Hey folks, I'm interested in opinions - pros/cons on this strategy of new construction for STR income. I am in my DD period with a contract on the lot for $89k.
Here's my projected numbers on the deal:
My income/expenses numbers are based on two other properties I own in my market. Both of my current 1BR properties are paid for and gross over $40k each annually.
I am trying to be smart about my next move and have considered a smaller 6 unit apt building also. Or wait until things are cheaper with an expected recession/downturn? I see that most more seasoned investors don't really like single family homes, but when I compare the income on the 6 unit vs what I'm getting in my market on a single family, it does not seem worth it to own the multi-unit.
Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes
6y
Your spreadsheet assumes 100% occupancy, which is of course not reasonable. (there's a note about 2% vacancy, also not reasonable, but even that 2% doesn't appear in the math)
I'd also consider holding costs while the property is under construction, account for cost overruns, etc.
As for the 6 unit, is that also for STR? Depending on your market, those units may not yield nearly so much as a SFR, so do some research on that.
Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes
6y
Your spreadsheet assumes 100% occupancy, which is of course not reasonable. (there's a note about 2% vacancy, also not reasonable, but even that 2% doesn't appear in the math)
I'd also consider holding costs while the property is under construction, account for cost overruns, etc.
As for the 6 unit, is that also for STR? Depending on your market, those units may not yield nearly so much as a SFR, so do some research on that.
Hi John and Julie, thanks for the reply! Not sure if you read my complete post, but at the bottom I stated where my numbers come from which are actual properties I already own in my market. Stating a vacancy rate is not really relevant to STR. The $40K+ each I am getting on my current airbnb rentals is actually less than 70% annual occupancy, so you can see how it doesnt really make sense to think about vacancy in the same way as a normal rental. Additionally I should add my cost to build number ($130K) includes my holding cost for 9 months and a healthy overage for any cost overruns.
Maybe I just don’t understand. Personally occupancy seems very important. Your profits are based on 100% occupancy yet you state your other vacation rentals are about 70% rented but that doesn’t matter.
Can you explain that? The more days I have rented, the higher my profit potential. Most of my costs are fairly fixed and don’t fluctuate too much. If I rent the house less, I have less.
If you changed your occupancy to 70%, your cash coming in is $26,600. That change makes it a completely different scenario.
I guess I don’t understand why occupancy doesn’t matter. Can you explain? Thanks!
You write : "If you changed your occupancy to 70%, your cash coming in is $26,600. That change makes it a completely different scenario."
NO, that's not correct. I guess I'm not being clear. My two other similar properties CURRENTLY gross over $40K+/year each, WHILE BEING LESS THAN 70% OCCUPIED. The $38k gross income estimate on the spreadsheet for the new property already has the vacancy rate built into that number. The way I look at it is this: all I can assume is that occupancy on this property would be about the same as it is on the two that I already have. It's really just a shortcut on the spreadsheet (and probably where I lost you) because it would be pointless and impossible to state a POTENTIAL INCOME at 100% occupancy, since - 1. this is a seasonal vacation market so 100% occupancy is never gonna happen, 2. our daily rates are adjusted all over the place, so trying to pinpoint what income could be at 100% occupancy would be an exercise in futility.
Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Bryan Harvey Make your spreadsheet in a way that makes sense to you, but in mine I'll have a top-line 100% occupancy number (e.g. maximum projected rent) and then on the next line have a "vacancy rate" that takes it down to something realistic. That way you can play with different vacancy scenarios. It appears you already have that slot in your spreadsheet, you just aren't using it. :)
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
6y
Thanks @Bryan Harvey, I think I get it...sort of. I took the spreadsheet as written, not as you are thinking. I do more like what @Julie McCoy does.
When we purchased our vacation rental, I pulled as much data as I could from surrounding rentals that came even close to ours in configuration. You have a leg up having 2 similar rentals in your specified area with a track record. I put in my calculations the average nightly and the expected occupancy based on others calendars. I knew that the first year would be thin. New to market with no reviews is always an uphill battle, but we did well enough. This year was our 2nd full year and we surpassed expectations by a small amount and were profitable. WOOT! We are already booked for 23 days next year and I expect 2020 to be just as full as 2019.
We are a single season rental for the most part. We do have some bumper season guests for biking on the 72 mile bike trail, but winter is snowy and we are pretty far from skiing so we remain empty. We do have a Thanksgiving rental coming up (first one) then nothing until June at the moment.
We bought at the right time so our property appreciation has been excellent. As long as we are profitable I am happy. We weren't looking to get rich off this house as it is a place for us and our kids/grandkids to come and hang out on the lake. :)
On the do it now or wait, a recession is not a guaranteed thing. There are some indicators and they have traditionally shown that we might enter a recession, but it is not a sure bet. Most of the economists I have been reading said that we are 18-24 months off if it even happens. I guess the question is whether or not you want to wait 2 years on a maybe.
I find that most people, during a recession, will still want to vacation. That means people like you, me and Julie are in a good position as we have places that appeal to short drive vacationers. They may not fly to Hawaii, but drive from Cleveland to the Smokey Mountains or the North Carolina shore is much more doable. Or even a high mountain lake in north Idaho!
