Help Me Evaluate This STR Deal

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Help Me Evaluate This STR Deal

Bob Mueller Jr.
Rental Property Investor · Member since 2018 · 41 posts · 8 votes

Have found a STR property in Florida that has a good history on VRBO and AirBnb since late 2015 until now. Seller has provided me with booking/revenue numbers going back to 2016, and is claiming the property was booked 316-324/365 days in 2016/2017. He is showing 283/365 so far in 2018. These occupancy numbers seem extremely high to me, but I have verified the property is pretty booked up on VRBO so maybe it's true. The cost of the house would be $500-600K to obtain, so it's not cheap. His numbers claim a NOI of $53,734 before any debt service, with a $500 monthly cleaning fee (average) and self managed. Or I get an NOI of $40,954 if I input 20% for property management. For both those calculations, I put 5% towards budgeted repairs and 3% to CapEx. With the 20% management and NOI of $40,954, I am still getting roughly $1,100/month positive cash flow, 10.14% COC return, assuming a $575K sale price and 20% down ($115K). Is this a risky deal? If I take away the 20% PM, the numbers jump to $2,150 monthly cash flow and 20.13% COC ROI.

A lot of numbers to digest here, but can any of you STR veterans help me out? @Luke Carl ? Is anything jumping out to you?  They rent the property for around $350/night average.  I think my biggest worry is if the extreme high occupancy drops for whatever reason, then this property comes into trouble pretty quick...  This would be my first vacation property.      

Annual Rent
Rent Rev. Mo.$7,824.83$93,897.98
Costs
Taxes$518.25$6218.98 paid yearly
Insurance$371.70

Average Bills
Power$600.00Duke Energy
Water$200.00$400 every 2 months Pinellas County Water
Cable$125.69DirecTV
Internet$58.28Brighthouse
Lawn$135.00
Pool$180.00
Garbage$17.16$51.48 paid quarterly
Cleaning$500.00average
Total Costs$2,706.08
Gross Profit$5,118.75
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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
8y

$94k gross rents on a $575k purchase is 16% rent/purchase ratio.  We target 25-30% for these larger properties, but would take less for something like this that is turnkey I suppose.  The biggest flag I am seeing is cleaning.  With that occupancy, cleaning should be a lot higher.  How much does it cost to clean the place, and how many turns do they average per month?  Cleaning should be WAY higher.

It's probably worth putting CAPEX, maintenance, and furniture and fixtures replacement into the equation. With a larger home with a pool, full of furniture, plan on significant costs to repair and replace.

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  • Luke CarlPro Member
    Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
    8y
    @Bob Mueller Jr. @Bob Mueller Jr. Woah! Your head is spinning. I actually read this on the forum and was surprised to see my name mentioned usually I’d see that pop up in my email first so thanks for that!!! Occupancy rates seem normal to me but its not my market. Questions: What is the GROSS number past couple years. Are you financing and how much down. Do you have time to get me on the phone real quick before I go to bed with a newborn.
    Podcast Guest on Show From Surviving on $30/Day to 30+ Properties Thanks to Blue-Collar Skills
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  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    8y

    I believe those numbers. We have a similar STR in St. Augustine. That being said, you should have an exit plan. What would this property rent for as a LTR? Does that work for you as a LTR? Regulations change, have an exit plan. Research but don't get analysis paralysis either. Good luck.

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  • Bob Mueller Jr.
    OP
    Rental Property Investor · Member since 2018 · 41 posts · 8 votes
    8y
    @Nancy Bachety The exit plan is what worries me. The seller is an agent, and he claims the house itself is probably worth $500-525K but he’s going to want around $600K because of the STR income it produces. I plan to negotiate if I buy it, of course, but how much “over market” should I pay just because this house it set up well for STR? He claims $40K of 2019 bookings would go with the house too. Would it cash flow as a LTR? After expenses and debt service, I do not believe it would, no.
    0Reply
  • Jon Crosby
    Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
    8y

    @Bob Mueller Jr. If you want PM me the address I can run it thru the tools I have available to confirm the occupancy and ADR amounts, the rest is just math and 'trust but verify' the Op Ex numbers he has provided. Other than that, I would just make sure you are apprised of any and all STR regulations/permitting requirements for the municipality, county and HOA. I'm also assuming this is turnkey and he is leaving all the furniture and essentials as it sounds like a large property.

    If the numbers are even close to what he is claiming, it looks like plenty of cash flow.  @Nancy Bachety is dead on though, you will certainly want to assess any/all exit strategies in case those numbers change in the future.  To be honest though, with that much cash flow if you just save most of that cash (or apply back to the principal) you should be able to weather most storms.  :-)

    Best of luck! 

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  • Jake Miller
    Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes
    8y

    This doesn't sound like a deal at all, for the amount invested you should be able to find far bigger returns elsewhere. That's just my own experience in STR's

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  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    8y

    $94k gross rents on a $575k purchase is 16% rent/purchase ratio.  We target 25-30% for these larger properties, but would take less for something like this that is turnkey I suppose.  The biggest flag I am seeing is cleaning.  With that occupancy, cleaning should be a lot higher.  How much does it cost to clean the place, and how many turns do they average per month?  Cleaning should be WAY higher.

