiple different data points, not just AirDna, etc from PM companies: 

Low-End Gross Revenue - $132K 

High-End Gross Revenue - $151K 

Overall Expenses (Prop tax/insurance/utilities/HOA fees/Management fee @25% /mortgage/CapEx @ 5%):

Low-End Expenses - $126K

High-End Expenses - $132K 

Financing and Cash to Close @ 20%: 

$215,000

ROI: 

Annual Cash Flow Between $5800 - $19,000

Annual COC Return Between: 2.79% and 8.8%

My notes/thoughts: 

PM fees are killing our returns but do not have the time right now to manage the property. 

Financing terms are also hurting us. 7.5% and different buy-down options. Have looked at Conventional and DSCR options.

What would you do? Transparent feedback is greatly appreciated. TIA!

[Rashid Khalil]

1. Obviously you aren't doing it for cash flow of 3 %

2. you aren't managing so you aren't looking for bonus depreciation and tax saving by w2 income washout

3. mortgage paydown typically is 4-5 % per year over 5-6 years

4. aggressive appreciation after recent free money run in home pricing and federal reserve commitment to slow down housing is very much questionable 

so i am not sure if the numbers work, but i know nothing and would love to read other input

[Brian Barch]

No go. Love the revenue, but expenses are too high. 

I’d love if you got your feet wet on a smaller property.

the higher the purchase price (risk), the higher the potential reward needs to be

[Jeff Langley]

I would certainly pass. If you’re looking for a hands-off approach, why not buy more multi family and make a “safer” play for LTR instead of a new shiny object?

[John Underwood]

I would pass.

You may have different goals.

Your still making some money and you have deductions such as depreciation and mortgage interest.

You could in time self manage and hopefully refi into a lower interest rate loan one day.

[Ryan Moyer]

I own a 9 BR home in this market (you can view it in my profile) and manage a few others.

I think it's a dangerous market to spend that kind of money in right now.  The area used to be simple.  Buy, theme, profit.  But lots of people have followed that mold and even the themed homes are getting a bit saturated at this point.  It used to be you themed to avoid having to compete on price.  But now there's enough of the themed homes that even the themed homes are competing on price.

Which resort neighborhood is this in?  At $925k I would hope it's already themed.  How well themed is it?  That matters now.  It used to be just high level theming was enough.  Now your high level theming has to really resonate with people.  

Which one sold for $1M?  Most themed ones I've seen have been in the low 900's.

Feel free to PM me if you don't want to share publicly.  I can give you my honest opinion of the place.  My place in Champions Gate heavily exceeded those revenue numbers last year but we really got lucky with nailing the theming and it turning out not just great, but REALLY great.  I've seen plenty of other highly themed places that will struggle to even meet those projections you posted this year. 

Expenses are high in the area so be careful. People are hard on these homes. Also Florida taxes and of course the HOA fees in these neighborhoods are high.

If you're not willing to self manage, there are a zillion PM's in the area.  I bet you can haggle on the commission.  Just be aware of rent shifting and the like (PMs shifting fees out of the nightly rate and into made-up fees that they keep 100% of), as well as PM contracts that make it difficult for you to leave them.  Both things the area is rife with.

ETA: Just saw your projected management fee is 25%.  That is way high for the area unless you're in Encore where only the contracted neighborhood PM can give the guest access to the resort amenities.

[Mike Hern]

Quote from @Chad Acerboni:

Hi All, 

My business partner and I own small multi-family properties (2-4) and are currently under contract for an STR in Orlando. This is our first one, hence the outreach. The quick snapshot below is for context but I'm looking for some feedback as we are unfamiliar with this space. Curious as to whether you would GO or NO-GO on this opportunity. 

Keep in mind we are both W2'd in the Tech Sector and our goal is to build up our cash flow. This investment will be handled by a PM company so, yes, aware that is cutting greatly into our returns but right now we are looking to be hands-off. 

Asset: SFH (9 bedrooms and 7 baths)

City: Orlando, FL (Kissimmee) 

Purchase Price: $925K --> A similar house in the neighborhood just sold this week for $1M and has one bed/one bath less and fewer house amenities. 

Projected Returns based on multiple different data points, not just AirDna, etc from PM companies: 

Low-End Gross Revenue - $132K 

High-End Gross Revenue - $151K 

Overall Expenses (Prop tax/insurance/utilities/HOA fees/Management fee @25% /mortgage/CapEx @ 5%):

Low-End Expenses - $126K

High-End Expenses - $132K 

Financing and Cash to Close @ 20%: 

$215,000

ROI: 

Annual Cash Flow Between $5800 - $19,000

Annual COC Return Between: 2.79% and 8.8%

My notes/thoughts: 

PM fees are killing our returns but do not have the time right now to manage the property. 

