Long Term vs. Short Term - rule of thumb for what direction to go
Rental Property Investor · Lansing, MI · Member since 2017 · 58 posts · 18 votes
As investors we seem to have "formulas" or rules of thumb to help us through our decisions. 1% rule, 70% ARV, etc...
Anything that helps you quickly decide when a short term rental is better than a long term rental?
I normally think long term is lower risk (occupancy, crazy renters, etc) but less margin when compared to short term. I have a condo that would be great for short term rental on Airbnb or similar. It's a "golf resort" and right next to the clubhouse. However, it's in Panama City Beach and medium/long term rental properties are in short supply right now and getting an absolute premium. Without taking advantage of people, but charging a "fair market rate" I can do quite well with it. I've thought about the Airbnb route and in the future it is probably a good idea. But for now, I'm tempted to just leave it as a long term rental. Known vs unknown I guess. Plus for STR I would have to lay out the cash to furnish it.
I'm not asking if Airbnb in general is "worth it". I've already done that research. Just where is the break even point where you just go STR? I can sit down and do the hypothetical numbers. Just wondered if there was an "industry accepted" rule of thumb.
I think it's going to depend on the market, and individual tolerance/desires for return, when you start looking at cap rates and so forth. Generally speaking, I want to see $1k cash flow per property per month before I'll consider one, and I buy fairly inexpensive properties (<$200k). I want to see cap rates that begin at 15%.
One of the things that creates a variable is the cost of furnishing/setting up a new property. In some markets it's easy to buy furnished properties, in others you're starting from scratch.
In your particular situation, my first question is if STRs are permitted by the HOAs. It's PCB so they probably are, but you definitely want to know that first.
Next question is: is the unit already furnished? If not, how much money/time will it take to furnish it?
Next question: Would you self-manage or hire a property manager to oversee STR turnover? If a property manager, how much will they charge? If not, how much time do you have available to self-manage? Once you get up and running, it's not difficult, but it definitely requires more time and effort than long-term rentals.
Finally, unless the STR returns are significantly higher than LTR or mid-term, I'd stick with the lower-maintenance mid-term/long-term renters. A way to determine this is to get a feel for local occupancy rates - PCB is a big tourist destination, but there's also a ton of STRs already there, so see if you can get a feel for a typical occupancy rate. You can do this by looking for comparable properties on AirBNB, VRBO, or local property manager sites and checking their calendars (though that's going to be most reliable for the next couple of months, less reliable for dates further out). You may want to call a local PM or two and get their insight, as well.
Good luck!
My rule of thumb is if 26 weeks of full rent will pay for the purchase price of the house, I go forward. But my market is not the typical market. A more realistic rule of thumb would be 104 weeks instead.
No industry accepted rule, mine earn around 3x the long term rate so it’s really a no brainer to do them as a str. if the rate of return on a long term vs short term isn’t much difference percentage wise then i’d definitely just do LTR.
I think it's going to depend on the market, and individual tolerance/desires for return, when you start looking at cap rates and so forth. Generally speaking, I want to see $1k cash flow per property per month before I'll consider one, and I buy fairly inexpensive properties (<$200k). I want to see cap rates that begin at 15%.
One of the things that creates a variable is the cost of furnishing/setting up a new property. In some markets it's easy to buy furnished properties, in others you're starting from scratch.
In your particular situation, my first question is if STRs are permitted by the HOAs. It's PCB so they probably are, but you definitely want to know that first.
Next question is: is the unit already furnished? If not, how much money/time will it take to furnish it?
Next question: Would you self-manage or hire a property manager to oversee STR turnover? If a property manager, how much will they charge? If not, how much time do you have available to self-manage? Once you get up and running, it's not difficult, but it definitely requires more time and effort than long-term rentals.