    It's probably worth putting CAPEX, maintenance, and furniture and fixtures replacement into the equation. With a larger home with a pool, full of furniture, plan on significant costs to repair and replace.

    1Reply
  • Luke CarlPro Member
    Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
    8y
    @John D. Makes a great point although that gross sounds decent to me for that PP but I need more info. If it’s worth 500k it’ll appraise for 500k are you paying cash for the entire purchase or willing to make up the difference?
    Podcast Guest on Show From Surviving on $30/Day to 30+ Properties Thanks to Blue-Collar Skills
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  • Mark S.
    Real Estate Investor · Houston, TX · Member since 2016 · 142 posts · 79 votes
    8y

    @John D.  I would be hesitant to pay anything over the true value of the property itself.  Just because it may cash flow good now, you don't want to be stuck with an underwater property should the worst happen.  There's a LOT of STRs all over Florida.  

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  • Bob Mueller Jr.
    OP
    Rental Property Investor · Member since 2018 · 41 posts · 8 votes
    8y
    @John D The cleaning fee seemed low for occupancy to me as well. Seller told me “cleaning fees were built into his revenue numbers” so maybe I could just push it higher and pass through to the guests. A few of his guest reviews did talk like the property could be cleaned better/more often. If I chose to get a PM @ 20%, wouldnt they handle the cleanIng Included In theIr services? If I self manage, if he‘s doing 4-5 turns per month how much higher should that cleaning fee be than $500?
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  • Anand S.
    Plantation, FL · Member since 2009 · 329 posts · 119 votes
    8y

    Not sure what market that is but occupancy seems quite high. FL is hot and humid as heck in the summer so impacts occupancy during those months.

    He should be able to print out his transactions from ABB and HA so there is no debate as to the income. If he is hesitant to do so, I'd be concerned. Utilities seem OK and cleanings a bit low but not much to be concerned there. 

    Lastly, I wouldn't pay more than retail for the home. 

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  • Anand S.
    Plantation, FL · Member since 2009 · 329 posts · 119 votes
    8y

    Location, size (BR/BA SQFT) and pool would also help in determining nightly rate. 

    0Reply
  • Villy Ellinger
    Real Estate Agent · Fort Walton Beach, FL · Member since 2018 · 219 posts · 275 votes
    8y

    @Bob Mueller Jr. Hi, Bob, I'm in Ft Walton Beach, FL. Not sure where your property is located, but I can believe the gross revenue and the occupancy. I have several vacation rental properties and I self-manage. I want to point out a few things to consider: occupancy and gross revenue are only partially a function of the property itself. Management style, marketing, guest loyalty etc is a big part of the equation. I would guess that these occupancy rates and gross revenue come with a pretty involved owner-management style. If you hire a rental management company I would expect your occupancy and your gross revenue to drop. Not sure by how much, but could be significant. Here on the Emerald Coast, the difference in gross revenue between actively managed by owner properties and those managed by larger rental management companies like Wyndham or Vacasa can be 20-30% or more. 

    Other questions:

    Does the gross rent number reported above include the FL occupancy taxes or is it net of that?

    Why are guests not paying for the cleaning fees? Or is the cleaning fee you are reporting a type of monthly "deep clean" in addition to the regular "turn" cleanings and laundry? Seems low if this is the only payment for cleaning an STR.

    I'm assuming there is no expense allocated for marketing, etc because you are planning on using a rental management company. Is that correct?

    1Reply
  • Sid Payne
    Longmont, CO · Member since 2018 · 105 posts · 79 votes
    8y

    The cleanings shouldn't cost you anything, they should be built into the revenue. My guests pay for their cleanings and I think that is typical.

    Your pool maintenance seems high compared to what I pay in Florida.
    Just because he has future bookings he will turn over to you, that does not mean that is what it will do year after year. Also, some of those folks may cancel any you will be on the hook for returning their deposit.

    20% for full PM seems low to me, I thought they were more like 30%. Also, is that PM company going to be doing your bookings and managing your guests from start to finish? If so, what is there incentive to book you over other clients. I do all of my own booking management and do not trust anyone to that side of the business.

    Do you have any STRs experience? It is a great business but very different from anything else. If you don't, I would probably recommend starting with something a lot smaller to get your feet wet. I've been doing this since 2015, have 4 properties down there and that big of a property/payment would make me apprehensive.
    Where in Florida is this property?

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  • Keith C.
    Lender · Central Florida Markets · Member since 2017 · 137 posts · 135 votes
    8y

    I own a few studio units on a beach block in St Pete area , I would be ok leasing some units to AirBNB entrepreneurs. All units are in middle of being fully renovated with all new appliances, flooring , fresh paint etc . 

    I perioanaly use a cleaning crew that I can introduce you too or choose your own .

    It gives you an opportunity to add to your portfolio or start your first one without purchasing a property.

    It’s  a class B+ Area per Airdna and the each studio avg income is $2300 . I have all the data . 

