STR pros - what is your target annual ROI?

18 Replies

I've been VERY impressed with the knowledge and professionalism of the STR professionals posting in this forum. It appears as if your much more on top of your market and profitability that most more conventional property investors.

When I purchase a real property investment my minimum return on an all cash basis that I’ll consider is 8%. I look at this after all actual cash expenses PLUS management fee and a depreciation allowance. I don’t use the depreciation allowed by law, I use a real number based on my experience. For a property in great condition, I have found that a reserve of 2% per year should be adequate. Of course, if the property is in less than great condition, an increase in reserves is required.

Now, my question is how much money may I be leaving on the table by not investing in STR instead?

I'm not asking if I should convert property I currently own to STR, the answer is probably not because as I have learned from this forum STR only makes sense in vacation destinations where it's accepted and those cities where restrictive legislation or ordinance hasn't been enacted, and competition doesn't degrade rates to the point of no excess returns.

So, if you don't mind sharing, what's your minimum and your target ROI for an STR? And does this include you managing the property or hiring a manager?

Thank you and eagerly await your response.!

@Don Konipol hey Don! I don't figure ROI on STR. Did you put 10% down? 20? 15? Did you pay cash? ROI will make your brain hurt. I should also admit I'm not a spreadsheet guy so I probably don't have the answers you seek.

My concern is cash flow. If it'll cash flow roughly twice as much as my LTRs it's a winner. My STR market, for the most part, is all winners. A 2 bedroom will make the same as the next 2 bedroom and a 6 bedroom will make the same as the next 6 bedroom.

Here’s the catch..... You can’t put it with a PM and make money. You must set up your systems and put out the occasional fire. Again.... most of this is market specific.

So..... the question is not necessarily “how much will it make” it’s “is this business for me” 

Thanks! 

Typed on iPhone 

Originally posted by @Lucas Carl:

@Don Konipol hey Don! I don't figure ROI on STR. Did you put 10% down? 20? 15? Did you pay cash? ROI will make your brain hurt. I should also admit I'm not a spreadsheet guy so I probably don't have the answers you seek.

My concern is cash flow. If it'll cash flow roughly twice as much as my LTRs it's a winner. My STR market, for the most part, is all winners. A 2 bedroom will make the same as the next 2 bedroom and a 6 bedroom will make the same as the next 6 bedroom.

Here’s the catch..... You can’t put it with a PM and make money. You must set up your systems and put out the occasional fire. Again.... most of this is market specific.

So..... the question is not necessarily “how much will it make” it’s “is this business for me” 

Thanks! 

Typed on iPhone 

I agree with Lucas here, it is difficult to compute for ROI since you cannot guarantee a specific amount of rents in STR. The best thing you can do is to use pricing algorithms to see how profitable your property will be if you put it in the STR market

@Don Konipol I have 9 arbitrage units (rent to re-rent) and 2 other units I manage in Tucson and it's not a "vacation" or "destination" marke per se. These units do just fine, so I wouldn't rule out your current units until you do the research (airdna.co or just look on airbnb and see how others are doing).

Also, I respectfully disagree with @Lucas Carl in that you can't make money with a manager. I manage 2 units at 20% (str management is more expensive) and both of them make about 50% more than they would with LTR, the owners don't have to deal with anything and have their properties cleaned and inspected every week on average!

I have to admit, Tucson is really the perfect storm though...

- It's big enough to have plenty of traffic but not so big that the competition is really fierce (yet)

- Arizonas laws prohibit cities regulating STR (for now)

- Property/rent costs are low enough even in popular str areas (near the University and downtown)

But I imagine there are similar areas around the country (I know Tulsa is a VERY similar market to Tucson for example. In general, not necessarily when talking STR)

But as a cash on cash investor even if you made another 15-20% better than ltr doing str with a manager handling everything wouldn't that be a huge ROI boost? So the question isn't "whats a target ROI" it should be, of the 2 options in your particular selected market where can you do better WITH a manager included in both scenarios. Because if you have to manage the STR to do better I would say all bets off (the day to day is not easy).

100+ % ROI per year. But houses are real cheap in my market. $9500 buys a 3BR with CH/A. It rents for $600/week. I live in Hades.

@Justin Ellis

Hi Justin

Thanks for the reply

I own a 2 br 2 bath unit at Bridgeview Hayden Ferry in Tempe across the street from Sun Devil stadium and next to State Farm regional headquarters. For the past 5 plus years, the unit has been rented, fully furnished with everything provided, to an ASU PhD student whose rich daddy is paying me $3850 per month. Almost no hassle, as the tenant having been there so long just calls my handyman with any issues. Of course, bigger and more expensive items I need to get involved with, but as I at one time owned 5 high rise condos in Phoenix, I have an already established vendor relationship(s).

