Valuation of unconventional and profitable STR property

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Valuation of unconventional and profitable STR property

Derek Stevens
Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote

I have an 8+ac parcel in Dripping Springs, TX (outside of Austin) that has two small STRs built on it. Both units are approximately 400 sqft, "yurt-style" cabins with large decks.

We have 2 full years of revenue history, grossing just over 100k in 2024. After some investments in amenities (primarily hot tubs), our last 3 months have averaged 12k/m.

This property is owned outright, and due to the size of the property, the small square footage of the units, and the lack of comps in the area we have found it difficult to lock down any refinancing. We have spent approximately 500k in improvements on the land in the structures and the infrastructure. We also have infrastructure in place at a build site for a 3rd unit on property.

With it being a difficult property for an investor to find traditional financing for, how would I go about assigning a realistic valuation for the property if we were to entertain a sale? From what I've been reading, cap rate is not a reliable metric for STRs.

Any insight is greatly appreciated!

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

Unfortunately - there are a couple of issues here that likely make this hard to finance:

-"Cabin style" dwellings typically are difficult to finance as the secondary capital markets treats these differently than standard single family homes as the buyer pool for a "cabin" dwelling is less than that of a standard home.

- Yurts: Lenders typically have difficulty financing Yurts as they are moveable collateral. Lenders want collateral that can't be picked up and moved overnight. Let's say they need to foreclose and the borrower picks up the Yurt and moves it - now the entire loan they underwrote is thrown out, along with title insurance, and the lien on that property.

- Value: A SFR, or 2-4 unit (what it would be in this case) are residential assets and thus are valued off the "sales comparision approach" rather than the income approach. An appraiser likely won't be able to value a 1-4 unit property based off STR rents (whether projected or actually incurred), and if they are, the lender won't lend off said valuation for their applicable value (value they're lending off of).

With all this said, to answer your question of how you'd value this for a sale, I'd get a STR specific broker that's able to market your property as a turnkey STR with data on the rents, figures, etc. An ATX friendly STR realtor that I reccomend is CRIBS Consulting. They do property management for STRs and are a brokerage. Here is their website: https://www.cribsconsulting.com/

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

    It's only worth whatnit will appraise for for the value of the houses and land. That's why your having difficulty getting any valuation from a bank. Little cabins have very little value.

    Maybe try for a commercial loan as a business?

    3Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    Hey @Derek Stevens, @John Underwood hit the nail on the head.

    The yurts are worthless for the most part. I am assuming you mean they are really like yurts which is nothing more than a upgraded tent. If so, then they are not considered real property and you are dealing with the land value only.

    If they are stick built tiny homes on foundations, then that is something else.

    In the end, if the former is true, then lenders will value it as land with improvements. By improvements I mean that there is power, water and sewer/septic installed and working.

    I would try for a commercial loan like John said and hope for the best. Has this property been working for a while with a track record of income performance? If not, then I doubt that you will get a loan for commercial business.

    Make sure you have a lot of ducks and all fo them in a row. 5 year estimates on revenue and expenses, full business plan, licenses etc etc all in place before you go in.

    0Reply
  • Derek Stevens
    OP
    Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote
    1y

    @Michael Baum They are stick built on foundations. There are just over 2 years of income/expense history.

    Thanks for the insight. I'm not particularly interested in a commerical loan at this time.

    0Reply
  • Derek Stevens
    OP
    Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote
    1y

    @Michael Baum I should have clarified in the initial post- Access to capital isn't the issues, but we did struggle when we attempted to do a traditional refinance.

    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    Ok, well I guess I have no advice seeing as you don't actually need money. 

    0Reply
  • Derek Stevens
    OP
    Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote
    1y

    @Michael Baum My initial question was about determining a sale price not raising capital. I appreciate the insight that you and John offered regarding the lack of value in the business itself and strictly the land + improvements.

    0Reply
  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    Maybe hire a licensed appraiser?  They have to surmise some valuation - people in divorces, bankruptcies etc need valuation on unique properties all the time.  Once you have the appraisal you should be able to find a lender to lend on that value.

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  • Garrett BrownPro Member
    Rental Property Investor · Houston, TX · Member since 2024 · 515 posts · 553 votes
    1y

    Hey Derek, I deal with the same situation at one of my glamping sites near Houston. You won't find many refinance options on these types of projects besides going the SBA or USDA route most likely. You have to treat it as a business-based sale. I am far from an expert in this field as I have been learning alot myself but cap rate does play a role in your type of business. Your NOI, revenue, location, risk for the business, assets (land and infrastructure mainly), equipment (yurts would be considered business equipment), and more all play a factor. These type of businesses are tough to price as the market varies greatly depending on many factors.
    Do you self-manage it all? That isn't going to help your sale unfortunately as the next owner isn't buying a business really as once you leave, the business disappears. You'll need to find someone that wants to buy this type of business while also running it themselves. Most owners would stay on managing at least for a year or two in this type of thing if so. 

    I would talk with a commercial broker in your area to get some real insight on what it might be able to get on the market, and then you can list it on things like Crexi, Loopnet, etc. to see if you get any traction. I'm actively working through this process somewhat now so I can roll funds into a bigger boutique hotel project. I learn something new everyday it seems.

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

    Unfortunately - there are a couple of issues here that likely make this hard to finance:

    -"Cabin style" dwellings typically are difficult to finance as the secondary capital markets treats these differently than standard single family homes as the buyer pool for a "cabin" dwelling is less than that of a standard home.

    - Yurts: Lenders typically have difficulty financing Yurts as they are moveable collateral. Lenders want collateral that can't be picked up and moved overnight. Let's say they need to foreclose and the borrower picks up the Yurt and moves it - now the entire loan they underwrote is thrown out, along with title insurance, and the lien on that property.

