Are vacation rentals still worth it?

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Are vacation rentals still worth it?

Collin HaysBusiness Member
Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes

As we return to the post-pandemic pace of supply and demand, investors are beginning to count the cost of operating a vacation rental, and if it is all really worth it.  Well written article here.  One huge factor not mentioned is rising interest rates:   If I finance $500,000 and have to pay 10 percent interest, I have to generate $50,000 per year just to cover the interest payment.  Two years ago, I might only need to generate $20K to pay the interest.   For all but the most exceptional deals, this is no time to be investing in anything that requires debt service.  


After an unpredictable summer, Airbnb and Vrbo operators are deciding if the headaches of hosting are worth it (msn.com)

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Zach Edelman
Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
3y

There are plenty of lending options for short-term rentals both conventional and non-conventional that are lending well under 10% interest. For example, I know for DSCR rates for short-term rentals currently, rates are typically anywhere from mid-7's to low 9's on a 30 yr note.

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  • John O'LearyPro Member
    Lender · Winter Park, FL · Member since 2021 · 738 posts · 412 votes
    3y

    Hello Collin,

    There's a lot to unpack here. Like most real estate investments location is paramount, and understanding supply and demand dynamics in the desired market is crucial. I also think a pivotal factor is the quality of the operator. Ensuring that the operator can offer a distinctive experience to vacationers can differentiate your property in an increasingly competitive space. If you identify properties in a market that isn't oversaturated and manage to provide that unique touch, there's potential for profitability.There are also DSCR financing options available for short-term rentals with rates hovering in the mid to low 7% range.

    [email protected]800-663-4122
    3Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Collin Hays:

    As we return to the post-pandemic pace of supply and demand, investors are beginning to count the cost of operating a vacation rental, and if it is all really worth it.  Well written article here.  One huge factor not mentioned is rising interest rates:   If I finance $500,000 and have to pay 10 percent interest, I have to generate $50,000 per year just to cover the interest payment.  Two years ago, I might only need to generate $20K to pay the interest.   For all but the most exceptional deals, this is no time to be investing in anything that requires debt service.  


    After an unpredictable summer, Airbnb and Vrbo operators are deciding if the headaches of hosting are worth it (msn.com)

    Good article, but yes as you say it leaves out the 30-60k extra interest on 500k/1m purchase new comers are paying. Essentially you are having the bank become a much bigger partner with you now. A little over a year ago when the fed first hiked I made a post that the punch bowl was being taken away and the party is over. The juice took a little longer to squeeze out as rates slowly crept higher but nonetheless here we are. Since rates have hiked I have not found one deal that made sense to buy here in the smokies. People buying 500k+ cabins at 10 percent which you still can’t really get anything below 500k and talk about adding value are facing a massive uphill battle.

    I’ve said before that the lower returns are going to push people to either sell or go to a property manager. People can justify doing this for a large pay day but once that is no longer the case and someone is answering guest messages on a property that they are losing money on or barely covering costs, that will get old really fast, and paying a 20 percent fee to not be associated with it will look much better and taking the loss will be the best option for them unless they sell, but some will be forced to not sell due to 6 figure loses. 

    the big promoters of self management are also the ones who don’t actually do it day to day and deal with guests. They pay other people to deal with the grunt work but they don’t openly tell you that. 

    1Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @John O'Leary:

    Hello Collin,

    There's a lot to unpack here. Like most real estate investments location is paramount, and understanding supply and demand dynamics in the desired market is crucial. I also think a pivotal factor is the quality of the operator. Ensuring that the operator can offer a distinctive experience to vacationers can differentiate your property in an increasingly competitive space. If you identify properties in a market that isn't oversaturated and manage to provide that unique touch, there's potential for profitability.There are also DSCR financing options available for short-term rentals with rates hovering in the mid to low 7% range.


     Where are these options available? An owner occupied conventional is over 7 percent now. Send me a private message with details please. 

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    Great time to pay cash for a STR....

    It is always a good time to do anything in Real Estate...it's just always about location, timing and finances...

    5Reply
  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y
    Quote from @John Carbone:
    Quote from @Collin Hays:

    As we return to the post-pandemic pace of supply and demand, investors are beginning to count the cost of operating a vacation rental, and if it is all really worth it.  Well written article here.  One huge factor not mentioned is rising interest rates:   If I finance $500,000 and have to pay 10 percent interest, I have to generate $50,000 per year just to cover the interest payment.  Two years ago, I might only need to generate $20K to pay the interest.   For all but the most exceptional deals, this is no time to be investing in anything that requires debt service.  


