Using STR to beat LTR Income

8 Replies

Hi BP! 

So I have a thought and I just want to put it out there to get some feedback on it. 

Our strategy is to invest in small MF's and SFH with 4+ bedrooms that are under 100K. These properties are located in a town with a college and hospital. We've noticed that there are quite a few STR's in the area that are averaging a 50-60% occupancy rate. Although its not a "hot" market for STR's, the people that offer them there are definitely bringing in more income than if the properties were rented long term.

For example, a 4/1 or 4/2 SFH long term rental is averaging $850-$1000 a month. This same property on AirBnb is going for $150+ a night. This would mean we would only have to rent the house for 10 nights a month to beat the LTR income potential. On top of that, single room rentals are going for about $30-$45 a night.

In terms of the small MF's, 2/1 are renting for $750 a month as a long term rental. As a STR, they're averaging $60-$100 a night, which once again we would only have to rent the place for 10-15 nights a month to beat the LT rents. Or lets say if we bought a duplex with 2 3/1's then we would have 6 bedrooms to rent out for $30-$45 a night.

In addition to all of this, if the STR didn't seem to be working out, the properties would be fully furnished with the ability to do student rentals by the room or just get slightly higher rents as a whole.

Basically, we found a market where we can get duplex's and SFH's for about 60-75k. We really believe we'd be able to get considerable cash flow from these cheap properties by utilizing this STR strategy. One other thing we love about this strategy is that it would eliminate the cost of property management. We would still have the cost of a cleaning crew, but that would be considerably less than a property manager for LTRentals. There are so many people who self manage STR out of state with much success. I would be traveling to this area to do cosmetic updates and furnish the places.


I'm just wondering if anyone is using STR's to beat the LTR's in markets that aren't really big STR markets, but still have a decent enough occupancy rate to produce more income in an area where LT rents aren't really that high. Please poke holes in this idea and let me know if you think it could work as well as we think or if we're just missing the point.


You have additional expenses with a STR.

Like all the utilities. Consumables, replacing damaged items or worn out items after all the expense of furnishing each unit in the first place. You will have more hands on dealing with multiple guests than a long term tenant. You can do these things or pay someone to do them for you which eats away at your net income.

Originally posted by @Jessica Piff :

Jessica, this is a great question, but not an easy answer. There are many investors on BP that will brag about making $50,000 a year on their vacation rental but they rarely tell the whole story. Just for background, I used to manage 70 short-term rentals, I currently own one short-term and 30 long-term rentals, and I manage about 400 long-term rentals for others.

I have a single-family home that would rent for $1,600 a month. Tenants would be responsible for utilities so I would essentially earn $19,000 a year as a long-term rental. 

I instead chose to use it as a short-term rental and charge $275 a night. I anticipate renting it for at least 150 nights in 2021 so that's $41,000 in a year. It's a no-brainer, right? But short-term rentals have a lot of additional expenses:

  • Furnishing costs
  • Utilities
  • TV/Internet
  • Consumables
  • Taxes

Those are just a few examples. The biggest expense is management, whether you hire someone or do it yourself. I'm a busy guy, so I hire a property manager to handle everything for me so about 30% of my income goes to management, utilities, and other expenses. Many of the investors on BP fail to account for the time they spend answering calls, meeting guests, mopping floors, etc. If they paid themselves for their time, their net income would drop dramatically.

I don't want to scare you away from short-term because it can be more lucrative if the market suits it and you provide a good product. Just be honest and realistic with your numbers. My short-term produces about 50% more than it would as a long-term and I still get to use it mysef during the winter or block time off for friends and family.

 

@Jessica Piff - I have LTRs and STRs.  I started with LTRs and saw that I could make a ton more with STRs so since then I have invested in STRs.  I am at a point now where I will continue with my STRs and will probably start buying more LTRs whenever the market crashes - which it will at some point.    Having said that the LTRs are easy.  I do next to nothing, the management company makes 8 to 10%.  For the 8 - 10 % they get, I get income which is about 95% passive.  Now the STRs are a different story.  STRs are a business and need to be run like a business in order to make the great income you hear folks talk about.  I make way way way more $$ on my STRs but it is not a passive investment - it is an active investment or rather a business.  

For me, the income from the STR is a huge multiplier over what I get from the LTRs so for me it is worth the extra work involved. This is what you need to figure out. I guarantee you are going to be doing a lot more work with these units as an STR than as an LTR. The question for you is - will the increase in income be a great enough factor to offset the extra time and work you will have to put in to manage the STRs? This is something only you can answer. For me it absolutely is, but I have invested in a proven tourist market where my occupancy is closer to like 85 - 90% or more.

@Nathan G.

Thank you for that well laid out response. We are aware of the additional expenses of STR, although I haven't run the exact numbers on it yet. I know that's a crucial step. There are a lot of automated systems out there to self manage in a less time consuming way and we would hire a cleaning crew, so although there's still the expense of the cleaning crew, I feel it would be considerably less than a property management company. I suppose once I run the exact numbers with furnishings and utilities, perhaps the income won't really be that much greater than long term rentals, but when the gross income is double to triple long term rent, it seems like it will still win even with the additional expenses.

@Luke Carl  

This is the episode we listened to a while back that got us completely fired up about doing STR out of state. It was so informative, very inspiring, and she makes it seem completely possible to successfully self manage STR. Obviously she has gained lots of experience that brought her to that point, but if someone can do it, then that means we can do it too. Of course there will be lessons learned along the way, but you have to start somewhere!

@Ken Boone

I definitely hear what you're saying about passive vs active. Our goal is to have passive income for sure, but our immediate goal is cash flow so I can quit my current job and have all of my time to build our portfolio and acquire more assets. I think in a year, once we have reached our first goal of $2000 a month of cash flow, then we will start shifting things to focus on making everything as passive as possible. What we're thinking now is that with STR, we can reach our $2000 a month of cash flow in less time and with less properties. Also, I don't mind being more active in the way of STR because it feels similar to the customer service jobs I've worked my whole life anyways. I love the world of hospitality and although we would be implementing all of the automated services out there, I don't feel like the work will be that bad. I know there will be moments of discomfort and things will pop up that we might not expect, but just as I said to Luke, you have to start somewhere!

Overall, whether we do LTR or STR, we are just starting out, and we know there's going to be lessons learned. Hopefully through the help of everyone here on BP, all of the podcasts, webinars, and REI meetups, we can avoid certain mistakes, but this is a journey we are excited to embark on and are willing to take the good with the bad. Nobody starts out perfect, and experience comes with time. We won't let fear hold us back, nor the thoughts of what if this or that. I think everyone can agree that the path to success isn't necessarily easy, but it's well worth it!

@Jessica Piff Well Jessica it sounds like you have thought through everything and have your reasons for doing this well defined.  You are well ahead of most people starting out.   I wish you the best of success in your journey!

@Ken Boone

Thank you so much! I appreciate your response and thoughts. I love getting feedback from everyone here on BP! It's because of this community that we feel so passionately about getting into REI.