Negative Cashflow - STR
Member since 2024 路 11 posts 路 3 votes
Negative Cashflow - STR
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Ryan MoyerBusiness Member
Property Manager 路 Orlando Kissimmee Davenport Salt Lake City, Park City 路 Member since 2019 路 991 posts 路 1k+ votesHonestly, I would sell it now while there are still an endless supply of foolish newbie investors out there that have the capital to throw around $2M with no underwriting skills and assume they'll cashflow based on bad advice from realtors and youtubers.
Eventually once everyone starts wisening up to these investment-only properties being a negative investment, prices will start falling and you might lose that equity. I have no idea how long that will take though because there are a lot of people out there right now with more money than sense buying these deals that will never cash flow and then complaining that they can't cash flow.
Cosmic Vacations4.9174 Reviews
46 Replies
- 2yGarrett BrownPro MemberRental Property Investor 路 Houston, TX 路 Member since 2024 路 504 posts 路 550 votes
I'll jump in to give some insights on what you could do to increase revenue without selling or major renovations. I will just rapid fire them off so if you are curious of me expanding on any, please ask! First some in house questions
1. Do you use a PMS?
2. Do you have social media accounts for the property?
3. Can your cleaners handle more workload such as adding revenue generating packages?
4. What is your biggest expense right now besides mortgage?
My ideas that have worked for me
1. Free and/or paid content creators staying during slow days (Monday-Tuesday)
2. Adding filters on Airbnb that are always targeted (are you pet friendly, do you have alt text on your pictures to hit more categories, maximizing number of beds, certain amenities like sauna/hot tub, etc)
3. Google ads (not free but can be effective when done properly)
4. Social Media Content around the property
5. Email marketing campaigns using companies like Stayfi or your own discount code on your direct booking website
6. Selling additional packages like birthday packages, romantic packages, smores and pizza kits, etc at a 50% revenue point for you (let your cleaners or inspector facilitate it)
7. Using something like Breezeway (or your auto message) to sell an extra night before or after someone has booked at a discount.
8. Youtube channel for the property that you upload tours for you guests but also will spread out to YouTube watchers.
I can go on for days but I will say losing that amount of money on an STR is tough to swallow. The amount of work and repairs that go into it may never catch up for you if you are maxed out on renovation budget. The smokies have been one of the most over saturated STR markets in the last few years. You could take the equity and build a site with smaller cabins in a new area to really maximize your cashflow and efforts. - Rental Property Investor 路 Manteno, IL 路 Member since 2009 路 2k+ posts 路 2k+ votes1y
I think some people may be thinking the sky is falling just because the numbers do look tough. But here's the thing. Its a brand new STR. And its a big one. I don't know any brand new STRs that hit the normalized numbers for the cabin size in year 1.
I'm assuming before you bought it the property management company told you a number for gross rent that the property should hit in year 1 and year 2 and then year 3. Hopefully, they were honest about those year 1 and year 2 numbers and set the expectation that your true numbers will hit in year 3 once you start getting repeat customers.
You're sitting on 800k. You didn't lose money in the summer so thats good. You might be losing money right now but how do you know where you'll be in 3 or 4 months? While its slow time, there's also the factor of people booking later than before so your bookings should increase as you get closer to those months.
What I can suggest is that those monster cabins are struggling right now and new cabins coming online take some time to really hit their revenue mark. If you can get through til next summer, I think you might have a much clearer picture of whether you should hold or sell.
As for some of the negativtiy, I'm not seeing a huge bust at all. I think you had a boom in building two and a half years ago when prices went crazy. But prices out there are different. They're based on rental income. Rental income has gone down because of supply and covid money being sapped up.I believe the area is starting settle back in to normalcy. The starts for new builds are significantly down and have been so for about the past year now. The area is putting up more and more tourist attractions which should continue to drive more growth. And once we get through this batch of cabins that came online, I think occupancy rates will return back to pre-covid levels - which were among one of the better rates in any other STR area I had seen.
Its funny. But I had a guy back in 2010 or 11 ask a question about selling a house at a loss of about 40k or keeping it even though the rental income was barely breaking even if not losing a couple hundred per month. Everyone - and I mean everyone - in BP told him to dump it and move on. I told him not to sell because prices will come back. He ended up holding it for another 3 or 4 years and sold it for a 100k profit.