    After an unpredictable summer, Airbnb and Vrbo operators are deciding if the headaches of hosting are worth it (msn.com)

    I’ve said before that the lower returns are going to push people to either sell or go to a property manager. 


    The problem with selling right now is that you may end up bringing money, and perhaps a lot of it, to closing: If the cabin you paid $750K for and financed @ 5% APR is barely making numbers, what fool is going to pay more than $400K for it @ 9 or 10% APR?

    Reality is beginning to set in.  

    [email protected]806-672-7102
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  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y
    Quote from @Bruce Woodruff:

    Great time to pay cash for a STR....

    It is always a good time to do anything in Real Estate...it's just always about location, timing and finances...


     I don't know that right now is a great time, but it's coming.  

    [email protected]806-672-7102
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    1Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Collin Hays:
    Quote from @John Carbone:
    Quote from @Collin Hays:

    As we return to the post-pandemic pace of supply and demand, investors are beginning to count the cost of operating a vacation rental, and if it is all really worth it.  Well written article here.  One huge factor not mentioned is rising interest rates:   If I finance $500,000 and have to pay 10 percent interest, I have to generate $50,000 per year just to cover the interest payment.  Two years ago, I might only need to generate $20K to pay the interest.   For all but the most exceptional deals, this is no time to be investing in anything that requires debt service.  


    After an unpredictable summer, Airbnb and Vrbo operators are deciding if the headaches of hosting are worth it (msn.com)

    I’ve said before that the lower returns are going to push people to either sell or go to a property manager. 


    The problem with selling right now is that you may end up bringing money, and perhaps a lot of it, to closing:  If the cabin you paid $750K for and financed @ 5% APR is barely making numbers, who is going to buy it for more than $400K @ 9 or 10% APR?  

     Yes exactly. There’s only one way this ends, and that’s lower prices unless the fed reverses course quickly like the overall market has been “predicting” since they did their first hike. I was looking back at data, a year ago the market was pricing in fed funds to be below 3 percent at this point. We are now 5.5 and no abatement in sight. 

    The window has been closing quickly, and there are still a few people out there who think they are a guru and can make profits on 500k + purchases at these rates, I imagine by winter those people will no longer be there and it will be fully obvious to everyone by then. 

    The fed has no incentive to cut rates. Home values, stocks, and jobs are still strong. Any rate cut risks inflation spiraling back up and the fed knows that if this happens they lose all credibility and then we are stuck with high inflation for the foreseeable future. 

    The fed has made all of us look like Warren buffet in real estate. A decade plus bull market, most investors don’t know what a business cycle is because they have never seen one, and people are blinded thinking they are gurus. We are all taking the FED medicine now. It’s needed though. 


    5Reply
  • John O'LearyPro Member
    Lender · Winter Park, FL · Member since 2021 · 738 posts · 412 votes
    3y
    Quote from @John Carbone:
    Quote from @John O'Leary:

    Hello Collin,

    There's a lot to unpack here. Like most real estate investments location is paramount, and understanding supply and demand dynamics in the desired market is crucial. I also think a pivotal factor is the quality of the operator. Ensuring that the operator can offer a distinctive experience to vacationers can differentiate your property in an increasingly competitive space. If you identify properties in a market that isn't oversaturated and manage to provide that unique touch, there's potential for profitability.There are also DSCR financing options available for short-term rentals with rates hovering in the mid to low 7% range.


     Where are these options available? An owner occupied conventional is over 7 percent now. Send me a private message with details please. 


     Just sent a DM

    [email protected]800-663-4122
    0Reply
  • Sarah KensingerPro Member
    Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
    3y

    We're finding that LTR has the same problem, it's not just in the STR market. A good time to start learning how Pace Morby does creative financing!

    [email protected]330-557-3021
    1Reply
  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y
    Quote from @Sarah Kensinger:

    We're finding that LTR has the same problem, it's not just in the STR market. A good time to start learning how Pace Morby does creative financing!

    Probably also good time to park money in short terms treasuries and make 5-5.5% for doing absolutely nothing.  👀
    [email protected]806-672-7102
    SMOKY MOUNTAIN FALLS INC.51 Review
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    7Reply
  • Brian Barch
    Member since 2022 · 272 posts · 253 votes
    3y

    It's hard to apply peanut butter spread answers here.  It all depends on what one's motive is.  Are they getting personal use out of it?  Did they have false expectations of $1,000/mo cash flow?

