Cash flow vs building equity with STR's

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Cash flow vs building equity with STR's

Heidi Nikolai
Member since 2023 · 2 posts · 3 votes

Hi all,

I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

Thanks in advance!

Heidi

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3y
Quote from @Heidi Nikolai:

Welcome to the BiggerPockets forums!

There's definitely an increase in short-term rentals, but you also bought right at the peak of the market. Once States opened up from COVID restrictions, everyone wanted freedom and everyone had extra money in their pocket. In 2021, every single camp site in or around Cody, Wyoming was jam packed. I mean 100% full and people driving around looking for places to stay. @Luke Carl came to town and can attest. He came back to town in 2022 and there were plenty of spots. Visit this year and you'll see it's back to 2019 levels, which means things are full around certain holidays like Memorial Day or Independence Day, but spots are available all other times.

The way I see it, you have two choices: stick it out or cut bait and run. I think a lot of people are in the same boat as you and will be cutting bait over the next 2-3 years. If you are able to hang on and get through the tough times, you'll improve the business and you'll be happy you hung in.

I don't know many people that look back and regret keeping a property through difficult times, but I know a lot of people (myself included) that regret selling a property.

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Hey @Heidi Nikolai, need more info. Where is the STR located? Could it be due to seasonal nature of the rental?

    You could be staring at what a normal STR year is like for you. COVID drove a lot of folks out to our vacation rentals. Many did better than previous years.

    Seeing as you bought during the high time of STRs, this could be the norm for your area.

    Post more info about the house so we can evaluate.

    1Reply
  • Heidi Nikolai
    OP
    Member since 2023 · 2 posts · 3 votes
    3y

    The rental is located in Idaho Falls, ID and yes it is very seasonal because most of my traffic is for Yellowstone & Grand Teton National Parks. However I started to see the drop off last July and there are way more STR's on Airbnb now. And yes, having it rented for only two years makes it difficult to evaluate because I did start renting it out when people seemed to be traveling to more rural areas or places that had less covid restrictions.

    2Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    Do you think the market will improve?

    By people selling their STR's or prices going up?

    Would the numbers work better as  MTR or LTR?

    1Reply
  • Matt Owens
    Investor · Coeur d'Alene, ID · Member since 2023 · 20 posts · 15 votes
    3y

    Hey Heidi, 

    I own one STR and a PM company in North Idaho. You touched on my first thought which is driving Yellowstone and Teton traffic. Have you used social media and created a brand for the property to try and stand out? If you want to drop a link to your listing, I'm sure quite a few people will be happy to review and provide feedback. I try not to reduce my pricing too drastically, even with saturation from competitors. Instead try matching/adding amenities to stand out and promote on social. How about the Yellowstone FB groups? Good luck!

    0Reply
  • Tim Bee
    Investor · CA · Member since 2023 · 196 posts · 107 votes
    3y

    It's all about cash flow.  Building equity is a gamble.  If you are a wealthy high end buyer that's a different game.  If you are buying homes under a Mil then stick to cash flow.  Just follow the 1% rule

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Heidi Nikolai:

    Welcome to the BiggerPockets forums!

    There's definitely an increase in short-term rentals, but you also bought right at the peak of the market. Once States opened up from COVID restrictions, everyone wanted freedom and everyone had extra money in their pocket. In 2021, every single camp site in or around Cody, Wyoming was jam packed. I mean 100% full and people driving around looking for places to stay. @Luke Carl came to town and can attest. He came back to town in 2022 and there were plenty of spots. Visit this year and you'll see it's back to 2019 levels, which means things are full around certain holidays like Memorial Day or Independence Day, but spots are available all other times.

    The way I see it, you have two choices: stick it out or cut bait and run. I think a lot of people are in the same boat as you and will be cutting bait over the next 2-3 years. If you are able to hang on and get through the tough times, you'll improve the business and you'll be happy you hung in.

    I don't know many people that look back and regret keeping a property through difficult times, but I know a lot of people (myself included) that regret selling a property.

