What flaws are in my $1M LTR->STR math

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

Hey folks,

Thanks to this community, I was able to rent my LTR SFH down the street from my current place (in MA). I am considering an alternative when the lease is up - taking cash into 1 (or more) STRs.

My LTR was my primary SFH and is now a rental, I am targeting somewhere between $6900 (current rent) and $7750 (ideal, based on the Sell or Keep BP spreadsheet) per month. After a state average 3% vacancy rate and a 8.3% (1 month's rent) MA agent fee for an average 12-18 month lease, I'm assuming somewhere between a 9-11% fee on those rents annually, with capex and opex combined around $700-750/mo. My PITI from my very low 2.8% mortgage, taxes, and insurance adds another $4300/mo. All-in, I'm looking at cash flowing somewhere between $1250-2000/mo.

The major inflection point that is having me reconsider is a recent stagnation (after massive appreciation) in the home value with a thin cash flow yield.

I purchased in 2020 for $920k at the start of Covid and it has risen to $1.5m - but has flat-lined for over a year. With the tax-free gain of $500k on a $500k remaining mortgage, I'm considering taking the $1m of tax-free cash and buying some STRs with my LLC as follows:

Research indicates 3-5 BR SFH are best near Jay Peak or North Conway, so I could probably acquire x2 STRs with that cash and projecting (based on AirDNA):

BALANCE SHEET ($/yr)
- INCOME
-- TOTAL (annual revenue target): 100k (assuming low end of STR math from this website)
- EXPENSES
-- taxes = 1% (NH) + 2% (VT) = 15k
-- insurance = 0.25% = 2.5k
-- PM fees = 20-40% (I'm seeing a wide range - anyone have comps?) = 20-40k
-- Capex (target 1% of capital) = 10k
-- TOTAL = 47.5-67.5k
- CASH FLOW (YIELD) = 32.5-52.5k (3.25-5.25%)

Based on that math, it's considerably better/higher yield to switch to STRs compared to the $15-24k cash flow in my LTR. Not to mention no mortgage, appreciating assets with 100% bonus depreciation via BBB I can deduct off my high W2 income, and STR tax treatments on my high W2 income (I plan to hit the 100 hr time limit / yr that's higher than the PM hours).

What am I missing? What is flawed about my calculations? What further research should I be doing?

I have several questions before I can read further.

1. 3% vacancy rate average for your entire state? Where are you getting this data?

2. What year did you convert your primary residence to a rental? You have to have lived here for 2 of the last 5 years when you sell for the capital gains to be tax free.

3. I'm not seeing costs for furnishings or utilities or lawn care etc. just a 10k capex for repairs.

2 Reply

Adam Conrad
OP
New to Real Estate · Boston, MA · Member since 2016 · 30 posts · 7 votes
8mo
Quote from @John Underwood:
1. 3% vacancy rate average for your entire state? Where are you getting this data?
2. What year did you convert your primary residence to a rental? You have to have lived here for 2 of the last 5 years when you sell for the capital gains to be tax free.
3. I'm not seeing costs for furnishings or utilities or lawn care etc. just a 10k capex for repairs.

1. St Louis Fed = https://fred.stlouisfed.org/series/MARVAC
2. Converted to rental this year and lived in it for the last 5 years - I can get gains tax free
3. Furnishings I'm baking into the cost of acquisition (so 950k home + 50k furnishings is how I would actually deploy $1m in capital). I didn't factor in utilities but I assumed lawn care was part of opex for a property manager charging 35-40%.

One example that looks attractive based on cap rate and gross yield (with likely a strong IRR as values in the North Conway area have appreciated considerably): https://rabbu.com/airbnbs-for-sale/bartlett-nh-03812/17-high...

That would do nearly double my LTR in revenue with a much better cap rate and yield. I got a quote from a reputable property manager in the area that was 25% which would, according to Rabbu's more thorough breakdown of expenses, would give me a NOI of $83.3k which is so much better than my current property.

Honestly even with that being slightly more than $1m (at $1.2, which I think I could get down based on time on market), because of the 100% bonus depreciation, that would essentially wipe out my entire W2 taxes and that alone is free money to justify the additional cost.

0 Reply
John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
8mo
Quote from @Adam Conrad:

Quote from @John Underwood:
1. 3% vacancy rate average for your entire state? Where are you getting this data?
2. What year did you convert your primary residence to a rental? You have to have lived here for 2 of the last 5 years when you sell for the capital gains to be tax free.
3. I'm not seeing costs for furnishings or utilities or lawn care etc. just a 10k capex for repairs.