    As a generality, I'd be more cautious buying an STR right now as there needs to be a small supply shake out, something that's not likely to fully run it's course for at least another year. That's not to say there aren't opportunities, but it feels like we are transitioning from the growth portion of the product life cycle curve, to the maturity portion.

    0Reply
  • Dave KushPro Member
    Frankfort, IL · Member since 2022 · 204 posts · 133 votes
    3y
    Quote from @John O'Leary:
    Quote from @John Carbone:
    Quote from @John O'Leary:

    Hello Collin,

    There's a lot to unpack here. Like most real estate investments location is paramount, and understanding supply and demand dynamics in the desired market is crucial. I also think a pivotal factor is the quality of the operator. Ensuring that the operator can offer a distinctive experience to vacationers can differentiate your property in an increasingly competitive space. If you identify properties in a market that isn't oversaturated and manage to provide that unique touch, there's potential for profitability.There are also DSCR financing options available for short-term rentals with rates hovering in the mid to low 7% range.


     Where are these options available? An owner occupied conventional is over 7 percent now. Send me a private message with details please. 


     Just sent a DM

    I would be interested in learning more. I just had a deal fall apart over an 8.8 interest rate last week. Feel free to send me a dm.
    0Reply
  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y
    Quote from @Dave Kush:
    Quote from @John O'Leary:
    Quote from @John Carbone:
    Quote from @John O'Leary:

    Hello Collin,

    There's a lot to unpack here. Like most real estate investments location is paramount, and understanding supply and demand dynamics in the desired market is crucial. I also think a pivotal factor is the quality of the operator. Ensuring that the operator can offer a distinctive experience to vacationers can differentiate your property in an increasingly competitive space. If you identify properties in a market that isn't oversaturated and manage to provide that unique touch, there's potential for profitability.There are also DSCR financing options available for short-term rentals with rates hovering in the mid to low 7% range.


     Where are these options available? An owner occupied conventional is over 7 percent now. Send me a private message with details please. 


     Just sent a DM

    I would be interested in learning more. I just had a deal fall apart over an 8.8 interest rate last week. Feel free to send me a dm.

     My son just qualified for a conforming 30 year fixed rate at just under 7% for owner occupied, with me as a co-signor.  I would be skeptical of hard money out there in the 7s or even 8s at this point.

    [email protected]806-672-7102
    SMOKY MOUNTAIN FALLS INC.51 Review
    WebsiteView Page
    1Reply
  • Sergei Gremeniuk
    Bloomington, MN · Member since 2023 · 17 posts · 13 votes
    3y

    I'm seeing a lot of open calendars on most comps in my area. If things stay the same way, inventory is going to increase. Get your financing in order and have good cash reserves to swoop in.

    1Reply
  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y

    Regarding rates...Looks like 30 year fixed, owner occupied as passed the 7.5% threshold today.   Investment loan rates have typically been 20 to 30 percent higher than that, so we should be in the mid to high 9s and even low 10s at this point.   That's a show-stopper.

    Mortgage Interest Rates, Mortgage Rates by State - Barchart.com

    [email protected]806-672-7102
    SMOKY MOUNTAIN FALLS INC.51 Review
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    2Reply
  • Yiwei Cheng
    Investor · Cincinnati, OH · Member since 2023 · 139 posts · 81 votes
    3y

    For me, it comes down to the numbers and my long term goals.  

    How much cash flow will the property generate?

    If there is a slowdown, do you have enough reserves to get through it for 1 year?

    My goal is to own property but it has to cash flow and I'm okay riding out the slowdown until rates come down or just breaking even for the short term as long as my expenses are getting paid.

    1Reply
  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    There are plenty of lending options for short-term rentals both conventional and non-conventional that are lending well under 10% interest. For example, I know for DSCR rates for short-term rentals currently, rates are typically anywhere from mid-7's to low 9's on a 30 yr note.

    13Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Zach Edelman:

    There are plenty of lending options for short-term rentals both conventional and non-conventional that are lending well under 10% interest. For example, I know for DSCR rates for short-term rentals currently, rates are typically anywhere from mid-7's to low 9's on a 30 yr note.


     Not sure how or why anyone would be lending commercial loans below the 8.5 percent prime rate. 

