Are Loan rates so bad that a first time STR buyer really should steer clear?

Branson, Missouri
Short-Term & Vacation Rental Discussions
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Are Loan rates so bad that a first time STR buyer really should steer clear?

Chris Allen
Republic, MO · Member since 2024 · 10 posts · 4 votes

I put Branson because that is what I am near, but I am interested in lots of areas, mainly Florida.

Are rates really so bad right now that a first time STR buyer with 20% Down should not even try? Based off the numbers from AirDNA and others, when I plug them into a calculator, it looks like I am out of pocket whether paying for management or not. Is that what everyone is seeing or am I missing something. I am figuring on a 360 month loan at 7.5%.

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Ken Boone
Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
2y

Chris, 

The problem is not just that the rates are higher.  Reality is that these rates we have had the last couple of years were historically low.  But again that is not the only issue.

There are many issues here. Too many people jumped in to the STR market when it was near its peak in 2021-2022 causing many places to be saturated. Then we had people with FOMO still buying at high interest rates at super high prices through 2023. Now with the increased supply of STRs, and less demand, everyone is dropping prices to compete. There is more competition and lower ADR. Lower ADR and lower occupancy combined with the higher interest rate is what is really making most STR deals not work out.

Having said that, it depends on what your goal is.  If it is to cash flow... uh think again for 95% of the deals out there.  If it is to have a vacation home that someone else helps pay for then maybe.  

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  • Ko KashiwagiPro Member
    Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
    2y

    Hi Chris,

    Yes deals are a lot more difficult to pencil out due to the interest rates, and a lot of people are putting more down (30-35%) to make the numbers work. Deals are still out there for 20% down, but they're just harder to come by. Airbnb is also very region specific, so picking a place with low vacancy (high demand) is very important.

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    1Reply
  • Chris Allen
    OP
    Republic, MO · Member since 2024 · 10 posts · 4 votes
    2y

    Thanks Ko!  That at least puts it in perspective for me as I determine how to break into the market.

    0Reply
  • Ken Boone
    Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
    2y

    Chris, 

    The problem is not just that the rates are higher.  Reality is that these rates we have had the last couple of years were historically low.  But again that is not the only issue.

    There are many issues here. Too many people jumped in to the STR market when it was near its peak in 2021-2022 causing many places to be saturated. Then we had people with FOMO still buying at high interest rates at super high prices through 2023. Now with the increased supply of STRs, and less demand, everyone is dropping prices to compete. There is more competition and lower ADR. Lower ADR and lower occupancy combined with the higher interest rate is what is really making most STR deals not work out.

    Having said that, it depends on what your goal is.  If it is to cash flow... uh think again for 95% of the deals out there.  If it is to have a vacation home that someone else helps pay for then maybe.  

    5Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    2y

    Imagine it is 1981 and rates were 18%. Do you think any type of investor should have stayed away because rates were so high?

    Median Home Price 1981: $66,000

    Median Home Price 1985: $86,000

    Median Home Price 1989:  $124,800

    Median Home Price 1993: $127,000

    Median Home Price 1997:  $144,000

    There is always reasons not to buy. The reality is prices keep going up. (OR in another view point, real estate values stayed the same, and the dollar keeps losing value). 

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  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 4k+ posts · 3k+ votes
    2y

    Hey Chris!

    High rates definitely do not help when considering whether to invest now.  Also as noted above, some markets being saturated.  I am in the Tampa market as an investor, broker, and property manager.  What I have been guiding my new clients toward is to find deals that cashflow (not too difficult if self managing, tougher but not impossible with management).  Your cashflow will be minimal but not insignificant.  The idea is to be breakeven+ right now and gather appreciation over the next 2-5 years and then pull a refinance and increase cash flow at that point.

    It also matters the purchase point.  Larger, more unique do better.  Run of the mill 3/2 or smaller where there is a lot more competition is tougher still.

    Best of luck and please let me know if you have any questions at all!

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  • Michael Dumler
    Real Estate Agent · Atlanta, GA · Member since 2020 · 1k+ posts · 1k+ votes
    2y

    @Chris Allen, everything is going up: utilities, insurance, taxes, management fees, service fees, etc. Adding interest rates to the mix makes penciling out deals increasingly tricky. As Russel noted, this is all considerably due to the dollar losing its value—aka, this Country likes to print money! Investors putting 30%-35% down on a property is precisely what the Federal Reserve wants - to slow the velocity of capital. The primary question is, since inflation is eating away your money, how do you put it to use and hedge? There are tradeoffs among all asset types. Before jumping into the STR industry, you must have vendors working for you who know the market and what they're doing. Assessing both macro and microeconomics is vital. If you haven't already, read "Short-Term Rental Long-Term Wealth" by Avery Carl. Best of luck!