Financing terms are also hurting us. 7.5% and different buy-down options. Have looked at Conventional and DSCR options.

What would you do? Transparent feedback is greatly appreciated. TIA!

You're better off becoming a private lender if you don't have time to manage and with such low return/high risk investing.

[Leslie Anne Morris]

There are so many different ways to look at this in relation to goals. Some say 20% COC or no go. Some say they are happy with a break even just to get into the game. In your case the return is slim. How conservative is the underwriting? What if a major repair pops up? It could put you down into break even or loss category.

[Michael Baum]

Hey @Chad Acerboni, I have seen pics of @Ryan Moyer's place and it is really cool. He knows a lot about what's what so I would reach out and get a PM going.

Another guy is @Shawn McCormick. I have had a few discussions about that area and he is very knowledgeable.

Overall, all that looks like a headache to me. It is a cool thing, but those numbers really don't work that well and one bad year and you are in the hole.

[Sara Levy-Lambert]

Dude don't cut your PM company, just swap it out, DM me, I can get you in at 15% for property management.

[Joel Case]

No go. Too much risk with too little reward in an already saturated market. 

[Nathan Gesner]

There's a good chance property prices will still decrease in 2023, so there's a good chance you're paying more than you would if you waited 6-12 months. How would you feel if you bought this property and then the value dropped 10% next year?

Regardless, your returns are bad. I wouldn't touch it for cashflow and I certainly wouldn't buy it for appreciation unless you are OK with waiting ten years.

[Rashid Khalil]

Quote from @Nathan Gesner:

There's a good chance property prices will still decrease in 2023, so there's a good chance you're paying more than you would if you waited 6-12 months. How would you feel if you bought this property and then the value dropped 10% next year?

Regardless, your returns are bad. I wouldn't touch it for cashflow and I certainly wouldn't buy it for appreciation unless you are OK with waiting ten years.

 what would make this deal good for you in today's market?

[Nathan Gesner]

Quote from @Rashid Khalil:

Quote from @Nathan Gesner:

There's a good chance property prices will still decrease in 2023, so there's a good chance you're paying more than you would if you waited 6-12 months. How would you feel if you bought this property and then the value dropped 10% next year?

Regardless, your returns are bad. I wouldn't touch it for cashflow and I certainly wouldn't buy it for appreciation unless you are OK with waiting ten years.

 what would make this deal good for you in today's market?

 A 15% cash-on-cash return.

[Carlos Ptriawan]

Quote from @Chad Acerboni:

Hi All, 

My business partner and I own small multi-family properties (2-4) and are currently under contract for an STR in Orlando. This is our first one, hence the outreach. The quick snapshot below is for context but I'm looking for some feedback as we are unfamiliar with this space. Curious as to whether you would GO or NO-GO on this opportunity. 

Keep in mind we are both W2'd in the Tech Sector and our goal is to build up our cash flow. This investment will be handled by a PM company so, yes, aware that is cutting greatly into our returns but right now we are looking to be hands-off. 

Asset: SFH (9 bedrooms and 7 baths)

City: Orlando, FL (Kissimmee) 

Purchase Price: $925K --> A similar house in the neighborhood just sold this week for $1M and has one bed/one bath less and fewer house amenities. 

Projected Returns based on multiple different data points, not just AirDna, etc from PM companies: 

Low-End Gross Revenue - $132K 

High-End Gross Revenue - $151K 

Overall Expenses (Prop tax/insurance/utilities/HOA fees/Management fee @25% /mortgage/CapEx @ 5%):

Low-End Expenses - $126K

High-End Expenses - $132K 

Financing and Cash to Close @ 20%: 

$215,000

ROI: 

Annual Cash Flow Between $5800 - $19,000

Annual COC Return Between: 2.79% and 8.8%

My notes/thoughts: 

PM fees are killing our returns but do not have the time right now to manage the property. 

Financing terms are also hurting us. 7.5% and different buy-down options. Have looked at Conventional and DSCR options.

What would you do? Transparent feedback is greatly appreciated. TIA!

This is very typical Orlando STR in 2022. Your number is right.
The last time Orlando could produce significant cashflow is only if you purchase in 2013 - 2014.

So my question is this, are you going to use this STR for your personal use often ? if not, dont even bother

[Drew Sygit]

What is your target audience?

How many of them need 9 bedrooms?

You would need to structure your ads to appeal to that audience.