A possible first STR property?

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A possible first STR property?

Tomoko Hale
Member since 2022 · 67 posts · 20 votes

I have been looking for an STR property and may have found one at a distance. The property is located in a mid-size city with several attractions nearby.

I understand that management fees can vary by location, but this property management company charges 20%. That seems high—does it? Based on my research, this PM company is highly reputable and provides excellent service. My local realtor obtained information from the PM about the property’s income for 2024, along with an estimate of monthly expenses the owner is responsible for. The PM handles almost everything except the decision-making.

Would it be rude or inappropriate if I communicated directly with the PM without involving my realtor?

The house is listed at $350K, including all the furniture. The owner wants to sell for a 1031 exchange, and the property hasn’t been officially listed yet. The location is great, and MTR could also be an option. Resale homes in the area have been selling for about $260/sq. ft., but this property is priced at $296.10/sq. ft. The house is 1,500 sq. ft. in size. How much would you counter if you were in my position? How much income would you at least if you purchase this property?

This will be my first time purchasing an STR, and I have no prior experience. I'm feeling both scared and excited about taking on this challenge.

I’d love to hear about your experiences and any advice you can share.

Thank you in advance!

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

My thoughts: If you are going to use a PM, hire out the cleaning and any maintenance/repairs, you will be giving away 30+% of your income.

So you need numbers to put on your spreadsheet.....1) what are you estimating for your nightly/monthly imcome? (Hint - go on VRBO and see what your local competition is charging). 2) How much do you intend to put down? Let's say 20%...now let's do the math:

You offer $320k, 20% down is $64k so you finance $256,000 @ let's say 6%....you neglected to mention where this property is(!) so I used 1.5% as a property tax number, and I used $200 mo for insurance. Your monthly 'basic' expenses are $2134. Add a CapEx withholding of 10% ($225) and your PM fee of 20% ($450) to this. So monthly expenses are $2809.

I'm assuming for the sake of this conversation that you charge $150 per night and are occupied 50% (15 nights a month), so your projected income should be $2250 per month.

If the above numbers are accurate, you will have an operating loss of -$559 per month. So no, tis is a horrible deal for you.

Now of course I know nothing about your property (since you provided so little detail) so if this is a huge 5 BR house with pool on a lake somewhere, then you need to adjust my numbers. But basically, you need to run numbers like above to know if a deal is worth doing or not......

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  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    20% is fair, but I'd always size up the market and see who manages the competitors near you. Then talk to them, also

    What regulations could stop you, too, and do you need to transfer any licensing?

    Then you need to bid fair market value, not appropriate the bid to take into account the STR revenue but more so LTR. And if they're valuing furnishings realize if the house is only marketed to a STR; then it limits the pool of buyers. And if it's marketed to the open market someone with a LTR will find those furnishings useless so mark it to 0.

    $260/sq ft vs $296 is a gap, question is how much liquidity is in that market and is it momentum driven? Cause an appraisal will cap you then.

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    1y
    Quote from @Tomoko Hale:


    So the the value of the house is $260/SF but the seller is trying to sell it at S$296/SF because of the furniture.

    So you're willing to pay $30,000 for their furniture when you could spend $5,000 on your own? I furnished 2 STRs for that amount, just go to either high-end thrift stores or a lower-end antique store....you'd be surprised at how little you can pay for solid wood furniture...

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  • Tomoko Hale
    OP
    Member since 2022 · 67 posts · 20 votes
    1y
    Quote from @Leora Merrell:
    Quote from @Patricia Andriolo-Bull:
    Quote from @Tomoko Hale:
    Quote from @Patricia Andriolo-Bull:

    Agree with others that 20% is fair.  Regarding your other questions:

      - If the going value is $260/SF, why would you pay more than that?  This is like buying any other property, it is valued at whatever the market is.  Maybe a bit more furnished unless other properties are also selling furnished. 

    - WRT income, at a minimum it has to cover all of your costs plus some for unforeseeable expenses.  What are your goals for this property (e.g. why are you getting into this)?  Will you also be using it for yourself, future appreciation, etc?  This could help decide if the income is enough.  How much do you expect to invest?  I usually look for 10% return if not more.


     Patricia,

    Thank you for the reply. So this property will come with all of the furniture and they looks fairy new. So the the value of the house is $260/SF but the seller is trying to sell it at S$296/SF because of the furniture. I

    My goal is to have a cash flow.


     I don't think you should pay a premium for the furniture but that's just me.


     Not only that, but the appraisal won't put much (if any) value on the furnishings. There's a good chance it may not even appraise for what the seller is asking if the seller really is asking for that much more compared to others just for furniture. 


     Leora,

    Thank you for the info! I thought about the price  of the house whether the furniture comes with it or not. I'm getting a comp so will see!

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  • Tomoko Hale
    OP
    Member since 2022 · 67 posts · 20 votes
    1y
    Quote from @V.G Jason:

    20% is fair, but I'd always size up the market and see who manages the competitors near you. Then talk to them, also

    What regulations could stop you, too, and do you need to transfer any licensing?

    Then you need to bid fair market value, not appropriate the bid to take into account the STR revenue but more so LTR. And if they're valuing furnishings realize if the house is only marketed to a STR; then it limits the pool of buyers. And if it's marketed to the open market someone with a LTR will find those furnishings useless so mark it to 0.

    $260/sq ft vs $296 is a gap, question is how much liquidity is in that market and is it momentum driven? Cause an appraisal will cap you then.


    Thank you for the reply. I started communicating the details to the current property management company which has a great reputation. You were on the right spot of my question about bidding fair market value. I wasn't sure if the price was higher because of STR revenue was included. Thank you!

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