I'm seeing the same thing here. And my answer is taking everything into consideration. I mean if the cabin was 5 years in and losing 60k, I'd definitely tell you to sell. But its not. Its brand new. The revenue will go up. How much? I don't know that and neither does anyone else here. But a 2 million dollar cabin should be generating about 200k a year in gross rent out there once its stabilized. Even with the downturn, I would say at least 180k. If you're going to lose money at that number,then maybe our investment analysis was off from the get go.
I'd be curious to know what the property management estimated your year 1, year 2, and year 3 revenues to be. And what your numbers look like in terms of profit if you hit those numbers.
But I'm not buying the sky is falling just because it fell in the past. Everybody is experience a reduction in STR rents across the board. This area had a boom of building and now there's probably a bit of an oversupply adding to that. But the last year the building has come to a screeching halt - and I know this because we're a builder and we talk with the permitting offices and get feedback on it. Not to mention things like septic permits that used to take 6 to 8 weeks are coming back in 1 or 2. :-)
I like it slow and steady. And with interest rates decreasing and supply normalizing over the next year or so as the area adjust to the new batch of cabins that came online recently, prices will start to go back up again. They're not going to crash because the prices of rental cabins are driving by ROI and ROI will go up as rates drop and occupancy goes up. - Rental Property Investor 路 Stewartsville, NJ 路 Member since 2016 路 418 posts 路 280 votes1y
If its a very large property, you may also want to make sure you are marketing to any wedding, family reunion, corporate meeting/team building customers. Just may require a pivot from vacationers to the above type customers to get your numbers looking better.
Hope that helps.
Mike
- Member since 2024 路 11 posts 路 3 votes1y
Thanks all this is good insight I鈥檓 feeling the same about holding.
And for marketing to weddings we are trying but having trouble, any insight on that would be very helpful. - Member since 2022 路 1k+ posts 路 1k+ votes1y
Quote from @Joseph Shuster:
Thanks all this is good insight I鈥檓 feeling the same about holding.
And for marketing to weddings we are trying but having trouble, any insight on that would be very helpful.There has to be a dominant website out there for wedding venues, just a matter of finding it.
- Investor 路 Seattle, WA 路 Member since 2023 路 87 posts 路 44 votes1y
Quote from @Joseph Shuster:
I finished a BRRR in the Smokies- now I'm short term renting it out. Losing money but created a ton of equity.
House is amazing and I want to hold long term but hemerging a bunch of cash right now.
What do I do?
Thank you 馃檹
Sell it.
- 1yRyan MoyerBusiness MemberProperty Manager 路 Orlando Kissimmee Davenport Salt Lake City, Park City 路 Member since 2019 路 991 posts 路 1k+ votes
Honestly, I would sell it now while there are still an endless supply of foolish newbie investors out there that have the capital to throw around $2M with no underwriting skills and assume they'll cashflow based on bad advice from realtors and youtubers.
Eventually once everyone starts wisening up to these investment-only properties being a negative investment, prices will start falling and you might lose that equity. I have no idea how long that will take though because there are a lot of people out there right now with more money than sense buying these deals that will never cash flow and then complaining that they can't cash flow.
Cosmic Vacations4.9174 Reviews - Member since 2024 路 11 posts 路 3 votes1y
It鈥檚 listed can鈥檛 find any buyers right now
- Rental Property Investor 路 Manteno, IL 路 Member since 2009 路 2k+ posts 路 2k+ votes1y
Quote from @Ryan Moyer:
Honestly, I would sell it now while there are still an endless supply of foolish newbie investors out there that have the capital to throw around $2M with no underwriting skills and assume they'll cashflow based on bad advice from realtors and youtubers.
Eventually once everyone starts wisening up to these investment-only properties being a negative investment, prices will start falling and you might lose that equity. I have no idea how long that will take though because there are a lot of people out there right now with more money than sense buying these deals that will never cash flow and then complaining that they can't cash flow.
I'm guessing you don't know this area at all. But to give advice like that without knowing any numbers makes no sense. Just because a property is worth 2 million does not mean its a bad investment. You need to ask what the income is on it.
I know three years ago my buddy's parents' cabin that was 1.7 was bringing in 350k during the boom rents. Now theyre seeing much less and it looks to be coming in this year around 220k to 240k depending on the final few months and bookings.
