STRs - can I be convinced they are a good idea...

OP

Member since 2022 · 10 posts · 1 vote

Okay that was a good reply! But, I think several people who don't own a STR are thinking some of my same thoughts so maybe I shouldn't say convince me, but rather I want to know what people think about these points.

On your response - didn't the properties in the vacation towns have the crazy appreciation rates, thus making it that much harder to now get in? And maybe some government likes the taxes, but it is true that in many popular areas it is becoming more difficult because of zoning, that is why in Hawaii they have vacation destination zones, and in the county i live in Colorado, they want you to have an acre or more for an STR. What I'm saying is that the appraisal is one thing, but I'm thinking more about what the market will do in the future with this mismatch of current property prices vs. cashflow on what the former price was.

Nathan Grabau

Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes

Quote from @Chris Gerard:

Does anyone have any thoughts on my current perspective: Properties have appreciated at a crazy rate in a short amount of time. Interest rates have since increased and may stay that way or go higher for the forseeable future. The more that an area becomes popular for STRs, the more likely the laws, fees, taxes will become increasingly burdensome. Then, consider airfare, fuel costs, general inflation higher, gets more expensive for average folks to travel. This article says there is more of a demand for STRs but it seems like there are plenty of STRs available since it became such a popular idea. I think this happened because interest rates were so low and buyers got in before prices went up, and before laws became more stringent.

It seems like STRs should ultimately be valued like an income producing property would be. For example, if a property was purchased $500K in 2019 at 3ish%, and maybe they put 20% down, and owner boasts about how profitable of an STR it is; and then now they put is on the market for $900K because that appears to be the market rate (at least this seems to be the case in high appreciation areas such Colorado, Hawaii, and several other areas), however interest rates are now 7.5%, how can this same STR now be cashflow positive? Maybe if you put 60% down payment it can be..., but most buyers can find a better place to park their money if they really need to put down $500K on a $900K property to make it cashflow. Something just doesn't seem to add up, but maybe I'm wrong and enough wealth is being passed down through inheritance from baby boomers and the supply is so low that we are at a "new" normal. Be interested to hear other people's thoughts.

I am getting house hacks turned STR's at 5% down with rates at 7.5% and PMI to cash flow for clients. I would research 4 and 5 bedroom STR's in Denver Metro in the cities where they are legal and you would be surprised by what you find.

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

Don't forget over saturation of STRS in certain areas.

Cliff H.Pro Member

Rental Property Investor · Nashua, NH · Member since 2014 · 599 posts · 477 votes

You're not wrong, but consider that there's always a gap between market reality today and the time it takes to flush bad or overleveraged investors out of the market. And that many of us here got in before these crazy prices and have the equity to put 50-60% down.

Bryan Breaux

New to Real Estate · Member since 2023 · 5 posts · 3 votes

I have similar thoughts as the OP. I don't own any STRs, and I'm convinced that some properties will cash flow at today's prices and rates. However, back of the envelope calculations show that the profit doesn't allow any scaling up in a reasonable amount of time.

Brian Barch

Member since 2022 · 272 posts · 253 votes

STRs have transitioned into the mature phase of the product lifecycle. It’s no longer the Wild West. Many people have been successful because of timing, not being a great operator. Those days are past us for the most part.

That said, it doesn’t mean you can’t find a profitable deal, or create one. But let me be clear, the last 3 years convinced people that you could buy a property and immediately replace 50% of your day job income. Traditionally, this has never been the case with real estate.

LTRs for instance have traditionally cleared $0- a few hundred/month in the early years of ownership.

I find this idea that unless you net $1500/mo that an STR is a bad idea to not be reasonable.

Also, many such as myself invest in vacation areas where I personally benefit from using the property and creating memories for my family. It takes some of the pressure off of viewing it as solely a money machine.

