what do you consider a successful or failing STR?

Question

Whether it's for underwriting, acquisitions, disposition, what data points do you use to determine if a property is a success or not?

Everyone has a different investment objective so I don't place much weight on opinions only talking about CoC.

* CoC?* ROI?* ROE?* Gross Yield?* Tax adjusted returns?* FCF?* Risk level?

John Underwood · Answer

Depends on your goals.

Some people just want a vacation house to pay for it self with some personal use.

Then you get the mortgage pay down for free.

Other people need a nice cash flow to live on.

The answer is different for everyone.

I am cool with a nice vacation property that pays for it self as I have plenty of income from my existing portfolio.

Collin Hays · Answer

There are a hundred different answers to your question. As with any investment, you have to identity YOUR OWN investment goals. What my investment goals and expectations are should be irrelevant to you.

Michael Baum · Answer

Hey @Jae Jun, if you aren't taking all of those things into account, then you are setting yourself up for failure.

Relying on COC only is a mistake but a good baseline.

Frankly not everyone will take all of these things into account. Gross Yield? Can be variable. Tax benefits? Important but not to all. ROI, always important. FCF? Tied to CoC and ROI really.

Risk level is one of the most flexible things on the list. Everyone has a different level of risk tolerance. Impossible to use what one person's risk level is to base what another's should be.

ROE is tougher. I always look at that as the end game. ROE is complex IMHO. When does the ROE look better than the COC?

Often times it makes sense to sell a performing STR if the value has skyrocketed. In the end it is a crap shoot. Do you sell the property to reinvest in something that might have a better return to take advantage of the increase in equity?

Could you buy something that performs as well?

I will say that in our case, I couldn't buy another property that performs as well as our lake house even though the value of the house has increased over 400% since we bought it.

The ROE isn't good, but I don't use that as my reason to sell it. My daily rates and ROI don't go up at the same level as the rise in value so if you own a property for a long time, your ROE will continue to drop but that doesn't mean it is a bad investment.

There is a lot to unpack in that list and I could go on forever on it.

Jeremy Horton · Answer

Where did you figure the passive real estate return is in the teens? Seems a lot of this is going to depend on the individual investor/investment/syndicator - I would bet that MOST investors (even a lot of syndicators) are performing less than the stock market especially in this environment. (I may have misunderstood something though!).

That's part of what I think is attractive about RE - it can be controlled to an extent through the individual deal, so the returns can vary a lot.

I'm in the same boat regarding personal returns though - stock market (ie: doing nothing) is going to get me 10% (capital return + dividend return) This maybe be higher with the AI boom right now. So for something RE related with the extra time/work involved, I would want something very close to 20% (total - COC cashflow + appreciation + loan paydown + tax benefits).

Mike Dymski · Answer

IRR.  Stock market is ~8% and passive real estate is in the teens; so, direct owned real estate needs to be ~20% to make sense for the added work involved.  I don't invest in STR but would want it to be higher to justify the extra work.

Christina B. · Answer

@Jeremy Horton Feeling this for the last several months. I've learned so much about STRs but at the cost of so many hours. Even passive investing would have yielded better returns for the time/work involved but glad to keep learning and mulling over other options.

V.G Jason · Answer

The metrics are going to blind you. A successful STR is a hospitality business with an underlying real estate asset.

You buy based off the real estate valuations then add renovations, you optimize with appropriate business leverage(20-40% LTV), and hospitality understanding(great customer, intrinsic properties, etc.).

You cannot predict how your STR will do today, tomorrow, 10 years from now, etc. What you can do is prepare how much you're spending, the value add, the leverage applied, and how your hospitality systems are.

Mike Grudzien · Answer

Depends on individual goals.

V.G Jason · Answer

There is no baseline because probabilities rarely work . What was the baseline for my Asheville STRs I bought back in 2023? Did you add any chance Helene would happen?

Again, margin of safety in essence, so risk level from your list is utmost importance in phys investing. Especially for STRs.

Jae Jun · Answer

yes and hence the question of what you are looking for.

I'm already doing this as a legit business and operator.

Although it can't be predicted, there's a baseline that can be achieved based on market dynamics and what others are doing. And it also helps to underwrite a deal.

what do you consider a successful or failing STR?

Most Popular Reply