    - Value: A SFR, or 2-4 unit (what it would be in this case) are residential assets and thus are valued off the "sales comparision approach" rather than the income approach. An appraiser likely won't be able to value a 1-4 unit property based off STR rents (whether projected or actually incurred), and if they are, the lender won't lend off said valuation for their applicable value (value they're lending off of).

    With all this said, to answer your question of how you'd value this for a sale, I'd get a STR specific broker that's able to market your property as a turnkey STR with data on the rents, figures, etc. An ATX friendly STR realtor that I reccomend is CRIBS Consulting. They do property management for STRs and are a brokerage. Here is their website: https://www.cribsconsulting.com/

    5Reply
  • Tanner Lewis
    Lender · Austin, TX · Member since 2021 · 448 posts · 441 votes
    1y
    Quote from @Derek Stevens:

    @Michael Baum My initial question was about determining a sale price not raising capital. I appreciate the insight that you and John offered regarding the lack of value in the business itself and strictly the land + improvements.


    I would go off of comparable cap rates when dictating the sales price. This deal is mainly operated as a business so I think that makes the most sense. The main hurdle you are going to run into is the buyer's financing. The best way to sell it will be seller financing or to an all cash buyer. Debt financing will be slim pickings

    2Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y
    Quote from @Derek Stevens:

    @Michael Baum My initial question was about determining a sale price not raising capital. I appreciate the insight that you and John offered regarding the lack of value in the business itself and strictly the land + improvements.

    So can you post a few pics of the place? Maybe the VRBO or AirBNB listing so we can get a good idea of what we are talking about. That would help a ton.
    0Reply
  • Derek Stevens
    OP
    Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote
    1y

    @Michael Baum Thank you everyone for the suggestions/opinions. Here are the airbnb links if that helps get a better idea of what I'm trying to describe.

    airbnb.com/h/treehouseyurt

    airbnb.com/h/yurtundertheliveoaks

    I had an investor ask me at what price point I would consider selling, that's what prompted me to dig a little deeper into determining what it is actually worth to a prospective buyer.

    I do manage these myself through a small STR management company that I own that manages about a dozen locations.

    0Reply
  • Derek Stevens
    OP
    Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote
    1y

    @Zach Edelman I appreciate the feedback and the broker info!

    0Reply
  • Derek Stevens
    OP
    Developer · Austin, TX · Member since 2019 · 11 posts · 1 vote
    1y

    @Garrett Brown Thanks for taking the time to share your insights and experience with a similar situation. Very helpful. These are self managed through my small STR management company.

    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    Ok @Derek Stevens, now we are cookin' with gas!

    Those are some pretty sharp looking "yurts". I will say that they aren't really yurts, which are a light wooden frame with canvas or the like fabric. Like you said, they are stick built small studios that have a yurt like look.

    They are pretty sharp and I like the setting. Looks good and a nice place to stay.

    One thing I wanted to see about is the foundation. They look like they are sitting on wooden piers and not on a slab or perimeter foundation.

    As far as lenders are concerned, that could impact the financing. Wooden pier foundations are a way to do a couple of things. @Bruce Woodruff can correct me if I am wrong. You often see them in coastal areas where the houses are on stilts to prevent damage from king tides or storm damage from flooding.

    They were a way to do foundations pre-1900 in a lot of areas, especially here in the northwest. The nicer houses had brick foundations but regular folks built on cedar piers.

    With the advancement of concrete in the last 100 years or so, you don't really see wooden piers. Even if you use piers, they are usually concrete (which is OK for most lenders), steel or wood on concrete. I can't see but maybe the wooden piers are sitting on sonotube concrete piers embedded in the ground which might change things.

    What I would do is get with a few major local lenders and maybe ask them what they would need to make sure the little studios (that is what I would call them, not yurts) are maximized for value.

    Seeing as they have full utilities and stick built, they should be categorized as real property and have good value for their size. The finishes look good to me.

    Maybe they would want a full perimeter foundation put in which wouldn't be that hard. It might be one of those positive sunk costs to increase the value when financing.

    Doing that bit of pre-work might be the difference for a buyer being able to move forward.

    0Reply
  • Wendy Usrey
    Specialist · Colorado and Missouri · Member since 2021 · 20 posts · 4 votes
    1y

    The answer is to value this as any other business generating income, not just stick within the confined box of valuing the real estate only.  The sales comparison approach is typically done for residential real estate and will be less appropriate and come in under value because there are no good comps, and even an appraisal using the income approach (unless the appraiser is trained to do more complex commercial appraisals) is probably not going to be the most accurate either because they typically use market cap rates and in this case you don’t have good comparable income properties to find the market cap for the analysis.  The best and most appropriate way to get a value, in my opinion, would be to use a discounted cash flow model.  A well qualified business broker or someone else experienced in those calculations (think someone with statistics/finance expertise) can easily do this.  

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y

    The issue I have seen with these types of properties is they could have two valuations - the value of the real estate which the structures will have little value and you have the land

    the other is as an operating business just like a bed and breakfast would have - real estate has value but it operates a business

    now you mention 12k / month but if someone also has to manage the property what is that worth and what would someone pay to manage a property like this? Of course it will be much harder to find someone who wants to pay for it as a business as they will need a loan and appraisers will probably lean towards a real estate valuation

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

    From my understanding you would have to sell the property as a business...a resort style destination with a number of amenities and places to stay. Speaking to a commercial realtor in the hospitality space would help you figure out the best way to market and sell a property like this. But a heads up...the best financing on these types of properties is seller/owner financing. If you're not open to that, I would hold on to the place long-term or sell the property at land value not including the yurts, hot tubs, etc.

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