5 Reply

Account Closed

Real Estate Consultant · Franklin, IN · Member since 2012 · 80 posts · 71 votes

Agree with Brian. Interest rates and turn key prices aren't the only thing that make a good deal. Would you buy a Ferrari at 40% interest? No. But what if I sold it to you for $10k?

Exaggerated example, but there's a lot that can make a good deal, no matter your real estate investment preference.

Brooklyn McCarty

Investor · Member since 2022 · 1k+ posts · 754 votes

If you are buying in establish vacation markets, you’ll be fine!

2 Reply

January Johnson

Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 486 votes

"The more that an area becomes popular for STRs, the more likely the laws, fees, taxes will become increasingly burdensome."

Disagree 100%. Communities like mine are BENEFITING from the occupancy/bed/TDC taxes. They are certainly not making it more onerous to operate them.

January Johnson

Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 486 votes

"The more that an area becomes popular for STRs, the more likely the laws, fees, taxes will become increasingly burdensome."

Disagree 100%. My community BENEFITS from STR occupancy/bed/TDC taxes. They don't make it more onerous to operate them.

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

Just as in all areas of real estate, it always depends on the area and the specific property. Of course you can have a successful str. Is it harder than it was 3 years ago? Probably, in most areas but it is still a viable income model i m o..

Brent Huling

Member since 2020 · 38 posts · 35 votes

It is an interesting thing to look at. To give a comparison, I have a rental in the Palm Springs area. It is a cash cow. Purchased for $550k and could sell for $1M today 2.5 years later. It grosses around $200k per year. Would I buy this house now at $1M at 7%? No. If I did, could it still make money? Yes. I have made offers on at least a dozen houses over past year or so and most decent deals get bought out by investors. Last house I looked at, there were Bentleys, Mercedes, etc. up and down the street looking at a $700k house. Sold for around $900k cash and there were over 10 cash offers within a few days. Any good deal in this area now is cash only and if it can be a STR, it is going for a $200k premium with the investor crowd. Hard to find a deal that makes sense here right now. You would have to be extremely lucky, or some deep pockets. Just an example in one area.

OP

Member since 2022 · 10 posts · 1 vote

That is good feedback to know about for your area specifically, but it would be fair to see you disagree, but because there are many areas I could cite for example (several in Colorado where I live, Bend Oregon, etc) that the community is not interested in saturation of STRs, regardless of if they financially benefit, I think your disagreement might be slanted toward your geographic area of specialization. Many other areas don't want their community to be comprised of a high population of STRs. So, in the spirt of our conversation, going with your line of thought (I assume focused on coastal Florida), that has support of community and government for more STRs. However, doesn't that just mean it is a more saturated area, and wouldn't this combined with the other factors I mentioned in my orginal post make it a tougher area to get started in? In other words, am I wrong in thinking that investors are seeking more undiscovered areas with the other given challenge of interest rates, recent high appreciation, etc. Open to hear your thoughts.

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

Quote from @Chris Gerard:

That is good feedback to know about for your area specifically, but it would be fair to see you disagree, but because there are many areas I could cite for example (several in Colorado where I live, Bend Oregon, etc) that the community is not interested in saturation of STRs, regardless of if they financially benefit, I think your disagreement might be slanted toward your geographic area of specialization. Many other areas don't want their community to be comprised of a high population of STRs. So, in the spirt of our conversation, going with your line of thought (I assume focused on coastal Florida), that has support of community and government for more STRs. However, doesn't that just mean it is a more saturated area, and wouldn't this combined with the other factors I mentioned in my orginal post make it a tougher area to get started in? In other words, am I wrong in thinking that investors are seeking more undiscovered areas with the other given challenge of interest rates, recent high appreciation, etc. Open to hear your thoughts.

Yes I think that in order to maximize your profits, or maybe make any profits at all, a savvy investor needs to look for those undiscovered markets ....