1. St Louis Fed = https://fred.stlouisfed.org/series/MARVAC
2. Converted to rental this year and lived in it for the last 5 years - I can get gains tax free
3. Furnishings I'm baking into the cost of acquisition (so 950k home + 50k furnishings is how I would actually deploy $1m in capital). I didn't factor in utilities but I assumed lawn care was part of opex for a property manager charging 35-40%.

One example that looks attractive based on cap rate and gross yield (with likely a strong IRR as values in the North Conway area have appreciated considerably): https://rabbu.com/airbnbs-for-sale/bartlett-nh-03812/17-high...

That would do nearly double my LTR in revenue with a much better cap rate and yield. I got a quote from a reputable property manager in the area that was 25% which would, according to Rabbu's more thorough breakdown of expenses, would give me a NOI of $83.3k which is so much better than my current property.

Honestly even with that being slightly more than $1m (at $1.2, which I think I could get down based on time on market), because of the 100% bonus depreciation, that would essentially wipe out my entire W2 taxes and that alone is free money to justify the additional cost.

LTR are a lot less work and less risk. Your 2k of cash flow is not bad for a much more passive investment. You also get continued mortgage paydown, depreciation deductions and you don't have to worry about lawncare and utilities.
STR is riskier but has a potential larger upside. I agree with the seasonality that will affect monthly occupancy. This is not as worrisome if you're paying cash. I would expect lawncare to be extra. Also we have a 1.6 Million cabin and our STR is 6k per year and we struggle to find this deal as we were at 8k per year prior to that, so I think your insurance number may be low.
Also owning a STR can be more fun and rewarding. All of by STRs are vacation rentals meaning there is an enhanced reason for people to want to come to my properties with family and friends and spend vacation money. They are also place I like go to unwind with my family and friends.
Based on your potential numbers and the bonus depreciation, which will only help the one year of W-2 taxes, it looks good on paper.
0 Reply
Adam Conrad
OP
New to Real Estate · Boston, MA · Member since 2016 · 30 posts · 7 votes
8mo
> Also we have a 1.6 Million cabin and our STR is 6k per year and we
struggle to find this deal as we were at 8k per year prior to that, so I
think your insurance number may be low

This place has no yard and lawncare included with PM (I checked). Insurance is not low, it was quoted for me by my agent.

> Also owning a STR can be more fun and rewarding. All of by STRs are vacation rentals
meaning there is an enhanced reason for people to want to come to my
properties with family and friends and spend vacation money. They are
also place I like go to unwind with my family and friends.

Yes agreed - we've wanted a vacation home and the fact it would likely cash flow much better than our LTR is a bonus
1 Reply

Denise SuppleeBusiness Member

Realtor · Willow Grove, PA · Member since 2017 · 1k+ posts · 652 votes

8mo

Hi @Adam Conrad the numbers look good but a few things to double-check: STRs come with added operational risks and seasonal fluctuations, so just be sure to factor in the full range of property management costs, as those can vary. Also, while STR tax benefits are significant, managing them effectively requires more time and attention, so make sure you're prepared for that. And make sure to verify local STR regulations to avoid any surprises. If all checks out, this could be a smart move for higher yields. I like to stress test before jumping in, play devils advocate so I can cover every angle

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

8mo

Quote from @Adam Conrad:

Hey folks,

Thanks to this community, I was able to rent my LTR SFH down the street from my current place (in MA). I am considering an alternative when the lease is up - taking cash into 1 (or more) STRs.

My LTR was my primary SFH and is now a rental, I am targeting somewhere between $6900 (current rent) and $7750 (ideal, based on the Sell or Keep BP spreadsheet) per month. After a state average 3% vacancy rate and a 8.3% (1 month's rent) MA agent fee for an average 12-18 month lease, I'm assuming somewhere between a 9-11% fee on those rents annually, with capex and opex combined around $700-750/mo. My PITI from my very low 2.8% mortgage, taxes, and insurance adds another $4300/mo. All-in, I'm looking at cash flowing somewhere between $1250-2000/mo.

The major inflection point that is having me reconsider is a recent stagnation (after massive appreciation) in the home value with a thin cash flow yield.

