We currently own 2 vacation rentals about 45 minutes from us. I self manage both. We are starting the process of looking into other states down south to purchase a STR and to use ourselves in the winter. As I'm crunching the numbers I'm curious if anyone has a "rule" such as, for every $100 k in house you want to net $10 k/year.
I've been trying to create one but only really knowing the numbers on one location I'm floundering. It would make comparing return on different locations easier... for me. :)
6 months of gross rent should cover the purchase price of the house. It may take 9-10 months to get 6 months of gross rent. But i buy bank foreclosures and rent them to refinery ruffians. It's made me a ruffian.
@Jennifer Schultz Unfortunately, in my opinion and you can take that for what its worth - just my opinion, that those kind of rules don't mean much. It comes down to your goals - why are you investing in STR, how much your time is worth, and if the net per year that you will get is worth it to you. Your 100k for 10k/yr only has a Cash on Cash of 10% the first year. Me personally for the worth I put into an STR I want a much higher return. In my market I can get close to 10% on LTR which I let someone else manage and so I can earn 10% almost 99% passively that way.
However, part of your goal is to use it through the winter. There is an intangible value to that as well. So you just have to crunch the numbers figure out your return and compare that with you goals and other investment options. There is not one rule that works for everyone is what I am trying to say and whatever rule you create for yourself and I do at times, may change based on market, time, location, etc..and my goals.
@Paul Sandhu What the what!? I need to move to Kansas if thats what your getting. By your rule id be around 50 months and I thought I was killing it. I honestly don't think 6-8 months is realistic in a vacation destination. Rural land rig oil field trash is one thing (I used to be oil fied trash so im allowed to say that lol) but a desirable place by the beach, lake, or ski mountain is never going to be even close to that. Good for you sir.
To OP, I dont think there is a good rule. Every market is different. Plus adding in furnishings would throw it off anyway. Honestly if you're going to use it yourself, if it breaks even you're doing great.
Ken brings up a good point. There is no right or wrong answers. Too many people get caught up on cap rates or cash on cash returns.
One of the biggest investors here in South Florida and one of my mentors simply says "how much money do you want to make on the deal?"
@Peter M. My towns population 10 years ago was around 11,000 and there was an Amazon distribution facility here. The facility relocated to a major city. People left town for jobs in the big city. If they had a loan on their house, they let the bank have the house. Most of the property we buy are bank foreclosures. General rule of thumb is 25 cents on the dollar. Population now is around 9000. Also if you Google "worst town to live in Kansas" my town is #1 on the list for the last 3 years.
@Paul Sandhu wow, good for you! They say if you want to do well, do the opposite of what others are doing. Sounds like you jumped on an opportunity when others may have been too skiddish to invest. Glad it is working out for you!
@Good points Ken Boone. Moving to the 99% passive income is certainly a goal of mine as I self manage our STR currently. It is becoming more and more appealing each day! :)
Frank Borzen, I like that quote! Thanks~
@Jennifer Schultz When I started doing these STRs my main competition was motels. When I had a decision to make I asked myself "What would that motel do?". I would do the opposite. That was 8 years ago. One of the motel owners sold it and moved away. Another one has been closed for 3 years and they sold the contents.
@Jennifer Schultz I like using an estimated gross revenue to purchase price ratio, ie expected gross revenue divided by purchase price. This allows one to compare the efficiency of a purchase with other like properties although there are many variables to arrive at profitability. Personally, I aim for at least 17% EGR to PP ratio.
Calculating returns can be done many ways and looking for a formula that works with STR's is very subjective. I've complete many BRRRR projects and my cash on cash return is 100% within 12-18 months that's much different then a STR that I may vacation at as well. There is an intangible benefit you can't put a number to it.
I prefer to look at cash on cash as my formula. Based on my current numbers my CoC will be in excess of 25%. That's a number I can wrap my head around. If things continue at that rate in four or less years you have recouped all your money back out. You can then repeat the process or enjoy the cash flow Then your cash return can become infinite.
If your looking to retire on the cash flow then you need to look at your entire portfolio to see where your at. I have a number of LTR. Those take less effort to self manage. I think I will end up with at least 3 STR. This will replace all of my W-2 income and I can travel to my STR. An intangible you don't get with LTR.