That being said, those numbers still work out really well. At 1.7, if you had put down 25%, that would have given you a loan of 1.275 million. Now they got their loan when it was in the low 5's so the numbers are a bit differnt. Loan payment is roughly 7,200/mo based on 5.5% which I know is higher than they got in for so thats 86k/year in mortg payment. But their taxes are only 1,200 a year. Insurance another 4k a year. PM at 20% (they're actually at 18% but still), off 230k lets say is 46k.230k minus 86k minus 4k minus 46k minus another 15k to 20k in misc, they're still netting 70k tol 75k on their 425k investment. And with depreciation thats almost entirely tax free. Add in another 17k in principal paydown per year and their return is closer to 85k or 90k a year not including any appreciation which historically out there is 5 to 7%. But take that out and their return is over 20% without factoring in any appreciation.
And once that area returns to normal and those appreciation numbers kick in again, even at 5% a year, that means he'd be gaining 100k a year in appreciation. Now what are the true overall returns on the investment? 40%? Come on.So just because the price point is high, don't assume that its a bad investment. And definitely don't give advice on an investment before seeing any real numbers at all on the deal. We weren't even told what the rents on this thing actually are. Nor what they should be after a couple of years being on the STR program there.
He said he was losing money based on the current rents. But did you factor in the issue that its a brand new rental and its going to take at least a couple of years to hit its actual rental numbers?
Quite honestly,noone would ever get into STRs at all if they were to base their rental numbers on what an STR made in its first year online. Noone.
Now is not the time to sell the monster properties out there. And definitely not one with rental income well below what would be needed to support that price. Give it a year more or so and that rental income will go up and with lower rates, the numbers will make sense for him if he refi's.
And for the larger properties - 1yRyan MoyerBusiness MemberProperty Manager 路 Orlando Kissimmee Davenport Salt Lake City, Park City 路 Member since 2019 路 991 posts 路 1k+ votes
Revenue numbers are trending down year over year, not up. An email marketing funnel for re-booking is nice, but it's barely keeping up with the year over year decline in rents due to saturation (quantity saturation AND quality saturation) and shifting travel trends. 20 years ago your hot tub made your listing an all-star. Now it makes it average, everyone has one. 5 years ago your dynamic pricing and professional photos and 5* reviews made your listing an all-star. Now it makes it average, everyone has that. Another 2-3 years game rooms and theaters and coffee bars and all that jazz will be the same. It's already headed there.
And that's while we operate at all-time highs for travel in an economy where travel demand has remained at peak. Any shift or slight weakness in travel demand and things can accelerate real fast.
There is still lots of dumb money entering the market that won't be if the economy softens. I see it every day. I had a client come to me just yesterday to manage their property that I had to have a real heart to heart with.
I asked them what their primary goal was (cash flow was their answer) and what the projections were that they used to make their purchase decision. They said they were projecting $300/nt with 48% occupancy. That's $52,500/yr
The house was $750k, 10% down @ 6.5% interest. And this was a large property in a high expense market (Orlando). HOA $500/mo. Electric $900/mo. Water $250/mo.
And they were planning to pay me 18% off the top to manage it.
And I would say, of the clients that typically come to market, they were MORE prepared than normal. 95% have not run any projections at all. They're just buying an STR because their friend (with a 2017 mortgage) is making good money, or because they saw something about it on Youtube, or social media.
If this particular cabin we are talking about here doesn't underwrite, it might still sell....for now. A few years from now when all the dumb money that doesn't know how to underwrite washes out that may not be true anymore. If the place is losing $60k-$120k/yr I would take that equity and invest it better into something that is not that far below the margins, while the getting is still good.Cosmic Vacations4.9174 Reviews - Rental Property Investor 路 Worcester, MA 路 Member since 2018 路 131 posts 路 135 votes1y
really depends on your exact numbers. If you can stomach some heavy losses in January and February (lowest revenue months in the Smokies) and May to a lesser extent, there may be better days ahead assuming this is your first STR. We took a small loss on our cabin in the Smokies year 1, but saw about a 20% Increase in revenue year 2 due to gaining traction on the booking platforms and perfecting our pricing strategy.