    The beach is approx 800 ft away , has off st parking and is one of the nicest beaches and beach town in the country 

    PM me for More info

    Best of luck 

    Keith 

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  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    8y

    Cleaning is not in the 20% property management fee, it is extra, and you may well have to pay more then 20% for quality management company.  Call some local cleaners, ask for a quote on the property.  I would assume it's going to be at least double that, maybe more given you need a cleaning crew that can turn the property around in 4-5 hours on times when you have a same-day turn.  And given his high occupancy, I would expect a fair number of same day turns.   Saying “cleaning fees were built into his revenue numbers”....does that means he is deducting cleaning before providing you the revenue numbers (in which case for our purposes cleaning cost is $0 as it has already been removed)?  Or something else.

    Also the power, water, etc. numbers are obviously too round to be accurate.  If he is going to try to charge a premium for this property as an established business, he should be providing ACTUAL numbers for the past couple years.  Something prepared by an accountant based on the info used to file taxes.

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  • Bob Mueller Jr.
    OP
    Rental Property Investor · Member since 2018 · 41 posts · 8 votes
    8y

    I looked at this property today and it was a big disappointment.  It had several water leaks, a lot of deferred maintenance, and now it kind of makes sense why the guy is wanting to sell it.  To be honest, I'm surprised he's getting as many positive reviews on the property as he is with its current condition---people must be very forgiving on VRBO!  

    I'm off this property for now, but will stay in touch with the seller in case he wishes to substantially reduce the price at some point and bail out. It probably needs $50K in updates/repairs so he's going to have to get aggressive on price if he wants out. For now, I am going to look at some other houses close to him and see if I can't just build up my own STR from scratch. Thanks to everyone for the quick input here, I plan to make my long-term strategy vacation rentals and will be back in touch with many of you at some point in time. Great answers!

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  • Eric A.
    Rental Property Investor · St. Augustine, FL · Member since 2017 · 189 posts · 127 votes
    8y
    @Bob Mueller Jr. maintenance in Florida is huge if you are close to the ocean. Trust me it’s huge. Also, never never never buy a property that can’t cover itself with a long term renter. If local municipalities drop new regulations you are screwed.
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  • Bob Mueller Jr.
    OP
    Rental Property Investor · Member since 2018 · 41 posts · 8 votes
    8y
    Originally posted by @Eric A.:
    @Bob Mueller Jr.  Also, never never never buy a property that can’t cover itself with a long term renter. If local municipalities drop new regulations you are screwed.  

    Everyone keeps saying this, and I agree its smart, but where in Florida can you even find single family houses that cash flow with LTR?  Getting the 1% rule or even close to 1% for LTR is becoming literally impossible in most markets.  Why not just sell the house if the STR laws change and you get shut down?  Can't that be an exit strategy too?  
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  • Angela Yan
    Rental Property Investor · San Francisco, CA · Member since 2017 · 207 posts · 138 votes
    8y
    @Bob Mueller Jr. Although Florida may be very solid in short term rental, I feel like the purchase price should not relative to the NOI as things can change and city or community ordinance can change and this Short term income may not be available. You may want to run your numbers if you have to rent it out by the month, at least 30 days and see if the deal still makes sense. This was my personal case with my property in SF and I no longer can do Air bnb except for corporate housing. My income dropped drastically. Besides the bank will always look at comps sold for SFR and not NOI as this is not a commercial property. Good luck!
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  • Eric A.
    Rental Property Investor · St. Augustine, FL · Member since 2017 · 189 posts · 127 votes
    8y

    If you are looking for deals strictly through realtors it’s not going to happen. Deals are made not found. 

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  • AJ Singh
    Rental Property Investor · Orange County, CA · Member since 2016 · 513 posts · 374 votes
    8y

    @Bob Mueller Jr.

    you made the right decision based on the condition of the house. 

    Best of luck !!

    0Reply
  • Nikki Beall
    Rental Property Investor · Northern VA · Member since 2018 · 8 posts · 4 votes
    8y
    @Villy Ellinger curious to know why his occupancy would drop if he hired a property managment co?
    0Reply
  • Anand S.
    Plantation, FL · Member since 2009 · 329 posts · 119 votes
    8y
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  • Bob Mueller Jr.
    OP
    Rental Property Investor · Member since 2018 · 41 posts · 8 votes
    8y
    Originally posted by @Anand S.:

    This was in the Tampa/St. Pete area.  3BR 3Bath house with poo/hot tubl and good entertainment area in the back.  

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  • Villy Ellinger
    Real Estate Agent · Fort Walton Beach, FL · Member since 2018 · 219 posts · 275 votes
    8y

    @Nikki Beall Definitely not always the case, but in my experience a savvy self-managing owner usually does better in occupancy and overall revenue than a property management company. There are exceptions, of course, especially when it comes to some small, targeted property managers who don't rotate properties and market them like they would their own (i.e. respond to inquiries in the middle of the night, pick up phone calls at any time personally, etc.). But for the larger property management companies that is not possible. Once you get into the type of operations where phone calls use IVR, responses are canned and automated and someone making $12 per hour is the person that has the direct contact with your guests, things get trickier. My two cents. Again, there are always exceptions... 

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