Real Estate Agent · USA · Member since 2016 · 909 posts · 1k+ votes
7y
STR's don't really fit into many of the boxes and calculations that traditional long term rentals do. There are many moving parts and there are no real rules of thumb that work for every property or market. I agree with @John Underwood, you have to get as much information as you can on the expenses, do as much research as you can on similar properties in the market's performance (on any and all rental platforms), and then run your numbers. You can also use the major STR income data sites like Airdna and Mashvisor as a loose guideline. Although their data isn't perfect, it's pretty good and it can definitely help you figure out the income range that you should be able to attain (it's actually a little on the low side compared to what my STR's do).
It's important to take any rental history with a grain of salt. Two owners with identical properties can have wildly different returns that have everything to do with their own management skills/style, and nothing to do with the property itself. You can usually find the differences in their listings that make one more successful than the other.
In my markets, most of the sellers are not investors, they are true "vacation home" owners who just threw the property on with a local property manager so that it can "pay for itself." In addition, most of the local management companies' properties underperform compared to self-managers and some of the more cutting-edge national managers, so it can be difficult to get accurate/investor-centric data from them.
Bottom line, nothing is going to be handed to you in a nice neat spreadsheet in most cases, but if you are willing to do a little research, you can come up with a pretty accurate basis for what sort of return you can get if you maximize a property's potential. Unfortunately there's just not a rule of thumb or calculator that can do this for you. But if you do your research, and you find that the return is high enough for it to make sense for you, then go for it!
Rental Property Investor · Castle Rock, CO · Member since 2017 · 335 posts · 387 votes
7y
I believe STR's are much more complicated to filter than LTR's. There are so many more moving parts. So I doubt you're going to find something as simple as the 1% rule.
Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
7y
If the purchase price of the house is 6 months or less of gross rent, it's a good deal. But my market is not typical. If my market was a typical market, that number would be 18-24 months.
For long term rentals its the 1% rule (for me anyway).
I've read that a good metric for STRs is whether a monthly mortgage payment equals a weeks worth of revenue.
Which financial metric do you use to filter your list of STR investable properties?
In the most desirable parts of the US (Tennessee, Florida, Arizona, Colorado, Utah, California, Hawaii), you can earn gross annual rental revenue of 15-20% of your purchase price. Eg, a $300k house will earn $45-60k in gross annual rental revenue. If you can get anything close to this, buy! (Of course, this requires being able to estimate annual rental revenue for a house or having a good agent who can help!)
Waipahu, HI · Member since 2018 · 121 posts · 81 votes
7y
I was looking at a property that several STRs' on it recently. It was very difficult to know what they would rent for. I went to the website for the property, and by booking different dates prices would change depending on if it was peak season or not. The best way I can think of is to ask for the actual pro forma, and analyze it carefully. I am sure some people that invest in a area long enough develop their own rules of thumb when looking at STRs'.
Property Manager · Scottsdale, AZ · Member since 2015 · 113 posts · 77 votes
7y
@James Murphey @Eric P.
Airdna.co is gonna be your best friend for finding occupancy rates and average nightly info. Beware there is such rich data on this site that it can cause analysis paralysis, but it's amazing, accurate info. It's an aggregate of 36 months of data from Airbnb and Homeaway!
Note, their income numbers include cleaning fees (which I hate and don'tunderstand why they do it this way) so you'll need to back those out unless you plan on turning the unit yourself. Other than that little issue, it's pure gold!
Real Estate Agent · USA · Member since 2016 · 909 posts · 1k+ votes
7y
STR's don't really fit into many of the boxes and calculations that traditional long term rentals do. There are many moving parts and there are no real rules of thumb that work for every property or market. I agree with @John Underwood, you have to get as much information as you can on the expenses, do as much research as you can on similar properties in the market's performance (on any and all rental platforms), and then run your numbers. You can also use the major STR income data sites like Airdna and Mashvisor as a loose guideline. Although their data isn't perfect, it's pretty good and it can definitely help you figure out the income range that you should be able to attain (it's actually a little on the low side compared to what my STR's do).
It's important to take any rental history with a grain of salt. Two owners with identical properties can have wildly different returns that have everything to do with their own management skills/style, and nothing to do with the property itself. You can usually find the differences in their listings that make one more successful than the other.
In my markets, most of the sellers are not investors, they are true "vacation home" owners who just threw the property on with a local property manager so that it can "pay for itself." In addition, most of the local management companies' properties underperform compared to self-managers and some of the more cutting-edge national managers, so it can be difficult to get accurate/investor-centric data from them.