Good luck with your build. It sounds like you have all your ducks in a row. IMHO, I would go do it. If you feel your numbers are solid, you have a good builder ready to go, permitting isn't crazy and your timeline works. Looks like a fun project!
Real Estate Agent · Gatlinburg, TN · Member since 2015 · 67 posts · 70 votes
6y
@Bryan Harvey Most CPA's, at least from my experience, will say that short term rentals are to be depreciated over 39 years instead of the 27.5 you have on your spreadsheet. This is due to transient use with the average guest staying less than 7 days. It doesn't make a huge difference in your numbers, but possibly worth looking into and changing. Doing a cost segregation on the new construction can help accelerate some of the items/components of the new construction to depreciate them quicker. Things like driveways (15 years) and a variety of other items including furniture (5 years) can be depreciated differently than the structure itself of course.
Edit: Actually I see you have the amortization period at 27.5 years? Did you mean depreciation period instead and got it switched accidentally? Because 27.5 years is an odd amortization for a loan?
Investor · Cape Coral, FL · Member since 2019 · 135 posts · 41 votes
6y
@Bryan Harvey - Not sure if I missed it, but how many units would the proposed structure have and what location are you building this? From the build cost, this seems like it would be a 1 bed at or less than 1000 ft2? Maybe understanding what the building is and where you are building would help me understand why it would be better to build vs. buy something? The building process will take up months that you could be earning money. If the economics are such that it is cheaper to buy existing vs. build, I don't see why you wouldn't just buy an existing property.
Thanks @Bryan Harvey, I think I get it...sort of. I took the spreadsheet as written, not as you are thinking. I do more like what @Julie McCoy does.
When we purchased our vacation rental, I pulled as much data as I could from surrounding rentals that came even close to ours in configuration. You have a leg up having 2 similar rentals in your specified area with a track record. I put in my calculations the average nightly and the expected occupancy based on others calendars. I knew that the first year would be thin. New to market with no reviews is always an uphill battle, but we did well enough. This year was our 2nd full year and we surpassed expectations by a small amount and were profitable. WOOT! We are already booked for 23 days next year and I expect 2020 to be just as full as 2019.
We are a single season rental for the most part. We do have some bumper season guests for biking on the 72 mile bike trail, but winter is snowy and we are pretty far from skiing so we remain empty. We do have a Thanksgiving rental coming up (first one) then nothing until June at the moment.
We bought at the right time so our property appreciation has been excellent. As long as we are profitable I am happy. We weren't looking to get rich off this house as it is a place for us and our kids/grandkids to come and hang out on the lake. :)
On the do it now or wait, a recession is not a guaranteed thing. There are some indicators and they have traditionally shown that we might enter a recession, but it is not a sure bet. Most of the economists I have been reading said that we are 18-24 months off if it even happens. I guess the question is whether or not you want to wait 2 years on a maybe.
I find that most people, during a recession, will still want to vacation. That means people like you, me and Julie are in a good position as we have places that appeal to short drive vacationers. They may not fly to Hawaii, but drive from Cleveland to the Smokey Mountains or the North Carolina shore is much more doable. Or even a high mountain lake in north Idaho!
Good luck with your build. It sounds like you have all your ducks in a row. IMHO, I would go do it. If you feel your numbers are solid, you have a good builder ready to go, permitting isn't crazy and your timeline works. Looks like a fun project!
Thanks for your take on this Michael.
Yes I agree guessing on the economy is a crapshoot. When I think about waiting 18-24 months for a dip - well that's over $80k in potential gross income I'd be missing out on in the meantime. And good point about recession vacations. Coastal NC is always a popular destination because it's centrally located on the eastern seaboard, so anyone east of the Mississippi can pretty much drive here in a day.
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
6y
Hey @Aaron Pfeffer, I don't care for it personally. Unless you are pricing out a place where the competition is high with lots of comps, the numbers could be skewed.
AirDNA had my place at $679 a night. There are several outliers in my area and not a ton of STR's so it was way off the mark. I wish I could get $679, but I was being compared to a lakefront cabin that goes for $1800 among other units that were similar.
So, if the area has a ton of other rentals to pull data, it will be more accurate. If not, then less. That is just my experience. I am sure there are people that are using it and it works well for them.
@Bryan Harvey - Not sure if I missed it, but how many units would the proposed structure have and what location are you building this? From the build cost, this seems like it would be a 1 bed at or less than 1000 ft2? Maybe understanding what the building is and where you are building would help me understand why it would be better to build vs. buy something? The building process will take up months that you could be earning money. If the economics are such that it is cheaper to buy existing vs. build, I don't see why you wouldn't just buy an existing property.