If you can't stomach the heavy losses might be worth selling before you get to the down months. Just wanted to let you know it is common to see big a jump in revenue year 2 if you are managing well.
- 1yJay HinrichsBusiness MemberReal Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
Quote from @Collin Hays:
If you sell it now, you could be looking at losing much/all of your equity in the home. The next buyer won't want a $5-10K a month loss, so they are going to buy the house at an appropriate multiple. You could easily be looking at a $400-500K loss.
If $5-10K a month loss isn't that much money to you, I'd just pay it and go on. If it is keeping you up at night and pinching your personal budget quite a bit, that's a different matter. Everything is relative.
As for the market value, in six months or a year, it could be far lower than it is today. In the Great Recession, I saw large cabins selling for 25% of what they sold for just 2 years prior.
I don't think we will reach those lows again, but wouldn't necessarily bet against it, either.
If you are skittish now, I'd get it on the market right now while there's still a season left, and price it to MOVE.
WOW this is sobering Maybe one just moves into the home and lives there ?? - 1yCollin HaysBusiness MemberProperty Manager 路 Gatlinburg, TN 路 Member since 2020 路 3k+ posts 路 4k+ votesClosings in Sevier County are down 50-80 percent year over year. Absorption rate is currently at 15 months.
Quote from @Mike H.:
As for some of the negativtiy, I'm not seeing a huge bust at all.I believe the area is starting settle back in to normalcy.
- 1yGary NelsonBusiness MemberReal Estate Agent 路 Branson, MO 路 Member since 2016 路 141 posts 路 93 votes
Hi @Joseph Shuster, hope you didn't sustain any damages from the recent flooding in Tennessee. Negative cash flow on a short-term rental (STR) can be tough, but there are ways to turn it around. First, take a close look at your expenses鈥攁re there any you can trim or optimize? Next, do a competitor analysis. How does your property stack up in regards to amenities, professional photography, cleanliness, reviews, and pricing. Perhaps there is something small you can change to increase your stays. You might also consider marketing more aggressively to stand out. If the numbers still don't add up, it might be worth reassessing the property itself to ensure it's the right fit for an STR. You may also consider contacting a real estate agent who specializes in STR properties and who has STR investments themselves in the area. They may have insights on your particular market and may be able to help advise you on what is causing your low bookings.
Gary Nelson Real Estate, EXP Realty, LLC553 Reviews - Investor 路 FL 路 Member since 2016 路 332 posts 路 388 votes1y
I take it is a 6 bedroom or larger property hopefully with an indoor pool at the price you have invested. Most bookings for these come 3 to 6 months out. Big strategy change from smaller cabins. Outside summer and holidays shoot to have your weekends booked at high rates and weekdays at low rates. Be thankful for any weekday bookings in the slow season. Make sure you are on multiple platforms as Airbnb is more of last minute guests. You should start recieving March/April bookings by the end of this month. Large cabins are like a train...slow to start but once they get rolling they just don't stop producing. Not sure how you are losing $10k a month as that means you only are bringing in less than $5k a month. Make sure you are not paying too much for insurance. I have two new 4,800sq ft builds and insurance quotes had $6k differences between insurers. That is $500 easy savings by shopping around, but make sure you are adequately covered.
- Real Estate Agent 路 40 Burton Hills Blvd Ste 200 Nashville, TN 37215 路 Member since 2022 路 6 posts 路 3 votes1y
Hey Joseph,
Just came across this thread and wanted to see what you ended up deciding to do!? My wife and myself are Realtors here in Pigeon Forge/Gatlinburg as well as own and operate a property management company with several cabins. We have lived and worked in this area for many years so we are very well versed with the both the Real Estate and Short Term Rental markets. If we can help you in any way please feel free to reach out, all of my contact information can be found on my profile.As far as your cabin is concerned is sounds like a great place! It is worth noting that rental numbers in this area are down across the board as a whole this year. Obviously, everyone has a different opinion on why that might be but that's a whole different discussion in itself. I will say say this though, this area is constantly growing. It is centrally located and we see near 14 million visitors/year. The mountains are not going anywhere. We sit at the base of the busiest National Park in the County (busier than Grand Canyon, Yosemite, and Yellowstone all 3 combined). It will come back around.