    2Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y

    @Russell Brazil is right (and that's about when I bought my first house at 18% :-)

    The numbers will always work - or never work, it just depends on which property you choose to purchase and where it is. Rates are low right now and should not affect your decision making.....what should be paramount is the bottom line numbers that matter to you - ROI, Cash Flow, Appreciation, C to C, or a combination of these....

    3Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    2y

    Home loans for second homes have high rates.

    Commercial multifamily loans have rates that are similar to SFR owner occ.

    If you bundle 3-5+ STRs together, you can get such a commercial loan on them, as a refi. You will have to put them all into a single LLC a week or two before closing, ideally they are geographically close together.

    So if you can cashflow at all at the residential mortgage 2nd home interest rate in the 'short term' (see what I did there?), then you can bundle them together into a commercial refinance each time you have a batch that's ready to ship to the land of "good positive cashflow." 

    Commercial mortgage lenders don't like doing small loans, so this will be a lot more viable if the total debt amount being refinanced has seven digits instead of six digits. 

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    2y

    You just have to do your due diligence.

    Getting a great deal on a great property could offset the higher interest rates.

    Other tings working against you:

    Higher property taxes

    Higher Insurance rates (if you can even get insurance)

    Local STR rules and fees.

    Changing STR rules that ban STR's after you purchase one.

    Etc.

    4Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    2y

    It is a tough market all around @Chris Allen.

    We are in a holding pattern for our next place waiting to see where interest rates land this year.

    I am still poking to see what's out there, but overall, nothing nets positive at this time.

    We came close but the owners pulled the listing.

    3Reply
  • Chris Allen
    OP
    Republic, MO · Member since 2024 · 10 posts · 4 votes
    2y

    Thanks for the input.  Lots of good information here.  I am willing to break even for a vacation home, but if the property breaks even on paper, that stills scares me.  The last thing I would want is to have a property break even with no fat to skim as a contingency.  I am not necessarily looking to get rich, but a cushion would be nice.  After management fees, that is pretty hard to come by.  I can't self manage a property in Florida living in Missouri so I really have no option there.  I'll keep looking but with these thoughts in mind.

    0Reply
  • Sarah KensingerPro Member
    Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
    2y

    It's very hard to find a cash-flowing deal especially in Florida right now! Have you considered creative financing? Robuilt has started a creative finance camp just for STR, and of course everyone knows about Pace Morby.

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  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    As everyone above is saying, just makes it harder to find deals and for deals to pencil. What I think is a valuable tool/person to have in your corner now more than ever is an investment specialist or specifically STR specialist realtor that knows how to underwrite and thus knows how to find a good deal. Bonus points if they themselves are an investor.

    0Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @Chris Allen:

    I put Branson because that is what I am near, but I am interested in lots of areas, mainly Florida.

    Are rates really so bad right now that a first time STR buyer with 20% Down should not even try? Based off the numbers from AirDNA and others, when I plug them into a calculator, it looks like I am out of pocket whether paying for management or not. Is that what everyone is seeing or am I missing something. I am figuring on a 360 month loan at 7.5%.


     Always good to remember that you don't always have to maximize leverage. Plenty of deals that don't work at 20% down (80% LTV) can be good deals at say 40% down - also if a first timer, almost always makes sense to be conservative and not stretch leverage

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    0Reply
  • Travis TimmonsPro Member
    Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
    2y

    It's a "What can you do that's really hard?" market right now. On the other side of that is good cash flow. Whether that is the ability to find needle in the haystack properties or situations, take on a serious fixer, self manage in a market that is remote and tough to self manage, or some other situation that most investors don't want to take on. 

    The hassle factor of self managing is real. The cost to furnish and get a place market ready is stressful, exhausting, and expensive. If you go through that and don't see the pay off month to month, it's not worth it to me. 

    0Reply
  • Nik Kov
    Member since 2024 · 12 posts · 2 votes
    2y

    Rather than finding the right deal, is doing a custom build something worth considering at all? We're looking to do that right now, and a big part of the allure is to save money on airbnbs when we travel ourselves, but also break even on our loan. Alternatively, we can pay all cash too. Looking to leverage that though. 

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y
    Quote from @Nik Kov:

    Rather than finding the right deal, is doing a custom build something worth considering at all? We're looking to do that right now, and a big part of the allure is to save money on airbnbs when we travel ourselves, but also break even on our loan. Alternatively, we can pay all cash too. Looking to leverage that though. 


     It just seems that any kind of new build, let alone a custom build, can make money right now. SF build prices are just too high. Might be areas that will work though, but be careful....