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    3Reply
  • Konstantin GinzburgPro Member
    Member since 2021 · 376 posts · 242 votes
    3y
    Quote from @Heidi Nikolai:

    Hi all,

    I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

    Thanks in advance!

    Heidi

    I am in a similar situation. I bought my STR in New Orleans a year ago and noticed that the booking rates I was getting were less than I was anticipating. Many other STR owners in the area that I have talked too have also said that their bookings were down a lot this year. I am still in a position where I am getting healthy enough cash flow on the property so I intend on keeping my investment for the long term but I know many who bought in this market will need to sell in the next few years since the revenue doesn't offset their costs. As @Nathan Gesner had said; after covid opened up, there was a sudden rush of people who wanted to travel and caused a spike in tourism which has since died down. At the same time, many people jumped into the STR market hoping to capitalize. As more of these new owners leave the market, I think there will be a rebound in STRs that are still able to offer a quality experience to guests. My current strategy is to improve my own listing as much as I can and see how the market balances out in the next 1-2 years. I also offer MTRs stays during off-season months. 

    2Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    3y
    Quote from @Heidi Nikolai:

    Hi all,

    I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

    Thanks in advance!

    Heidi

     Welcoem to BP!

    There's not enough info here to directly answer your question, but I can guarantee that you are not alone. This is happening with STRs in most markets across the country. 

    A couple things I'd consider:

    -Does it work as an LTR? Even if the cash flow is less, it is significantly more passive to run an LTR than a STR and your income will be stabalized rather than having to worry about nightly rates and occupancy.

    -What is the best way to tap in to your equity? You really have two choices- 1031 and move it in to a property that better suits your goals OR HELOC and leverage it in to another property. There's no wrong answer, but with a 1031 you'll end up with a higher interest rate, so take that in to consideration.


    Congrats on having that equity in the first place- if may not feel like it right now because of your unpredictable income, but many people on these boards would love to have that equity to play with, you're already winning, just have to figure out how to maximize your gains and make your next move. 

    Best of luck!

    1Reply
  • Sarah KensingerPro Member
    Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
    3y

    I was just in Idaho Falls pretty much a year ago and stayed in a large cabin with some extended family to see Yellowstone! Frankly you are in a PERFECT location for a short-term rental! Yellowstone gets millions of visitors each year and all those people need a place to stay, and from what I remember there is hardly any hotels which gives you a major advantage. Plus, people want cabins/STR at national parks not a hotel, it's all about the experience and they want it all especially for social media! Right now, national parks are a huge attraction and not just with our own country, thousands of people come from other countries to see our parks. I had to book a place.... granted a needed a larger cabin...6+ months in advance out there. As we waited for the ferry on Jenny Lake at Grand Tetons, people were talking about how hard it was to find lodging because they waited to long and everything was clear booked. Some had to rent ridiculously expensive tiny homes or drive a good way to where they had lodging!

    I would love to see the listing and see your STR! I wonder if you reevaluated your property, add some different amenities and stop lowering the price, you might see some bookings roll in. To be honest I hesitant to book a property less than $100 in a major vacation market unless it's a last-minute booking, because I have found that those properties are very much "value STR". If there's anything I can help you with, please few free to reach out!

    [email protected]330-557-3021
    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Heidi Nikolai:

    Hi all,

    I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

    Thanks in advance!

    Heidi


    To sell or not we need to forecast the future projection based on zip code, house configuration and market trends, without that factor it's almost impossible to answer.

    For example, my best answer for bay area: if you have condo now, most likely it is overappreciated by now; then sell. But if you have luxury 5/2 with > 1500sqft house, do not sell until 2027.
    0Reply
  • Chad McMahan
    Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 754 posts · 504 votes
    3y
    Quote from @Heidi Nikolai:

    Hi all,

    I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

    Thanks in advance!