As you know there are a lot of factors that play into making each property a successful Short Term Rental. One of those being location. I would love to know where this property is located in relation to all of the amenities and things this area has to provide. For me, I tell clients as long as you are within a 30 minute drive of either Pigeon Forge or Gatlinburg you'll likely see more consistent success. I am by no means saying you can't be successful outside of that because many folks are BUT this is a driving destination. Many people drive 8,10,12 hours to get here, the majority do NOT want to get back in the car and drive another hour to get to all of the attractions of things they came to do. The other thing I truly think you have working against you is its shear size. It takes a special group of people to rent a cabin that size. They are people who have planned trips like family reunions, church events, baseball tournaments, etc. Because this area is a driving destination your smaller 1,2, and 3 bedrooms really excel. They are the perfect size to accommodate the majority of families who come here and they see a TON of last minute bookings. I'm not saying it won't ever happen but the likelihood of someone renting a 30 person cabin on a whim or last minute is pretty slim.
- Member since 2024 路 11 posts 路 3 votes1y
This is really great insight, thank you. This property is in Sevierville (Shagbark).
Feel free to text me today and maybe we can find a way for you to help me out.
Although I can relate to this feedback quite a bit. I think just wait it out and slowly keep making improvements to the property.
- Rental Property Investor 路 Manteno, IL 路 Member since 2009 路 2k+ posts 路 2k+ votes1y
Quote from @Ryan Moyer:
Revenue numbers are trending down year over year, not up. An email marketing funnel for re-booking is nice, but it's barely keeping up with the year over year decline in rents due to saturation (quantity saturation AND quality saturation) and shifting travel trends. 20 years ago your hot tub made your listing an all-star. Now it makes it average, everyone has one. 5 years ago your dynamic pricing and professional photos and 5* reviews made your listing an all-star. Now it makes it average, everyone has that. Another 2-3 years game rooms and theaters and coffee bars and all that jazz will be the same. It's already headed there.
And that's while we operate at all-time highs for travel in an economy where travel demand has remained at peak. Any shift or slight weakness in travel demand and things can accelerate real fast.
There is still lots of dumb money entering the market that won't be if the economy softens. I see it every day. I had a client come to me just yesterday to manage their property that I had to have a real heart to heart with.
I asked them what their primary goal was (cash flow was their answer) and what the projections were that they used to make their purchase decision. They said they were projecting $300/nt with 48% occupancy. That's $52,500/yr
The house was $750k, 10% down @ 6.5% interest. And this was a large property in a high expense market (Orlando). HOA $500/mo. Electric $900/mo. Water $250/mo.
And they were planning to pay me 18% off the top to manage it.
And I would say, of the clients that typically come to market, they were MORE prepared than normal. 95% have not run any projections at all. They're just buying an STR because their friend (with a 2017 mortgage) is making good money, or because they saw something about it on Youtube, or social media.
If this particular cabin we are talking about here doesn't underwrite, it might still sell....for now. A few years from now when all the dumb money that doesn't know how to underwrite washes out that may not be true anymore. If the place is losing $60k-$120k/yr I would take that equity and invest it better into something that is not that far below the margins, while the getting is still good.Suggesting revenue numbers are trending down year over year is somewhat accurate at a the macro level. But if you want to drill down to markets and product type, you'll see there are certain combinations still doing well. In Sevier county, the larger properties (3bed, 2,000 sq ft and higher) have definitely seen a decline in rents. But the smaller properties (1 or 2 bed, 1,000 to 1300 sq ft) have actually continued to rise.
My guess would be the people with a family of four that were coming in and staying at the larger 3 bedrooms are deciding that its more economical to just rent out the 1 or 2 bedroom places so that they can still vacation at a cabin but at a more reasonable price.
Additionally, two and three years ago, the numbers on the larger ones just made more sense so people went a built a bunch of those but the small ones not so much. And right now the building starts have been almost non-existent for the past year. So eventually the oversupply will be sucked up and this lack of building will allow rents/occupancies to return to a more normal growth period.
Keep in mind. That when you have these big event changing periods, everyone tends to overreact. When the housing crash hit in 08, everyone and their brother was saying how the housing prices weren't going to come back up to pre crash levels for years. And that real estate was no longer a great investment. The logic of that made no sense though. But when I was buying during that period, I had lenders sit me down and tell me they couldn't give me a loan on investment properties because of how bad of a long term investment it would be.