I purchased in 2020 for $920k at the start of Covid and it has risen to $1.5m - but has flat-lined for over a year. With the tax-free gain of $500k on a $500k remaining mortgage, I'm considering taking the $1m of tax-free cash and buying some STRs with my LLC as follows:

Research indicates 3-5 BR SFH are best near Jay Peak or North Conway, so I could probably acquire x2 STRs with that cash and projecting (based on AirDNA):

BALANCE SHEET ($/yr)
- INCOME
-- TOTAL (annual revenue target): 100k (assuming low end of STR math from this website)
- EXPENSES
-- taxes = 1% (NH) + 2% (VT) = 15k
-- insurance = 0.25% = 2.5k
-- PM fees = 20-40% (I'm seeing a wide range - anyone have comps?) = 20-40k
-- Capex (target 1% of capital) = 10k
-- TOTAL = 47.5-67.5k
- CASH FLOW (YIELD) = 32.5-52.5k (3.25-5.25%)

Based on that math, it's considerably better/higher yield to switch to STRs compared to the $15-24k cash flow in my LTR. Not to mention no mortgage, appreciating assets with 100% bonus depreciation via BBB I can deduct off my high W2 income, and STR tax treatments on my high W2 income (I plan to hit the 100 hr time limit / yr that's higher than the PM hours).

What am I missing? What is flawed about my calculations? What further research should I be doing?

Depends how good your current location is. If it's superior, I'd keep the golden goose, don't "diversify" into singles. It's wealth destruction.

Yes, Boston has consolidated. That's normal, the line doesn't go up and to the right forever.

RE is a term game, if anything this means try to buy another with someone trying to bail if you have the means too.

0 Reply

Adam Conrad
OP
New to Real Estate · Boston, MA · Member since 2016 · 30 posts · 7 votes
8mo
Quote from @V.G Jason:
Depends how good your current location is. If it's superior, I'd keep the golden goose, don't "diversify" into singles. It's wealth destruction.
Yes, Boston has consolidated. That's normal, the line doesn't go up and to the right forever.
RE is a term game, if anything this means try to buy another with someone trying to bail if you have the means too.
Well my current location for LTR is based on a superior school system - it's a totally different calculus for what makes it good compared to a STR in a vacation spot. Both locations are excellent for what they are designed for. I wouldn't get an STR in a place we wouldn't actually want to spend time for part of the year ourselves.

But yes, I agree. It's a term game - and I think I've extracted the 80/20 of appreciation on my current home and I'm looking to take the gains and apply it to something with better cash flows and more upside on appreciation, as well as a fun place for me and my family to vacation, cost free (even if it never rents, we still own a vacation home with no mortgage).
0 Reply

Andrew SteffensBusiness Member

Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes

8mo

To me as a PM/Agent in FL with many out of state clients, the best clients are those not buying because they ran numbers down to the tenth of a point. STR's can and often do make solid investments but with many more moving parts than LTR's the numbers will fluctuate a lot more year to year. Most of my clients own for reasons such as desire to have a second home in FL, tax depreciation benefits, or a combination of similar factors. Their cash flow fluctuates from month to month and year to year and they do not mind because they enjoy it and they are not analyzing it to the tenth of a percent where they could have invested in LTR, or index funds, etc. You are not doing anything wrong at all, I am just pointing out that the happiest clients I have tend to have different motivations.

[email protected]813-563-0877

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1 Reply

Adam Conrad
OP
New to Real Estate · Boston, MA · Member since 2016 · 30 posts · 7 votes
8mo
Quote from @Andrew Steffens:

To me as a PM/Agent in FL with many out of state clients, the best clients are those not buying because they ran numbers down to the tenth of a point. STR's can and often do make solid investments but with many more moving parts than LTR's the numbers will fluctuate a lot more year to year. Most of my clients own for reasons such as desire to have a second home in FL, tax depreciation benefits, or a combination of similar factors. Their cash flow fluctuates from month to month and year to year and they do not mind because they enjoy it and they are not analyzing it to the tenth of a percent where they could have invested in LTR, or index funds, etc. You are not doing anything wrong at all, I am just pointing out that the happiest clients I have tend to have different motivations.
Totally agree - I mean it's all of those factors for me. I grew up going to North Conway as a kid. I love skiing, mountain biking, fly fishing, hiking...it has everything I love doing. And our kids love it. We would want a vacation home here if we never rented it a day, and being able to rent it is pure upside if we pay with cash. It's an (seemingly) ideally happy situation - it's a home we'd want to be in, in an area we want to vacation in, that also happens to cash flow with no mortgage. Seems great! Which is exactly why I posted - I always get a spidey sense if something seems too good to be true.
0 Reply
Andrew SteffensBusiness Member
Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
8mo
Quote from @Adam Conrad:

Quote from @Andrew Steffens:

To me as a PM/Agent in FL with many out of state clients, the best clients are those not buying because they ran numbers down to the tenth of a point. STR's can and often do make solid investments but with many more moving parts than LTR's the numbers will fluctuate a lot more year to year. Most of my clients own for reasons such as desire to have a second home in FL, tax depreciation benefits, or a combination of similar factors. Their cash flow fluctuates from month to month and year to year and they do not mind because they enjoy it and they are not analyzing it to the tenth of a percent where they could have invested in LTR, or index funds, etc. You are not doing anything wrong at all, I am just pointing out that the happiest clients I have tend to have different motivations.
Totally agree - I mean it's all of those factors for me. I grew up going to North Conway as a kid. I love skiing, mountain biking, fly fishing, hiking...it has everything I love doing. And our kids love it. We would want a vacation home here if we never rented it a day, and being able to rent it is pure upside if we pay with cash. It's an (seemingly) ideally happy situation - it's a home we'd want to be in, in an area we want to vacation in, that also happens to cash flow with no mortgage. Seems great! Which is exactly why I posted - I always get a spidey sense if something seems too good to be true.

Then it sounds like it might just be a good idea!
[email protected]813-563-0877
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Allan C.

Rental Property Investor · Member since 2018 · 826 posts · 810 votes

8mo

You're doing detailed math based on a lot of assumptions. Take a step back and look at this fundamentally. Have you considered why STR yields are higher than LTR yields? It's due to extra effort and risk - is the extra effort ant risk worth it to you?

You know what other yields look great on paper - section 8 rentals. don't just chase paper yields - that's a recipe for disaster. Try to understand fundamentals of why something gives higher yield than another (risk, effort, barrier to entry).

You have the best competitive advantage of low interest rates. Do the math on giving that up. $500k capital gains exclusion is a great benefit, but you're also on a short fuse to sell if you've already been renting it.

Looks like you got a low LTV at purchase, so you do have a lot of trapped equity. I agree with selling it to get, but don't get caught in the STR trap.

0 Reply

Adam Conrad
OP
New to Real Estate · Boston, MA · Member since 2016 · 30 posts · 7 votes
8mo
Quote from @Allan C.:

You're doing detailed math based on a lot of assumptions. Take a step back and look at this fundamentally. Have you considered why STR yields are higher than LTR yields? It's due to extra effort and risk - is the extra effort ant risk worth it to you?

You know what other yields look great on paper - section 8 rentals. don't just chase paper yields - that's a recipe for disaster. Try to understand fundamentals of why something gives higher yield than another (risk, effort, barrier to entry).

You have the best competitive advantage of low interest rates. Do the math on giving that up. $500k capital gains exclusion is a great benefit, but you're also on a short fuse to sell if you've already been renting it.

Looks like you got a low LTV at purchase, so you do have a lot of trapped equity. I agree with selling it to get, but don't get caught in the STR trap.
> Have you considered why STR yields are higher than LTR yields? It's due
to extra effort and risk - is the extra effort ant risk worth it to you?

Totally agree - it is extra effort and risk. And I believe:

- The effort is mitigated with a reliable, quality property manager (and I don't mind putting in roughly 100 hrs a year to materially participate, I can spare ~2 hrs/week on it).
- The risk IMHO is near zero. At worst, I pay for a vacation home with cash. No matter what, I get a vacation home I can now use for me and my family for as long as I own it. In the middle, it has a very low occupancy rate, but because I put effort into it and keep it listed, I get the bonus depreciation, which is several hundred k in year 1, that's also worth a ton. Better/best case, even if the occupancy rate is as low as 15% (Rabbu, AirDNA, and PriceLabs all have Conway as above 50%, and I'm not going to buy and undesireable piece of cr*p place), which is extremely conservative, I will net a higher cash flow from the STR than the LTR.

So overall, that's why I'm here. I can't seem to find a reason why this is a bad move, and all of you are incredibly helpful in ensuring I'm not missing anything. Appreciate all of the feedback!
0 Reply
Allan C.
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
8mo
if it were that easy everyone would be doing it. There are limited barriers to entry in real estate, so good margins will get competed away over time.

i'm challenging your thinking as you're being overly optimistic with all of your assumptions.
0 Reply

Collin Chan

Investor · Dublin, CA · Member since 2019 · 167 posts · 134 votes

8mo

We went from LTRs to STRs and learned alot. Consider all expenses:

1) Cleaning fees are included into Airdna possibly and depending on the size of your house and number of turns (guests) per month could be $2000/mo easily

2) Transitory taxes in the state where we operate are about 13.5%. So you will need to add that as an expense if it's not factored in

3) Utilities/services can add up especially if you add pest control, spa servicing, etc. Management fees from my experience are 20-30% so maybe if you've seen up to 40% they cover utilities for you? The 20-30% don't typically cover utilities.

4) STR insurance is higher than LTR so make sure to get a couple quotes for more accurate pricing.

Collin

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What flaws are in my $1M LTR->STR math

What flaws are in my $1M LTR->STR math

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