STR: Where's my mistake in my numbers.

49 Replies

Hey guys, 

I am looking at getting into the STR game in Galveston TX or Destin FL. The problem I keep running into is that I can barely cashflow with the numbers I've researched. I would love for anyone who is currently operating a STR to look at what I have below and let me know if I'm off somewhere with my cost estimates.

Rental Income ($42,705.00/YR) = $ 3,558.75
Expenses
Cleaning $ 711.75 20%
Maintenance (Monthly & Cap Ex.) $ 533.81 15.00%
Utilities $ 302.49 8.50%
Property Taxes $ 325.00 9.13%
Insurance:  flood, windstorm and homeowners = 4000/yr $ 338.08 9.50%
City HOT Tax (Galveston) $ 320.29 9.00%
AirBnb Fee $ 106.76 3.00%
Other (Beyond Pricing) $ 35.59 1.00%
Net Operating Income = $ 884.98 

At these numbers I am barely cash flowing if I bought a $200,000 house (and that's cheap).  

Do the maintenance and cleaning yourself.  25 years ago I did maintenance on my LTRs to cut down being ripped off by appliance and other repairmen.  

Replace a fan motor or capacitor in an exchanger?  I do it for $50-$100.  HVAC would want $300.

Replace minor parts like agitator dogs, toilet flapper, light bulbs, etc in 5 minutes.  Appliance repairman would charge $100 plus parts.

I could keep going.

My wife didn't graduate high school.  She had enough college credits that she didn't need to go her senior year.  She graduated college with a 4.0.  She cleans our STRs and we make more money than if she had a regular job and contracted the cleaning work out.

Where are you getting your gross numbers from?  What % occupancy?  At 711 cleaning per month, that’s less than 5 stays per month if you’re using a cleaning service. Average stay is 3 nights if I remember correctly. You’d need to charge 210+ per night, and I don’t think you’re going to get that in Sept-Feb months. And I don’t think you’re going to find a home for $200k that will let you make up for it charging 400-600 a night during summer. At least not in Galveston. 

@Bruce C. - the occupancy is based on $195/night with a 60% occupancy rate. which equals the $3,558.75. 

Also, you're right that a $200,000 house in Galveston isn't very nice. I was just saying that at those numbers you barely cash flow on just a $200,000 house. Let alone anything more expensive. I know plenty of people are cash flowing in Galveston doing STR but I can't figure out where I am wrong in the numbers. 

@Christopher Fordinal Cleaning is your largest expense. You can't skimp on cleaning. A dirty STR will kill you on reviews. You might try for a lower cost cleaning crew or just sell the property and buy another local one that you can self manage.

One of my STRs is vacant.  It's a 3 story house with 4 fulls baths, 8 beds and resident paranormal entity.  There is a vacant lot next door.  I spread a bunch of bird seed on the lot and shoot feral pigeons with a .22 cal pellet gun.

Have fun with your STR. Make it local.

@Cliff H. - simply basing that off of multiple landlord comments I had read on BP. I'd love to be wrong with that. wasn't 100% sure what to estimate. If we assumed a 60% occupancy rate out of an average 30 day month = 18 days. Im estimating that to be about 6 turnovers on average. Is that thinking off in your opinion?

@Christopher Fordinal   Just a few things I see.  Cleaning is a pass thru to the guest normally so I wouldn't include that unless you are including it in your Rental Income totals.  I woud use ADR and Occupancy rate to get that total if/when possible.   

STR's have really high Op Ex ratios so unless you are putting a lot of cash down it's going to be tough to get positive cashflow unless you are getting a good value add purchase opportunity.

Originally posted by @Jon Crosby :

@Christopher Fordinal  Just a few things I see.  Cleaning is a pass thru to the guest normally so I wouldn't include that unless you are including it in your Rental Income totals.  I woud use ADR and Occupancy rate to get that total if/when possible.   

STR's have really high Op Ex ratios so unless you are putting a lot of cash down it's going to be tough to get positive cashflow unless you are getting a good value add purchase opportunity.

My excel sheet and yours are actually almost the same. The major difference is I am currently taking 15% out for maintenance and Cap Ex; whereas, your sheet is only taking 6.6%. Have you found 6.6% to be enough to cover your costs? 

Edit: Oh the other major difference is your sheet doesn't include any furnishing costs. 

Hey @Christopher Fordinal . Just a couple of notes. I run number like you have done. Here are some suggestions to get things more accurate.