    0Reply
  • Nik Kov
    Member since 2024 · 12 posts · 2 votes
    2y
    Quote from @Bruce Woodruff:
    Quote from @Nik Kov:

    Rather than finding the right deal, is doing a custom build something worth considering at all? We're looking to do that right now, and a big part of the allure is to save money on airbnbs when we travel ourselves, but also break even on our loan. Alternatively, we can pay all cash too. Looking to leverage that though. 


     It just seems that any kind of new build, let alone a custom build, can make money right now. SF build prices are just too high. Might be areas that will work though, but be careful....


    Can or can't make money? Looking at 350$/sq ft in a certain vacation area with a decent CoC% based on comparables

    1Reply
  • Spencer Riche
    Investor · Canada · Member since 2017 · 40 posts · 32 votes
    2y

    "Date the rate, marry the property." Don't let high interest rates stop you from capitalizing on a great opportunity. If a property ticks all your boxes, has potential for added value, and yields the return you want after accounting for the cost of capital, why overlook it just because the rates are considered "high"? In my view, now is a prime time to make a move in the market when others are reluctant "waiting it out" and keeping their capital on the sidelines. I've landed some of the best deals of my career this past year. Plus, if rates drop later on, your position will only improve.

    3Reply
  • Mike GrudzienPro Member
    Lender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
    2y
    Quote from @John Underwood:

    You just have to do your due diligence.

    Getting a great deal on a great property could offset the higher interest rates.

    Other tings working against you:

    Higher property taxes

    Higher Insurance rates (if you can even get insurance)

    Local STR rules and fees.

    Changing STR rules that ban STR's after you purchase one.

    Etc.


     Josh,
    Well except for the 4 items you mentioned, then it's a walk in the park.... LOL

    Mike

    0Reply
  • Lisa Lister
    Realtor · BRANSON, MO · Member since 2023 · 29 posts · 8 votes
    2y

    @Chris Allen

    My first thoughts are why not Branson? I am an investor agent here, still selling STR properties. I agree, not all properties work with the current rates, however it is refreshing to hear that if the properties are paying for themselves (with a little fat) then why not? I currently have three condos on the market for a client of mine, where the seller is offering seller financing, with 20% down at a competitive 6.75%, 3 year balloon. If you would like details, I'd be happy to share them with you or your realtor.

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y
    Quote from @Spencer Riche:

    In my view, now is a prime time to make a move in the market .

    I agree for two reasons. 

    1) The perceived 'high rates' are keeping a lot of investors on the sidelines....newbies, younger folks, the timid investors, etc...

    2) The rates are low enough in reality to make many deals work. An investor just needs to be a bit more careful.


    2Reply
  • Danae PitcherBusiness Member
    Realtor · Orlando, FL · Member since 2023 · 61 posts · 61 votes
    2y

    In the Orlando market, my buyers still do well even with the higher interest rates.  They are putting around 25% -30% down and as long as you purchase in an area with a reputation for high occupancy and above average ADR's, along with choosing a management team that will market your home tirelessly, you can come out just fine.  Best of luck to you on your search. :-)

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    0Reply
  • Kyle Westerman
    Investor · Raleigh, NC · Member since 2024 · 17 posts · 15 votes
    2y

    We just bought our first short term rental in January and it’s breaking even right now. We’re in the summer season now so we expect it to get better but we put 30% down to stay conservative. 

    I definitely have been learning a lot over the past few months self managing. We just had to fire our cleaning person for poor performance and it’s been tough being competitive with cleaning fees while finding good cleaners. 

    We're definitely thinking long term with STR. Our goal is to buy another one next year but we'll see based on the market. This house is close to the beach so it's been a win since we get to spend time down there.

    So it's definitely a numbers game and making it work for your strategy. You can stay conservative but know Airdna.co data changes overtime. Also review similar STR close to the property you want to buy to see what their charging and plan for 15 days occupied to determine your break even. That's what I did.

    3Reply
  • Gary NelsonBusiness Member
    Real Estate Agent · Branson, MO · Member since 2016 · 141 posts · 93 votes
    2y

    Hi @Chris Allen,
    While interest rates are starting to come down, Branson remains a promising market for short-term rentals (STR), especially when compared to other destination markets like those in Florida with much higher price points! The key to a solid investment is in the combination of choosing the right asset and creating a memorable guest experience. Top-performing units can still achieve occupancy rates upwards of 70% in the Branson market. This means that with the right property, you can find opportunities that offer at least a 5% Cash on cash return when including the debt service. I'd like to recommend my local lender that offers 10% down 30-yr fixed as a second home loan product. Feel free to message me privately and we can connect if you're interested in learning more or have questions!

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