Bottom line, nothing is going to be handed to you in a nice neat spreadsheet in most cases, but if you are willing to do a little research, you can come up with a pretty accurate basis for what sort of return you can get if you maximize a property's potential. Unfortunately there's just not a rule of thumb or calculator that can do this for you. But if you do your research, and you find that the return is high enough for it to make sense for you, then go for it!
Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
7y
My two other metrics:
Would my wife and I live in the neighborhood of the property?
Would we live in the house? I make my places just as good, if not a little better than our own house. The main difference is that every bedroom in the STRs is decorated like Hugh Heffner sleeps there.
Property Manager · Columbia, SC · Member since 2017 · 121 posts · 163 votes
7y
Agree with others that you should always run a full analysis before purchasing. That being said, I have created a metric for myself that I think serves a similar purpose as the 1% rule...
The rule for me is the .1% nightly rate. I will explore a property further if I believe I can reasonable demand .1% a night relative to the property's purchase price.
So a house for $100,000 would need to bring in $100 / night. A house for $200,000 would need to be able to bring in $200 / night...and so on.
Again, this is just a rough metric that works for me in my market..
Be careful about using any metric that is based on cashflow.
Communities are stomping on STR. This means a political change invalidates all the past data for the community.
I also strongly believe that in the current regulatory climate, when looking to buy for purposes of STR, you need to make sure that the market has a serious rental supply shortage. Although it seems like MOST of the time with change in regulation there is a grandfather clause, this has not always been the case, so you could get your sweet little BNB up and cash flowing hard and then policy changes. You and thousands of other STR's are then converted to LTR so the market needs to be able to support that. Of course, this is a double edged sword in that the markets where there is a affordable rental supply shortage is where strict regulations will inevitably roll out first (LA for example has just shut it down).
So, don't be afraid of regulation change (As many people are and won't touch STR for that reason), but be aware what's going on with them, buy smart and ride the STR wave while it's here, there's tons of money to be made!
Rental Property Investor · New York City, NY · Member since 2017 · 93 posts · 101 votes
7y
On the revenue side, to get estimates - the most reliable way it to find someone already doing STR and ask them and hope they would disclose. Or, call property management companies (if it's a vacation area - they should be there) - and ask. The problem is...even those data points are not 100% reliable. Because you don't know how they are running it. Same property well run vs property poorly run - HUGE revenue difference. Decor, # of people it can sleep, great photos - all make a difference. Can look on AirDNA too - but don't rely on this info either. Hugely distorted. But if there are a LOT of listings, can get some directional guidance what a true occupancy/daily rate is. So that's the challenge #1.
Expenses are much easier to get right - taxes, insurance, mortgage, maintenance, HOA fees, utilities. Revenue side is more complex.
Challenge #2 as others pointed out - regulations. They are truly unpredictable. Example of Jersey City - they passed an ordinance in 2015 allowing Airbnb. In 2019, out of the blue, with no warning - reversed 2015 ordinance and largely banned STR (very heavy restrictions). NO GRANDFATHERING. (The hosts are still fighting it, it's not final yet). This part I find unanalyziable - you just don't know. So the only thing you could do to mitigate this risk it so to buy at such a price that your rental would work as a long term rental if you have to convert down the road.
I run a detailed analysis of all expenses, repairs, upgrades and projected revenue. This is much more reliable.
I agree you should do that. But you can't analyze every deal. What metrics determine which properties make it to the detailed analysis stage?
I did analyze each and every property we looked at before we bought. I am a metrics guy and the more info I can gather, the better off I will be and so would you. STR's are a different animal, like other have stated and you can't just rely on those metrics that work for LTR's.
I ran numbers on everything I could think of and read about to figure out whether or not to buy the place. I self manage our current STR and that is the only way I can remain profitable. We use the home as well, but I would still like to make a buck.
Rental Property Investor · Kelowna, British Columbia · Member since 2015 · 136 posts · 54 votes
7y
We run STR properties and the investment analysis is pretty simple.
Check on STR platforms what the average daily rate is and research what the achievable (or forecasted) booking rate would be then check if it would cash flow.
If the idea is to run all year long (and If is legal in your area) I would consider a 65% booking rate. (Please keep in mind that occupancy ratio and daily rates are directly connected to the local attractions or desirability)
Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
7y
Keep in mind that with all your metrics are done, except in a few markets, they mean absolutely nothing.
the time is coming after everybody decides they should have a short-term rental, when your rent might be one third of your projection and your occupancy may be also one third of your projection.