The property will come off lease (finally) August of next year. The association has a 6 month rental minimum requirement, I believe, or at least did when I purchased the unit in 2012. Anyway around this condo bylaw? If I could obtain a

20% increase in net cash flow, as you’ve mentioned (after mgr fee), I would probably keep it. Right now I would probably sell, have just been waiting until my tenant finally graduates.

@Don Konipol

Check the rules, but I highly doubt they've gotten LESS strict. And the only way around CCR's is to disregard them and do what you want (hahaha) however that's obviously not sustainable. So STR won't work for that unit.

I assume the $3850 is way above market rents? Or else why wouldn't you pop another graduate student in there for another few years rather than sell? Is it the fact you would have to handle the minor stuff yourself? If so I would be willing to help with that stuff.

@Don Konipol

So $2350 before mortgage, cap ex, and repairs.

What's your mortgage on the unit?

How much cash do you have in the deal?

Thats what I would base the keep/sell decision on. But I assume you've got a good bit of equity sitting there and want to roll it into something with a better ROI?

Could you get your money our with a refi or heloc and still cash flow? As a super newbie I'm cringing at the thought of getting rid of a property as I'm trying to scoop em up! :) But I know things look different from different experience levels.

You cannot compare long term rental again short term rental income. My long-term unit do not have a 3% credit card fee. They don't have a property management fee. They don't have a channel manager fee. Or software fee. Long-term renters pay most of the utilities as well as Wi-Fi or cable. My long-term unit don't pay a commission to VRBO or Airbnb. I don't pay self-employment tax on long-term rentals. Short-term renters demand immediate fixes and long-term renters can wait a couple of days for most things. I don't have to clean units every weekend or chase after cleaners. I don't have to obsess over reviews and answering of use or giving directions every time they get cluelessly lost. I don't have to supply clean towels and linens and coffee setups and recommend things if they call and furnishings and a lot of headaches that short-term rentals have.

it's the difference between gross and net profit. I would say that is a long-term rental dollar is worth at least $0.30 more than a short-term rental dollar.

@Justin Ellis ,  for me it about having a balanced portfolio; I want half my investable assets in high interest mortgage notes, and the other half in physical real estate leveraged 50%, so that if I have $2 million in notes I want $4 million in real estate, with that real estate having a 50% Loan ratio, bringing the net equity for the real property portion to $2 million.

The reason is that with $4 million in gross real property holdings, my entire portfolio equity of $2 million in notes plus $2 million equity in real property is hedged for inflation.  Meanwhile, I target 12% annual return on the note holdings (I've actually averaged about 17% over the last 18 years, by buying some notes at a significant discount and "working" the notes), and averaged about 12% in the real property holdings, about 6% cash flow and 6% appreciation and equity build up.  

By the way thanks you and also @Paul Sandhu , @John Underwood , @Ken Barton , and @Lucas Carl for taking the time to answer my question. From your answers, my take is that you're all as much into the business aspect of real estate as you are into the investment aspect. Interestingly, while I run a real estate and mortgage note syndication/crowdfunding/private fund, I separate the business and the investment side so I can measure both, on both a ROI basis as well as a time commitment aspect. I've really just started doing that about 7 years ago when I hit age 60, the realization hit that time is not an unlimited commodity!

More directly to answer your question, I purchase 5 high rise/mid rise condos in the Valley of the Sun between 2011 and 2012. 4 as investment and 1 to live in. The investment condos were all sold in the last three years for 60% or more over the purchase price, and returned 7-9% cash flow annually. My best guess is that the condo I lived in from 2011-2014, and which I rent for $3850, has increased in value about 15-20%. I paid cash for all 5 condos, but when I decided to move and lease out the condo I was living in, I went ahead and did a 60% financing at 3.125%. My cash flow is about 6-7% on invested capital, 4-5% on current value equity. I'm not overly optimistic about near term future appreciation, and as with most high rise condos the HOA fees will continue to increase as the building ages.

I'm not quite sure which  post this goes against.  It's long term rental vs short term rental,  investment versus business doesn't really  apply in my opinion. Functionally to me being a landlord is still a business. I'm trying to make money on my investment.

 People keep glorifying short term rental  as if it's free of so many costs.  They talk about a multiplier against long term rental  without realizing how many costs should be deducted before you "multiply." As well as being a lot more time intensive  if you do it yourself or costly if you have someone else do it.

Originally posted by @Don Konipol :

@Ken Latchers

Thanks Ken. You've just described a BUSINESS more than an INVESTMENT. But, can a STR be an investment if you have a good property manager?

@Don Konipol , sure passive RE investments using property managers are investments. You should consider visiting the forum that talks in detail how you can purchase real estate ,notes and have tax free cash flow in a Solo 401k or IRA.

There are thousands of

investors leasing their RE held by their retirement plan to property managers while achieving 10-12 % returns and 15%+ returns with some leverage.