This is one of my favorite STR Deals we've done in the Austin area!

[Blake Anthony Carter]

I wanted to share a recent short term rental case study because I think it highlights something that gets overlooked when investors talk about their exit strategy. Selling a short term rental is not always the same as selling a normal residential property, especially when a large portion of its value comes from the design, performance history and operations.

In November of 2022, we helped an experienced investor purchase a dated 4 bedroom, 3 bathroom home in Pflugerville for $494,000. It had a pool and was in a good suburban location, but the biggest reason we liked it was the revenue potential. We were already managing similar properties in the area that were producing around $140,000 annually, and the purchase price gave us enough room to improve the property without getting too far ahead of the numbers.

We negotiated a large seller credit and helped oversee an approximately $80,000 renovation. The formal living room was converted into a bedroom and the garage was converted as well, taking the property from 4 bedrooms to 6. The renovation lasted about four months. The owner then spent approximately $45,000 on furnishings and design. We branded the property as The Mad Hatter and used a consistent emerald green theme throughout the home, which gave it a memorable identity and photographed much better than a generic setup would have.

During its first year of operation, it produced approximately $130,000 in gross revenue and cashflowed around $2,000 per month after management fees. That was close to our original projection and made it one of the stronger performing properties in its immediate market.

After approximately three years of ownership, the investor decided to sell and complete a 1031 exchange into another market. We sold it entirely off market for $700,000 to another short term rental investor. The property was sold fully furnished and turnkey, and the buyer kept the existing management in place because the home already had a proven revenue history and an operating system that was working.

The economics are naturally different for the new buyer because their cost basis is higher. Their cash flow is lower than the original owner’s, but they were also buying a different product. The first owner bought a dated house and took on the renovation, setup and stabilization risk. The new owner purchased a finished, proven asset that was already producing income and helped meet their tax objectives.

The biggest lesson from this deal is that the exit strategy should be considered long before the property is listed for sale. An established short term rental may have more value to another investor than it does to a traditional homeowner, but only when the revenue history, furnishings, design, systems and management are properly packaged and presented. Most agents are prepared to sell the house itself, but many do not know how to present the business operating inside of it.

Our client’s reaction after closing was probably the best summary of the deal: “I can’t believe this worked. You guys did a great job managing the property and now we’re selling it for a profit.”

[John Underwood]

a 24k net income from this type of investment is honestly not that great. I can buy 3 LTRs, or more, with that money and make more money with effort.

With that gross vs that Net I bet the management fee costs more than the Net so the first thing to substantially increase cash flow is to self manage. 

Also a residential house is only worth what the comps say it is worth to a mortgage company. Now you might get a cash buyer to pay more where comps and appraisals are ignored.