OP

Member since 2022 · 10 posts · 1 vote

Quote from @Brent Huling:

It is an interesting thing to look at. To give a comparison, I have a rental in the Palm Springs area. It is a cash cow. Purchased for $550k and could sell for $1M today 2.5 years later. It grosses around $200k per year. Would I buy this house now at $1M at 7%? No. If I did, could it still make money? Yes. I have made offers on at least a dozen houses over past year or so and most decent deals get bought out by investors. Last house I looked at, there were Bentleys, Mercedes, etc. up and down the street looking at a $700k house. Sold for around $900k cash and there were over 10 cash offers within a few days. Any good deal in this area now is cash only and if it can be a STR, it is going for a $200k premium with the investor crowd. Hard to find a deal that makes sense here right now. You would have to be extremely lucky, or some deep pockets. Just an example in one area.

OP

Member since 2022 · 10 posts · 1 vote

Brent - this is a very helpful example. Palm Springs is a fun area I am visiting soon. I would think is pretty saturated. You got in at the right time, and now cash is king it appears, and investors are paying a premium. As much as I love short term rental idea, for me personally, I am thinking there are some very unpredictable erratic variables in the equation. I know people can suffer from paralysis from analysis, but when i look at the rapid extreme variability in all of these factors, my gut tells me unless you have mostly cash, then it may be prudent to sit tight on the idea of getting into the first one. If you're already in the game it's different.

Brent Huling

Member since 2020 · 38 posts · 35 votes

Quote from @Chris Gerard:

Brent - this is a very helpful example. Palm Springs is a fun area I am visiting soon. I would think is pretty saturated. You got in at the right time, and now cash is king it appears, and investors are paying a premium. As much as I love short term rental idea, for me personally, I am thinking there are some very unpredictable erratic variables in the equation. I know people can suffer from paralysis from analysis, but when i look at the rapid extreme variability in all of these factors, my gut tells me unless you have mostly cash, then it may be prudent to sit tight on the idea of getting into the first one. If you're already in the game it's different.

I would agree with that. Rentals are down this year compared to the last 2 in PS. Not a huge concern as I use this home to vacation when not rented. I know Bend well. I have one rental there and it does well, but bought a long time ago. I had an offer on a home last April for $1.6M. It would have penciled out, but maybe $75k year net at best. It already had a license, but wasn't being used and could be trasnferred. I could have added a basement and another 1000 sq. ft. of living space to add more equity. Just didn't feel right about it with the market changing last year and backed out on signing day. It sat for 3 months and went for $1.3M after, so I made the right call. It would have tied up a lot of capital and create a lot of stress. Wasn't worth it.

I will get a place in Bend next year, but I think I will have to do more of an Airbnbrrr. The $1.5M homes last year will be closer to $1M. In order to get a decent deal, I will have to do some upgrades, add some square footage, etc. to create the value. Problem with that are building permits are 6 months out there, so now you have holding time. Or rent for less for a while, shut it down for 2 months, and then rent for more, refi, etc. Not easy right now and everything is dependent on location.

Joel Case

Rental Property Investor · Ocean Springs, MS · Member since 2022 · 349 posts · 301 votes

No.

Brian Barch

Member since 2022 · 272 posts · 253 votes

Quote from @Chris Gerard:

That is good feedback to know about for your area specifically, but it would be fair to see you disagree, but because there are many areas I could cite for example (several in Colorado where I live, Bend Oregon, etc) that the community is not interested in saturation of STRs, regardless of if they financially benefit, I think your disagreement might be slanted toward your geographic area of specialization. Many other areas don't want their community to be comprised of a high population of STRs. So, in the spirt of our conversation, going with your line of thought (I assume focused on coastal Florida), that has support of community and government for more STRs. However, doesn't that just mean it is a more saturated area, and wouldn't this combined with the other factors I mentioned in my orginal post make it a tougher area to get started in? In other words, am I wrong in thinking that investors are seeking more undiscovered areas with the other given challenge of interest rates, recent high appreciation, etc. Open to hear your thoughts.