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Collin Hays:

    As we return to the post-pandemic pace of supply and demand, investors are beginning to count the cost of operating a vacation rental, and if it is all really worth it.  Well written article here.  One huge factor not mentioned is rising interest rates:   If I finance $500,000 and have to pay 10 percent interest, I have to generate $50,000 per year just to cover the interest payment.  Two years ago, I might only need to generate $20K to pay the interest.   For all but the most exceptional deals, this is no time to be investing in anything that requires debt service.  


    After an unpredictable summer, Airbnb and Vrbo operators are deciding if the headaches of hosting are worth it (msn.com)


     This is why :
    1. STR is more like hotel business with huge impact from economic tailwinds
    2. STR is more useful when it's combined with our targeted retirement planning, if you want to retire in Smoky for example, no need to invest in Indiana.
    3. Supply and Demand metrics for STR is more important than the projected gross revenue.

    1Reply
  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y
    Quote from @Zach Edelman:

    There are plenty of lending options for short-term rentals both conventional and non-conventional that are lending well under 10% interest. For example, I know for DSCR rates for short-term rentals currently, rates are typically anywhere from mid-7's to low 9's on a 30 yr note.


    Mid 7s is factually incorrect, unless you are counting 4 or 5 points.  There are a lot of folks seeking honest information on this forum.  Let's do our part in providing that.  

    [email protected]806-672-7102
    SMOKY MOUNTAIN FALLS INC.51 Review
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    0Reply
  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y
    Quote from @Yiwei Cheng:

    For me, it comes down to the numbers and my long term goals.  

    How much cash flow will the property generate?

    If there is a slowdown, do you have enough reserves to get through it for 1 year?

    My goal is to own property but it has to cash flow and I'm okay riding out the slowdown until rates come down or just breaking even for the short term as long as my expenses are getting paid.


    How much cash flow does your 401K produce?  

    [email protected]806-672-7102
    SMOKY MOUNTAIN FALLS INC.51 Review
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    0Reply
  • Chris McCue
    Property Manager · DFW, TX · Member since 2023 · 9 posts · 11 votes
    3y

    Honestly to me this just comes down to the typical old phrase of making the money when you buy the property. What is your plan B if the short term rental market in that area is blown out the water by new city ordinance's? You can't go into an investment that only has one path to success. What other exit strategies do you have built into that property? It's just like flipping a house you can't solely rely on one path saving you, you have to analyze the property for multiple situations and see if it makes sense. 

    What's your END GOAL with getting into short term rentals? Once you can clearly and honestly ask yourself that question and come up with a deep answer then you will have a better plan of attack. Starting with that end in mind (and no to be rich isn't a deep answer) then you can work backwards and see those boxes that need to be checked off for a property to fit your criteria. 

    Really the short term rental market should be a tool in your belt but not your belt. I feel like so many people want to be in the short term rental business because as a society we've moved to this instant gratification model where we watch 30 second clips online and think we've learned something. People see these clips of others talking about how they make all this money a month are STR platforms and flash how they have no money in the deal and think they found the golden ticket. What you aren't seeing is these people are just glorified property managers that have no risk in the mortgage and aren't building wealth. Sure there is always a place for a great property manager but don't get them mistaken for a wealth building investor. The STR property manager that sole investment portfolio relies on those STR's can lose it all overnight with the strike of a city ordinance.

    So ask yourself is your goal to build wealth with short term rentals and real estate or is it to just increase your riches? Both are fine but each has a different path and criteria for that investment...

    1Reply
  • Michael SmytheBusiness Member
    Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
    3y

    A lot of novice STR investors will be "hitting the panic button" soon as bookings/rates continue to fall.

    Logical Property Management4.9455 Reviews
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  • Brooklyn McCarty
    Investor · Member since 2022 · 1k+ posts · 754 votes
    3y

    Trying to time the market is like paying the lottery. 

    As long as you know your numbers then you are good to go 

    0Reply
  • Louis Jeffries
    Lender · Chicago, IL · Member since 2010 · 149 posts · 127 votes
    3y

    In the past and through the pandemic STRs were the hottest investment. almost every property was a good deal. No so now. Like any other investment you must know your market and buy right. In some markets people were paying above market value because the believed the return would justify it. That never made sense to me.

    My advice as a lender who has financed hundreds of STR properties.

    1) Invest in a good and stable market that the local laws are not restrictive of STRs

    2) Make sure your numbers make sense, Evaluate the property as a long term rental with a gross profit of 25% or more. If you are in a good market for STRs you will be successful

    3) Get prequalified long term rates are not 10% for DSCR loans, they may be 7% to 8% in todays market.

    4) Consider BRRRR

    0Reply
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