Looking for advice to either continue my STR or sell

OP

Member since 2022 · 24 posts · 5 votes

2y

Hi Michael, thank you for the advice. As for how long I've lived in the home, it's only been since December of 2022. So, it's technically been one full year as of last month. I think in this situation, it wouldn't be tax free, unfortunately.

I have been considering taking whatever profit from selling it and investing in a duplex or 4 plex once the rates dip later this year or early next year. I will need to do some more research into them and the area I'm moving to. And yes, it's been both rewarding and challenging to live in a home with a rotating cast of renters.

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

2y

You didn’t mention what you paid for it. If you have a “large” gain (say over $100k after selling costs) and don’t want to do a 1031 exchange you should not close on the sale until December 2024 to make the profit tax free. (Figuring you’d save at least $30k in taxes per $100k.) Unless you think the property will sell for much more in the summer than winter though I assume it’s not a big swing in Atlanta especially if rates drop later in the year.

Shouldn’t the lodging tax and the cleaning fees be paid by the renter? (To increase income numbers). Also don’t forget that more than $700 of your mortgage payment is going towards principle. So that’s not an expense and is basically the same as cash in your pocket, so add that to the income ledger. I’d still sell in December but it would help you to hold on.

2 Reply

OP

Member since 2022 · 24 posts · 5 votes

2y

Hi Bill, thanks for the feedback. I bought the home for $859k and I put $100k down. Seems like holding to sell until December makes the most sense.

As for lodging, I think you're right that it's already taken out via Airbnb. Once I list the entire home, I believe you're right that I could include a cleaning fee. I haven't for my current room listings, as I've done most of the cleaning myself, and I saw fewer bookings when I included cleaning fees.

Michael BaumPro Member

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

2y

Man I need to read better...sorry @Jacob Lockard. I read that exact thing and didn't put it together.

@Bill B. is right. Can you hold off until Dec of this year?

Take a look at the possible tax implications (if you don't 1031) of the sale vs losing a bit each month on a LTR for a year.

OP

Member since 2022 · 24 posts · 5 votes

2y

No worries Michael :) I think that's where I would need to figure out what my next step would be if I hold until December of next year to sell.

To your point, at least renting it long term until then might be my best bet in bringing in consistent rental income, rather than an inconsistent and more costly short term rental.

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

2y

If you bought in December 2022 you only need to hold until this December to avoid the taxes. (2 years). BUT… if you paid $859k you can probably just sell asap. If you sell for $925k (the middle of your 2 estimates). You’ll pay about $60k to sell and only net $865k. If so, you’ll only “profit” $6k and owe $1k in taxes. (Even though you have $149k left after paying off mortgage.)

[email protected]330-557-3021

Sarah KensingerPro Member

Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes

2y

I wonder if it would be good to talk with some other STR operators in the Atlanta area and get their opinion about your situation. They would know the market and about what your property could do. Lastly don't base the "party situation" off the old PM. There are many different systems, process, and pricing strategies to keep those type of people from staying at your property, or even having a party to begin with. I'm suspicious it was a PM problem and not so much a sq footage problem.

2 Reply

OP

Member since 2022 · 24 posts · 5 votes

2y

Thank you @Bill B., that breakdown makes a lot of sense and gives me some financial clarity if I decided to sell now.

OP

Member since 2022 · 24 posts · 5 votes

2y

@Sarah Kensinger You make a great point that it very well could have been that the previous PM wasn't as experienced as they could have been. I have been thinking a lot about how hiring the right PM might help me out in many ways, in all of the points you've outlined.

I think your idea of talking with STR operators in Atlanta makes a lot of sense, I am already on many FB groups. I will bring the conversation to them.

[email protected]330-557-3021

Sarah KensingerPro Member

Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes

2y

Quote from @Jacob Lockard:

@Sarah Kensinger You make a great point that it very well could have been that the previous PM wasn't as experienced as they could have been. I have been thinking a lot about how hiring the right PM might help me out in many ways, in all of the points you've outlined.

I think your idea of talking with STR operators in Atlanta makes a lot of sense, I am already on many FB groups. I will bring the conversation to them.

Sure! Also, there's a monthly meet up that I think might be this week...STRategic Invester.

OP

Member since 2022 · 24 posts · 5 votes

2y

@Sarah Kensinger Thank you for sending this link along. I will definitely be attending.

[email protected]330-557-3021

Sarah KensingerPro Member

Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes

2y

Quote from @Jacob Lockard:

@Sarah Kensinger Thank you for sending this link along. I will definitely be attending.

Anytime! If you talk with Kyle or Allie Fugatt, tell them I said hello...they are the masterminds behind getting STR hosts/investors together in Atlanta.

OP

Member since 2022 · 24 posts · 5 votes

2y

@Sarah Kensinger Will do :)

John UnderwoodPro Member

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

2y

Sounds like the best option is to sell this one.

If you move out this summer, you're not going to get the owner occupant tax savings like you would if you hold out for the 2-year mark.

OP

Member since 2022 · 24 posts · 5 votes

2y

@John Underwood It could be the better option to sell, I agree. Unless I rent the home long term for $5k a month and take on and extra $500 out of my own pocket until rates go down and I refinance or rents increase enough to even out or better.

And that's a great point about owner occupant tax savings, it would benefit me to at least hold out until December.