Call several cleaning services to get a more accurate idea of pricing. That is a pass thru to guests so you should take that off the list.

The HOT tax should also be removed as AirBNB should pull that and pay it direct (need to check that).

Are you sure on the property tax? Galveston County tax rate is .55% of assessed value. I am not sure if there are other property taxes added, but 200k is $1100 a year. Does this sound right?

Maybe it is just me, but nearly $900 per month as stated is cash flowing pretty well in my opinion, If you get your 60 percent occupancy rate.

What am I missing?

@Michael Baum The cleaning fees are a pass through thing but if you are using AirDNA's data to help determine ADR then they include cleaning fees in that number. 

In Texas (from what I understand) they only take out the state tax (6%) but you still are responsible for paying the city HOT (if applicable. which in Galveston is 9%)

As for property taxes, take a random zip code in Galveston (say 77550), according to the SmartAsset property tax calculator (as well as Zillow) the property tax there is 1.925%. On a 200K house (which is really lower than you could get a decent property in Galveston) thats $3850 a year. 

Finally, $900 a month would be great but that's before you've paid the mortgage. The mortgage on a 200k house (with 30% down) is $669 a month. So really you would be cash flowing about $215 a month or $2,590/Yr.

$2,590/$200,000 home = 1.3% Cap Rate... not great.

I may be missing something somewhere but that was my logic behind all those things. 

I just pulled several homes in Galveston and I am finding the overall tax rate is 2.42%. Whew.

Well, maybe Galveston is not the best place. My cap rate this year is at about 6.5% so far this year and we have several more days open that should fill up in the next few weeks. I doubt that I will break into the double digits unless I pull in a short, long term rental over the winter.

Why not include the mortgage in the calculations?

@Michael Baum yeah It seems like Galveston just isn't a great market right now. But I'm having trouble finding any STR markets that are giving me Cap rates over 3% so I figured I must be adding something up incorrectly.

Oh I definitely have included the Mortgage in calculations. I just didn't want to post my whole long excel sheet on the forums because that's a lot. 

Roger that @Christopher Fordinal . From what I saw online, there seems to be some pretty nice places under 200k. I am not very familiar with the market there. We are looking for our next STR and Galveston is not on our radar.

When we planned out our purchase, I ran the number like you, but I used actual numbers based on our purchase. Find some places that fit your budget then build around that.

I never use AirDNA as it was waaaaay off on our estimated nightly rate. It was something like 500-600 per night in the summer which is nuts for our Idaho lake house. I did contact the developers and they did tell me that the fewer rates they pull, the more skewed the rates get. 

I just took a look on AirBNB for all the places in Galveston and the nightly is not as high as I thought. But on VRBO, the homes are larger and the rates are much higher. The average nightly seems to be around $350 a night for a 3/3. On AirBNB the places are 1/1 for well under $100.

Do some looking on HomeAway/VRBO for a better idea on the homes there. I get very little from AirBNB and much more from Verbo. 

Galveston is $130 per clean plus laundry for a 2 bed with 1000 sqft. 

Yes, that gets “passed” to the customer, but most estimates include it in the yearly gross revenue. 

AirBnB does NOT collect the 9% HOT tax. You pay that later, and it is based on your gross. 

You can cash flow in Galveston. It all depends on your purchase price, just like anything else. You’re probably not going to get it buying a place that is already nice. You need to find something that is discounted because it needs repairs. 

Just a note on the taxes. In Galveston, there are multiple taxing entities, only one of which is the county. The tax rate for any particular home is going to be around 2.5 percent of assessed value and assessed values can vary WIDELY from what the owner might find fair.

Galveston has several refineries. Try to rent your STR to refinery contractors, not people on a vacation. My average stay with refinery contractors is probably 3-6 weeks. They have basic needs. A place to drink beer after work, do laundry, cook dinner, take a shower and sleep. Watching TV in a room filled with artwork of scantily clad women is a bonus. That's what I do with my 23 STRs in Coffeyville Kansas.

@Chris Fordinal, best of luck in your RE adventure!

This may have been already mentioned... it is going to be EXTREMELY difficult to cash flow a Vacation STR using traditional finance methods.

Perhaps your peers have paid cash for these homes/investments?

it’s kind of incredible folks still looking at RE with cap rates at 1.5%, 3%, 6% etc.

If I can get 8%+ in another investment vehicle there's no way I'm dealing with STR's below that number...waayyy to much work!