Finally, unless the STR returns are significantly higher than LTR or mid-term, I'd stick with the lower-maintenance mid-term/long-term renters. A way to determine this is to get a feel for local occupancy rates - PCB is a big tourist destination, but there's also a ton of STRs already there, so see if you can get a feel for a typical occupancy rate. You can do this by looking for comparable properties on AirBNB, VRBO, or local property manager sites and checking their calendars (though that's going to be most reliable for the next couple of months, less reliable for dates further out). You may want to call a local PM or two and get their insight, as well.
Good luck!
Our plan was a little different. We bought the lake house to enjoy but also as an investment. Our home is now paying for itself with a little bit more. Overall we lose money on it, but that offsets our taxes so it works. We use the house, take friends and family there etc. Plus it is growing in value so when we go to sell it, we get that profit in the end. We might go live there when we retire, we might not.
Now that we have dipped our toe into the STR experience and found that it can work for us, we are looking for a more profitable property with more than 2 season rent ability.
PCB is packed with STR's, with an average nightly rate of about 120 bucks. That is a 2 bed/2 bath condo. Not knowing what your property is like, it could be more, but not much more. Bigger places are running around 220 give or take.
Just do the research and see how it all pans out. Also, remember STR's are a hospitality business, so be prepared to chat with guest on the phone, text with them and make them feel welcome. That is my favorite part of the gig!
I am paying all cash for my LTR, my STR is a lake house and for me it is doing much better than breaking even which was my goal since I keep my boat and jet skiis there and can use them when we are there doing maintenance.
I can find houses for pennies on the dollar that I can fix up and get 1k / month rent. If I find this criteria I'll buy it in a second.
Our plan was a little different. We bought the lake house to enjoy but also as an investment. Our home is now paying for itself with a little bit more. Overall we lose money on it, but that offsets our taxes so it works. We use the house, take friends and family there etc. Plus it is growing in value so when we go to sell it, we get that profit in the end. We might go live there when we retire, we might not.
This is part of my "struggle". I want to be able to use the condo for my family occasionally, which is one point in favor of STR. But I like the consistency of the LTR cash flow. They aren't completely hands off, but much more so than STR.
I have another property in the area so I'm pretty familiar with the rental market there...just trying to decide what I want to do with this unit.
Thanks for the input BP family!
In my world of monthly furnished corporate housing rentals these are some things to think about:
Top 4 things to consider when deciding if your rental is best as a corporate housing rental or traditional unfurnished rental.
While corporate housing can be quite lucrative and make your property stand out in a sea of available rentals, it’s not the right strategy for everyone. If you are an investor looking to purchase the right type of rental property, review the following information to determine whether you and your property are the right fit for corporate housing – or whether your property may be a better fit as a traditional, long-term rental property.
LOCATION
Corporate housing thrives in urban and business areas where executives travel to often. It also does well near hospitals and universities, which tend to bring on temporary staff or relocate professors or doctors to the area. (Please note these may not be traditional rental areas.) If your property falls into one of these locations, you may want to make it a corporate housing rental and tap into these lucrative opportunities.
CASH FLOW
While you will typically get a higher annual return with corporate housing, you don’t necessarily get the smooth cash flow that you would from a tenant who is signing a long-term lease. If you need money by the second of each month in order to pay your mortgage, than corporate housing is not for you. With corporate housing, your place will be rented more sporadically and less consistently than a tenant who signs a 12-month lease. In some cases, especially when you work with corporations versus private tenants, you may not get payment for 45 days.
NERVES
Are you a worrier? Your rental property might sit vacant for part of the year (versus having a long-term, lease-committed tenant). Some people, by nature, worry about these kinds of details and may not have the stomach for investing in a short-term rental property. That said, if you’re more easy-going and enjoy earning higher returns overall, you may be just be the right personality fit for corporate rentals.
TIME
Do you have the time? Corporate housing can take more time than traditional rentals because you will have to deal with turnover more often. There may be anywhere from two to 12 transactions on your property per year. If you don’t want to be as active in your property’s management (i.e. you’re not cut out for “by owner” management), then hire a good property manager to handle the nitty-gritty details like prepping the home for the next tenant.