    Heidi

    Hi Heidi!
    This is a very common problem right now. Most STR owners were successful before- but they are struggling now. My best advice (And I do a LOT of STR's), is to consult with a STR specialized real estate agent AND a really freaking good STR property manager in your area- have them come out, boots on the ground at the property, and make recommendations to significantly boost your occupancy and your ADR.
    You will likely need to spend some money to polish it, so it markets better and/or sell it and buy something more unique.

    I'd love to be able to give you other great advice on specific improvements. I know my area quite well, and what works here. I won't pretend to know your area and what works there.

    Good luck!

    0Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    3y

     @Corby Goade do you or anyone else know of lenders who will HELOC against an investment property? Thank you in advance.

    0Reply
  • Don SpaffordPro Member
    Investor · Idaho Falls, ID · Member since 2016 · 935 posts · 629 votes
    3y

    @Heidi Nikolai I am in Idaho Falls. I have seen many STR do very well here. I am not personally myself in the STR market but there could be a few things to consider. How is your property being marketed to stand out from others? What do you offer above just a place to stay? The STR that have been in my neighborhood, literally across the street from me, have done well and aren't your typical Yellowstone travelers. But large families coming here for other events or gatherings or even corporate stays that will rent it out for a few weeks at a time. This property specifically did well as a 5 bed 3 bath home because it was able to sleep 17! They had bunkbeds and it was a corner lot so lots of parking room aside from the garage, has a fenced yard w/ firepit. They had it set with electronic locks so that they could assign a pin for gusts to use at the doorpad or from an app.

    They did sell that house a couple years ago. I now manage it as a LTR for the current owners who moved away but wanted to keep it. But that house was not unique. But if you are looking specifically to target the Yellowstone visitors, you may want to look into moving closer to Yellowstone, like Island Park or even Driggs/Victor for the Tetons and Jackson.

    My wife has helped other STR buyers to find properties in these locations that work well there. They are more expensive in those areas usually $800k and up you should expect. But there are lenders available to get properties with just 10% down. Ideally if you sold that current property and came out with at least $100k you could possibly buy one of those more expensive properties to be closer to Yellowstone. Even with a higher cost, you may get more traffic and be able to charge higher rates to make up for it. And in winter people still stay at them for skiing and other family gatherings.

    We'd be happy to talk and help with anything you would like to do and have some boots on the ground for you.

    0Reply
  • Melissa Nash
    Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes
    3y

    As a believer of "holding for wealth" there are a few things that are happening for profit centers on your real estate that you might not be looking at. 

    1. If you are at least breaking even, your mortgage is being paid down by the guests, so equity is going down

    2. appreciation is most likely happening faster than inflation (depending on your market for that rate) we know real estate always goes up over time. 

    3. Tax beneifts; if you are not using the STR loophole I recommend you look into it. (huge tax savings)

    4. Hedging inflation buy using leverage: Your loan is being paid down each month and inflation is going up. 

    5. Lastly is cashflow- this should be your last category item. 

    You are winning even if you are just breaking even. Hold for long term wealth. 

    1Reply
  • Stephen KeigheryBusiness Member
    Rental Property Investor · New Orleans, LA · Member since 2018 · 717 posts · 555 votes
    3y
    Quote from @Konstantin Ginzburg:
    Quote from @Heidi Nikolai:

    Hi all,

    I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

    Thanks in advance!

    Heidi

    I am in a similar situation. I bought my STR in New Orleans a year ago and noticed that the booking rates I was getting were less than I was anticipating. Many other STR owners in the area that I have talked too have also said that their bookings were down a lot this year. I am still in a position where I am getting healthy enough cash flow on the property so I intend on keeping my investment for the long term but I know many who bought in this market will need to sell in the next few years since the revenue doesn't offset their costs. As @Nathan Gesner had said; after covid opened up, there was a sudden rush of people who wanted to travel and caused a spike in tourism which has since died down. At the same time, many people jumped into the STR market hoping to capitalize. As more of these new owners leave the market, I think there will be a rebound in STRs that are still able to offer a quality experience to guests. My current strategy is to improve my own listing as much as I can and see how the market balances out in the next 1-2 years. I also offer MTRs stays during off-season months. 