Good point Dan. I wish I could just buy existing to be honest. But the reason I'd build instead of buy existing is that there's a lack of properties in the area that fit my strategy. I've looked at everything, and I continue to keep my eyes open for the few properties that I think would work. I've driven every street and know every house and have a list of less than 15 or so that I'd make an offer on IF they were for sale. And I've cold called the owners of a few with no luck so far. Where I live, mostly there's a whole lot of the same kind of cookie cutter vacation rental homes. I think my strategy has been successful with my two current STR's by providing something different and unique. One of them I built specifically for STR, the other one I bought off the MLS, but it is very unique for our area. The main advantage we see with this strategy is our occupancy is way above the competition. The property IS the destination. We do really well even in the dead of winter when most other vacation rentals doors can be shut for months at a time.
Enjoying this thread. How does everyone following here feel about AirDNA as a reliable source of data for their STRs?
I don't have a ton of experience with it but I think it depends on how you use it. It can definitely be a useful tool for certain scenarios, and then sometimes it can miss areas and trends that seem obvious to me.
Assume way more vacancy than 2% for str and if the numbers still work after that I would say go for it.
Noah, the thread above kind of covers that discrepancy - but to repeat...My spreadsheet gross income number ($38k) is just a shortcut - it has a proven vacancy rate already built into it based on my other comparable STR's in the area.
Investor · Colorado Springs, CO · Member since 2011 · 322 posts · 238 votes
6y
@Aaron Pfeffer I use Airdna and accept most of the data as generally reliable and useful for my area. However, I would expect this not to be the case for all areas. One thing airdna will not account for is occupancy by the owner which could be construed as revenue generating occupancy. I supplement data with my own research and also use Evolve.com.
Real Estate Agent · Gatlinburg, TN · Member since 2015 · 67 posts · 70 votes
6y
@Bryan Harvey I also noticed you didn’t have a line item for furnishings of the short term rental. Unless you already had that factored in the build cost?
In my experiences with short term rentals repairs of $500 per year, even for a new construction one bedroom, is too low. But I don’t have one in your market area of course and you may be aware of the average costs since you already are operating two similar properties in the area
Finally, although it doesn’t really necessarily come out of your cash flow, it is a good idea to consider having a long term capital expenditures reserve built in when figuring your numbers. Being a new build you shouldn’t have any problems with the major components such as HVAC, roof, painting/staining exterior in the near future. It in my opinion it wouldn’t be a bad idea to budget it in there so an adequate reserve is in there when those type of items begin to fail or need replaced.
That return is pretty solid in today’s market environment.
Rental Property Investor · Lookout Mountain, GA · Member since 2019 · 6 posts · 0 votes
6y
@Bryan Harvey. I am a little unclear if the property is a single family home. If so, before you sign with a contractor, check out Blue Ridge Log Cabins. They offer log homes and mountain style home. They are premanufactured and include everything except site prep and HVAC. They advertize they even include light bulbs!
Its a great concept. You know exactly what its going to cost, no going over budget; it takes three months from start to finish; and the houses are really nice.
Lender · Los Angeles, CA · Member since 2015 · 127 posts · 82 votes
6y
Thanks all for thoughts on AirDNA, and my apologies to @Bryan Harvey for splicing the thread. Appreciate all you've been offering as well, including your spreadsheet template. Wish you well with the project.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
6y
With a say $250k build cost (including all the holding costs while building) and $38k-$45k gross rents annually, those numbers look rough to me. Most vacation rental investors I know would look for $38k-$45k in gross rents immediately, buying something near turnkey, on a $250k investment. No way they'd take on the effort, risk, and wait-time of new construction without a massively higher upside. It seems if you factor in property management expense (even if you do it yourself, your time is worth money), CAPEX, maintenance, furnishings and furnishing replacement, etc. you are going through a lot of effort building new construction, and tying up your capital for a long period of time during the build phase, with a rather small return.
With a say $250k build cost (including all the holding costs while building) and $38k-$45k gross rents annually, those numbers look rough to me. Most vacation rental investors I know would look for $38k-$45k in gross rents immediately, buying something near turnkey, on a $250k investment. No way they'd take on the effort, risk, and wait-time of new construction without a massively higher upside. It seems if you factor in property management expense (even if you do it yourself, your time is worth money), CAPEX, maintenance, furnishings and furnishing replacement, etc. you are going through a lot of effort building new construction, and tying up your capital for a long period of time during the build phase, with a rather small return.
Thanks @John D. This is exactly the type of feedback I was looking for - analysis of the deal, (rather than all the critique about how I did my spreadsheet).
But...Are you sure you are not living in a super-unique market to expect the returns you mention above? In most vacation rental markets I know of (including where I live), a $250k investment in a turnkey property will not even cashflow. Also, many buy and hold bigger pockets investors are just looking to profit a couple dollars a door per month. I'd be doing 10x that. I realize this is not an apples to apples kind of investment comparison, but even figuring in additional management fees for short term rental - its just a vastly higher return than a few hundred bucks per door.
For sure there is added risk and work building from scratch, and it will take a year of my time more or less...But at the end I expect to be netting way over $1000/month for the rest of my life on just a single 1BR property. The IRR is over 26%. Is that sub-standard for what I'm doing here?
My strategy is buy and hold for maximum income.
Anybody else want to chime in on what type of return I should be looking for in this endeavor - building a vacation rental from scratch?