Our plan was a little different. We bought the lake house to enjoy but also as an investment. Our home is now paying for itself with a little bit more. Overall we lose money on it, but that offsets our taxes so it works. We use the house, take friends and family there etc. Plus it is growing in value so when we go to sell it, we get that profit in the end. We might go live there when we retire, we might not.
Now that we have dipped our toe into the STR experience and found that it can work for us, we are looking for a more profitable property with more than 2 season rent ability.
PCB is packed with STR's, with an average nightly rate of about 120 bucks. That is a 2 bed/2 bath condo. Not knowing what your property is like, it could be more, but not much more. Bigger places are running around 220 give or take.
Just do the research and see how it all pans out. Also, remember STR's are a hospitality business, so be prepared to chat with guest on the phone, text with them and make them feel welcome. That is my favorite part of the gig!
@Ken Latchers I hear ya. I understand that completely. I agree that there is more to choosing a good STR property than just occupancy and seasons, but I believe it is the strength that is the base of the pillar.
You might be able to find great deals in areas that don't make it good for STRs. Unfortunately most places people want to visit have higher property values plus lower nightly rate due to many of us doing this exact thing.
I would love to get some lakefront cottages or something at 50% off the going rate. That just doesn't happen in nice areas often.
For example I was looking at Clear Lake, CA. Lakefront places are not that expensive there and the lake looks decent. Of course crime is rampant there. The overall crime rate is 86% higher than the national average. Plus I read the lake is pretty poor.
Anyways, like any property purchase, there are a lot of variables.
This is a question for @Matt "Roar" Gardner. I know in my market, the cash on cash return is great but the properties here don't exactly fit into the box of many tried and true investor formulas and rules of thumb. Your best bet is to ask a local expert to assess on a case by case basis!
"You might be able to find great deals in areas that don't make it good for STRs. Unfortunately most places people want to visit have higher property values plus lower nightly rate due to many of us doing this exact thing."
Not accurate at all. I am in a small town that gets a LOT of tourists. And housing prices are low. And no hotels.
The problem is that people think they have to spend $400,000 to only make somewhat more than I make with a low-cost property.
Then they give away the best 30% to Some PM.
It is called laziness, uninformed, lack of imagination.
These locations are all around the country.. Cities. Tourist meccas. But people flock to places they consider hot and overpay greatly and are too far away to avoid PMs. Orlando! Maui! Smokies!
@Avery Carl thanks for the shout out. @Jason Munger - I'm a realtor and investor in the Destin area. I also have great colleagues that cover the Panama City area. It sounds like you've already made up your mind with sticking to the LTR market, and if you're cash flowing with processes already in place, I'd just recommend continuing that machine! To touch a few topics for the area: Occupancy -- yes, it's very seasonal here in cash flow and occupancy. For example, I expect a 10-20% occupancy in the winter, but a 95% occupancy in the summer. As far as 'crazy renters', I've actually read that the social media STR market (AirBnB and VRBO), where you get reviewed, produces better renters with less damage overall. I haven't seen the study, so that's just word-of-mouth data. I'll try to find some studies on that to back it up eventually. Generally, in the Destin/30A/PCB area, you often see 15-25% ROI without management fees. With management, you'll generally break even (rates are ~18-30%). I hope that helps!
@Jason Munger we self manage on Airbnb here in PCB, a 2bd/2ba SFH on east end of town off Thomas and 2 block to beach. Like @Matt "Roar" Gardner mentioned, I think guests booking on Airbnb take better care of the property knowing that we will review them just the same as they review us. I shared some of my numbers here where @marcmiller is trying to decide whether to STR his duplex. https://www.biggerpockets.com/forums/850/topics/692200-panama-city-beach-airbnb?page=1#p4202703