Jon Metcalf

Member since 2019 · 1 post · 0 votes

2y

The thing is ,you would technically have to be an occupant until Dec, although I won’t tell…

Lisa Marie

Member since 2021 · 56 posts · 120 votes

2y

@Jacob Lockard I have a somewhat contrarian view on this topic.

If you look at this as a regular business, its revenue is $82k, and its expenses are $41k, so the gross profit is $41k. That's not bad. If somebody tells you "give me $3400 every month, and at the end of the month, I will give you $6800 back", you will of course jump at this deal. Your house is basically giving you this deal, except there is a catch -- in order to make that kind of money, you need to put up $860k cash upfront. So your decision is: do I borrow the money at 6% (subsidized by the tax deduction, which work out to be more like 4.5~5%) to make that investment or do I pass?

In order to make that decision, you have to consider your own financial situation. What's your total income vs expense (outside the house)? Can you find a way to squeeze some cash flow from other areas of your life to fund the loan payment? Do you also have money set aside for major expenditures on the house? If you can manage the cash flow and if you have a reasonably long term perspective, I would recommend that you keep the house and use it for STR. Keep in mind that the mortgage payment covers the principal as well as the interest charge. And, unlike other business like pizzeria or hair salon, the underlying asset of this business is guaranteed to appreciate in value over time.

You were doing the calculation based on the assumption that the income from STR has to cover the expenses AND the mortgage payment. That may be feasible pre-COVID, but it's not realistic now. Almost all the STR properties are priced at around 10x multiple of their gross annual revenue, which puts your house right at average ($859k sale price for $83k annual revenue). In other words, if you are selling this house to another investor, he/she will have the same financial calculation -- their income won't cover the expense + mortgage payment either. But they are willing to do this deal, because they are willing to be cash flow negative for a while in exchange for the future gains.

Having said all that, if you really cannot come up with the extra money to pay the mortgage, you have another possible option -- rental arbitrage. Find an experienced STR operator who is already managing properties in the area. Instead of hiring that person as the PM, propose to rent the house to him as a LTR. Charge him $5500 a month which is the same as your mortgage payment. So you will break even but eventually (after 30 years) will have a fully paid off house. He will have a built-in expense of $81000 ($66k rent payment to you, $25k operating expense). If he does a mediocre job and makes $83k as Air DNA projected, he will barely break even, but if he believes in himself and is willing to put the money where his mouth is, he can improve the performance and maybe make $93k or $103k gross. He gets to keep all the extra profit. That will be a win-win and that's how a real arbitrage is supposed to work.

OP

Member since 2022 · 24 posts · 5 votes

2y

@Lisa Marie Thank you for the thoughtful contrarian feedback :)

In regards to my financial situation, I do have a few hundred dollars of cash leftover after expenses (and mortgage) are paid each month. And I have $19k saved from the first year's rental income for expenditures. So, I don't have concerns that I won't be able to fix something or cover the current expenses for 2024. And as for perspective, I initially bought the home to buy and hold. And I agree that from a business perspective, the appreciation is worth it in the long term.

Thank you for putting the STR income into perspective. It's nice to have your insight on the current state of financial expectations for STR properties. I agree that the value of future gains outweighs the negative cash flow.

I hadn't thought of rental arbitrage. That's a great creative idea to propose it as a long-term rental, as opposed to the typical arbitrage terms. Do you know of anyone who has done this successfully?

Neal Z.

Miami · Member since 2013 · 42 posts · 24 votes

2y

Would house do better as a single rental and not by the room?

Concerns with parties can be mitigated with cameras, noise monitoring, not renting to locals, etc. You'll be able to jump on issues quick. I'm sure you've built a relationship with your cleaning staff so you'll have photos consistently for how the property is looking. There's a hurdle to overcoming the stress with your first place operating from afar, but this subsides fairly quickly as you realize no problem is insurmountable. Just roll with the punches and my guess is, they are few and far between. Bulk of your stays won't be an issue.

Make friends with your neighbors. Pay them a bit to take your trash out and keep an eye on things. They'll be happy you care about them.

In regards to selling it, would only do that if you're sitting on bunch of equity. Otherwise you did all that work learning the game to walk away with very little.

STR's historically have been feast and famine at times. No one can predict how well it'll perform. Any estimates are like +-50%. AIRDNA has it's place, but it's no crystal ball. Some years blow your mind, others are a grind.

2023 was especially tough for many. Huge ramp up in listings from 2021-2022 so this increase in supply outstripped demand. Everyone took at hit. The market will work itself out. You're not the only one thinking about selling and getting out. It's something everyone is chewing on. But, I've been in the game long enough to know if you stick around, you'll be the one reaping the rewards while those who got out when it got tough, are kicking themselves for not holding out for better times.

Only you know your actual financial situation and you don't want to bury yourself either if #'s definitely won't work. Maybe there's a situation where you can rent it long term to someone if things get challenging. Or, rent to an operator who does rental arbitrage.

John Mausteller

Real Estate Agent · Outer Banks, NC · Member since 2019 · 168 posts · 116 votes

2y

I agree with others - not a fan of getting rid of properties but with you potentially losing money and being out of state - it seems the way to go is to sell. Potentially buy something wherever you are moving and STR there or house hack.

Theresa Holl

Investor · Minneapolis · Member since 2023 · 265 posts · 161 votes

2y

Hey Jacob, I'd love to learn more about how you've been running it. Have you had a marketing audit lately? Events and gatherings should be good money.