Not necessarily. Have you ever noticed that Home Depot and Lowe’s (or Menards) will often build store right across from eachother? It’s because of what is sometimes known as the “Mecca” strategy. Essentially creating a destination out of your offering that will benefit all parties involved. or go to the Wisconsin Dells/myrtle beach/Branson areas. More water parks and mini golf courses than you could ever imagine. The question becomes, if you want to open a mini golf course, are you better off being the 20th one in myrtle beach? Or the only one in small town South Carolina?

the answer is, it depends. Neither is wrong, but it depends on your strategy. Opening in myrtle beach is going to likely give you more potential, however your course has to be inherently better than the others. It’d be like buying an ugly 3/2 house without a view in the Smokey mountains.

OP

Member since 2022 · 10 posts · 1 vote

Brian, those are great thoughts. I guess kind of like having a food court at a mall. It's the mecca so although there are competing eateries, it brings the masses in that all have the intent to eat... I suppose the real art of investing in these is knowing what everyone else wants to know....which is, how much saturation in the mecca until the demand declines.

Brandon Gale

Rental Property Investor · Worcester, MA · Member since 2018 · 131 posts · 135 votes

@Chris Gerard I feel we are going through the same cycle with STRs as happens with all newer business strategies. At the "start" (3-5 years ago) it was a piece of cake. Anyone with any amount of experience could just throw 20% at any property in a vacation town and kill it, even with half *** analysis and mediocre management. But like with all other businesses, where there is money, there will be competition. What we are seeing now is a more normal market, where you have to analyze properties well, and be an excellent host to be successful. You actually have to be better than the rest to succeed in the space now.

STRs are still very profitable in many areas, theres just much much more competition to beat out. Sure, we aren't seeing 30%-50% ROI much anymore, but 20%-30% is still damn good.

I will say I agree on the point about laws and taxes, which is why I would stay away from any markets that do not rely heavily on strs for their economy.

Leslie Anne Morris

Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes

This is definitely a different time to 'get in.' You have to run your underwriting conservatively and account for all factors of what has changed in the last couple of years (prices higher/interest rates higher, etc). With that said, you can't just buy anything and make it work unless you want to lose money and have a second home. You also have to consider that ADR adverage daily rate is increasing (not on par with inflation, but close).

Michael BaumPro Member

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

Honestly, I am not sure why I am posting @Chris Gerard. Personally, I am here to provide advice and guidance on various issues surrounding STRs in general, not to convince someone to do it. You have to make that decision for yourself.

Like everyone said, STRs still have plenty of viability. You still have to hunt for deals, just have to be more diligent.

I really disagree with the laws, fees etc statement just like @January Johnson. You will find that the most visited areas are setup for STRs as it benefits the community. I have no problem with fees and taxes (if they are reasonable) as long as I work them into the numbers.

2 Reply

OP

Member since 2022 · 10 posts · 1 vote

Quote from @Michael Baum:

Honestly, I am not sure why I am posting @Chris Gerard. Personally, I am here to provide advice and guidance on various issues surrounding STRs in general, not to convince someone to do it. You have to make that decision for yourself.

Like everyone said, STRs still have plenty of viability. You still have to hunt for deals, just have to be more diligent.

I really disagree with the laws, fees etc statement just like @January Johnson. You will find that the most visited areas are setup for STRs as it benefits the community. I have no problem with fees and taxes (if they are reasonable) as long as I work them into the numbers.

Yes, the responses have been very helpful, however, appears to me the laws, fees, are dependent upon the area, some more favorable than others, such as Florida coast that January mentioned. As you can see from the thread, someone cited Palm Springs as an example where it is more difficult, and I know here in my county in Colorado, and certain in the research I found on Hawaii, there have been more challenges with some of the community not wanting STRs. So it seems as it varies place to place. Just a concern, and in bringing it up, seems like it would be a consideration for myself. On another note I think some folks have read into my post about being convinced. I would of course convince myself to invest in an STR, and I'm here posting to get guidance and advice, which you have done, so much appreciated.