This covid thing was a huge disruptor. Flooded the country's str's with more guests than ever because of all the extra money they got and their ability to work from anywhere so they could travel and still work. And that drove more building and more entry into STR investing than made sense. We are at an oversupply.
But now we're seeing the correction. Nobody is building new stuff in sevier county. Nobody. Very few investors are buying existing stuff. And some people in other areas of the country are getting out altogether. This is a good thing for long term investors. And exactly what you'd want and expect to happen.
But don't be scared off by whats happening now. If you're investing for the next 12 months projection, you're in the wrong business. Invest for what the market should look like 3 to 5 years out. And to me, I think this area looks absolutely great. Florida would scare the heck out of me given the recurring hurricanes and insurance increases. - Member since 2024 路 11 posts 路 3 votes1y
Thanks for so much detail yea I agree! Glad to have all of you provide so much input and confidence!
- Real Estate Investor 路 Saint Paul, MN 路 Member since 2017 路 543 posts 路 474 votes1y
@Joseph Shuster Property values on STRs in the Smokies are going down and building is continuing at a frantic pace. It鈥檚 a crazy market. If you aren鈥檛 consistently making money and can sell at a profit, I would do so. In fact, I am likely listing one of mine later this year. And yes, I have owned in that market for years.
- Rental Property Investor 路 Manteno, IL 路 Member since 2009 路 2k+ posts 路 2k+ votes1y
Quote from @Mark S.:
@Joseph Shuster Property values on STRs in the Smokies are going down and building is continuing at a frantic pace. It鈥檚 a crazy market. If you aren鈥檛 consistently making money and can sell at a profit, I would do so. In fact, I am likely listing one of mine later this year. And yes, I have owned in that market for years.
Property values on strs in the smokies are going down. But that had to be expected. The values they had before were based on rents that simply weren't sustainable. Occupancies were running 90% or better on most properties. And there was a huge wave of construction that came through because of that. So then you had more supply and less demand and occupancies fell quite a bit on most products.
That being said, the one bedroom homes are doing well and have actually gone up in value. One bedroom 1,000 sq ft new construction cabins were selling at 450/sq ft a few years ago. Now they're at 525 to 550 a square foot for new construction. So they're not all going down.
In addition, building is absolutely NOT continuing at a frantic pace. The permits on sfh's are so far down over the past year from two and three years ago, its beyond silly. So to suggest something like that makes me wonder where you're getting your information from, if anywhere at all.
From what we've been told by the county, build permits are down by over 50% from two and three years ago. And the health dept (i.e septic permits) is down about the same if not a little more. Its been like this since the beginning of 2024.
If you somehow were told by someone that the building was still crazy here, you need to call the county building department and let them correct you. They issue the permits. They can give you real numbers.
And then Go look and see how few new construction projects are listed for sale. And see how many spec builds are listed (almost no spec builds at all - whereas two the three years ago it was probably close to 30 or 40). Compare those numbers to the covid boom listings and its well below 50%. Its closer to 20% in terms of the actual listings by count.
Now if you have owned in the market for years, then you're definitely sitting on a really nice chunk of equity for sure. Not as much as if you had sold 2 or 3 years ago. But if you bought 5 or 6 years ago, you can still probably come close to doubling your money or maybe getting 70 ot 80% on it.
Had a buddy that bought one for 350k+ about 6 or 7 years ago and sold it for 750k about 2.5 years ago. He Couldn't pass up the profit considering he only owned it for 3 or 4 years. But then again, the thing was raking in cash like you wouldn't believe. 100k+ gross per year so his profit was amazing given how little his loan was.
Still. To me this area is easily the best in the country for investing. It'll return back to normal in another 6 mos to a year where the occupancy will be in that 70% range and you'll see nice and steady growth. These boom and bust cycles always make the boom time prices look ridiculous and the bust time prices look like the sky is falling.
But the reality is this place has been steady and above average growth for decades. It took a turn during the crash and now again during the covid crash (except for the one bedrooms that is). But so did everywhere else. And whats special about this area is that the subdivisions are zoned for str so they can never take that away - unlike many other areas in the country who are continuing to find ways to restrict people from doing strs - even ones that are already in use. And that would really scare me.
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