    New Orleans had an increase in supply and less bookings per STR last year. What zoning is your STR? All the rules for residentially zoned STR's just changed which should reduce supply. They are having a meeting tomorrow and looking to limit commercially zoned STRs as well. My STR is commercially zoned so I will be at City Hall trying to make my case. We will see what happens with that. 
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  • Konstantin GinzburgPro Member
    Member since 2021 · 376 posts · 242 votes
    3y
    Quote from @Stephen Keighery:
    Quote from @Konstantin Ginzburg:
    Quote from @Heidi Nikolai:

    Hi all,

    I am looking for advice on STR's and cash flow. I bought my first STR two years ago and did very well my first year and a half. However, now the STR market in my area is flooded with inventory which drove down both my occupancy and my rate. I went from $150-$250 per night down to an average of $87 in the last four months. Between the mortgage, utilities, cleaning costs, ect I am usually just breaking even each month. I have about $80,000-$100,000 of equity in the house already, along with a very low interest rate. I am wondering if it would be worth it to hang onto this property and continue to build equity until the market improves, or interest rates decrease, and I can sell to find a more suitable market to invest in. I am not losing money at this point, but I am not sure when I should pull the plug. This was my first investment property and the first time I am finding myself at the "hold or sell" stage.

    Thanks in advance!

    Heidi

    I am in a similar situation. I bought my STR in New Orleans a year ago and noticed that the booking rates I was getting were less than I was anticipating. Many other STR owners in the area that I have talked too have also said that their bookings were down a lot this year. I am still in a position where I am getting healthy enough cash flow on the property so I intend on keeping my investment for the long term but I know many who bought in this market will need to sell in the next few years since the revenue doesn't offset their costs. As @Nathan Gesner had said; after covid opened up, there was a sudden rush of people who wanted to travel and caused a spike in tourism which has since died down. At the same time, many people jumped into the STR market hoping to capitalize. As more of these new owners leave the market, I think there will be a rebound in STRs that are still able to offer a quality experience to guests. My current strategy is to improve my own listing as much as I can and see how the market balances out in the next 1-2 years. I also offer MTRs stays during off-season months. 


    New Orleans had an increase in supply and less bookings per STR last year. What zoning is your STR? All the rules for residentially zoned STR's just changed which should reduce supply. They are having a meeting tomorrow and looking to limit commercially zoned STRs as well. My STR is commercially zoned so I will be at City Hall trying to make my case. We will see what happens with that. 

    I have a residentially zoned STR. I was active in city council when they were deciding the new legislation. I can't say that I am thrilled with the choices they made but I am currently in manageable condition to adjust to the new changes. Luckily I am only one of 2 STRs on my block which means I should either be able get the lottery license or one of the safety valve license's. Good luck with the council session tomorrow. I hope the legislation they decide on will be fair. The best advice I could present is to get as many STR owners to attend those in person to leave public statements. Almost all of the residential city council meetings had a very large contingent of anti-STR personnel that were well organized and were able to present a unified display.

    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Hey @Heidi Nikolai, you got yourself a lot of answers!

    If you post your listing we can get a gander at it and see if there are improvements to the wording of the ad or interior upgrades that make sense.

    0Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    3y
    Quote from @Jon Martin:

     @Corby Goade do you or anyone else know of lenders who will HELOC against an investment property? Thank you in advance.


     I do- there are actually quite a few, depending on how the economy is going, many lenders offer them or pull them. Feel free to DM me.

    1Reply
  • Brian Barch
    Member since 2022 · 272 posts · 253 votes
    3y

    Do you enjoy being a host? What are your long term real estate plans? Do you enjoy personal use of the property?


    to me this isn’t just a financial equation. However, from a financial standpoint if it’s at least breaking even, I’m in favor of keeping it for the long haul, as I’m in the buy and hold camp with real estate.

    0Reply
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