Investing in STR in Maui

[Jennifer Creager]

We are purchasing a STR in Maui. I had wanted to start small, a 1 bed/1 bath, but the analysis showed they didn't cash flow very well at the purchase price. We put in a low ball offer on a 2 bed/2 bath, and it was accepted! It will cash flow nicely, and I am excited to self manage.

On a whim, I did an analysis on a 1.9M house on Maui that is in the STR zone. Using average numbers from VRBO, this would start cash flowing after renting it for just 7 days. For the first investment, I didn't want to risk that big of a purchase. My question is: is it a rule of thumb that the bigger the place, the higher the cash flow? I'm including the mortgage costs, which are higher with the higher purchase price, but I wanted to get other perspectives for a future purchase down the road.

[John Corey]

Originally posted by @Lane Kawaoka:

San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing.

It could appreciate but I consider that gambling. Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work).

Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%.

I slightly disagree. Not like you are wrong. Just that what you are saying is not a universal rule for all investors.

Sophisticated investors do invest in high-value markets. They just are investors who are less concerned about growing their wealth compared to protecting their wealth. They have a different time horizon. They may be investing with very low LTV on no debt at all. Cash on cash return is not the focus. When there is no debt, the cash flow will be fine for keeping things ticking over.

I used to work for Swiss Bank Corp. What private clients want and what the BP community wants can be very different. The very wealthy do buy in all the markets you listed. I have investments in London UK. They are not the highest yielding property. They are very liquid (easy to sell), have grown in value for decades and make most of the cities you shared as inexpensive by comparison. Sort of similar for HI property.

It is hard to argue with the 1% rule. Unless you have more cash than you have time to invest. In that case, the 1% is less of a target than deploying large sums into stable assets which will respond well to inflation.

As the British will say, horses for courses. Different assets appeal to different people because they have different criteria.