Buying STR in this Market?

24 Replies

Hi all,

I am one of those who think there is never a “bad” time to buy real estate, but there are very difficult times.  I have always thought that the key to real estate wealth is through long term appreciation. 

With that being said, I am stunned by the rise in housing prices. My strategy is simply to purchase a SFH in a popular vacationing area to generate income through a STR.

Deals are incredibly hard to find unless it needs major rehabbing - which brings out of state, is not something I will be able to do. People know what they have and the inflated prices show it.

What are your thoughts on purchasing "turn/key" properties in this market for STR? Is it a horrible idea?



It all depends on the numbers.. If the numbers work out great, if they don't horrible idea.  In some markets, some STRs will still cash flow at the inflated prices.  

Like @Ken Boone said. Numbers, numbers, numbers. 
Also try to hit singles and doubles versus home runs in this market. There are still plenty of "deals" on the market that you can get 20%+ CoC return and more! Error on the side of action.

Originally posted by @Alex Smith :

Hi all,

What are your thoughts on purchasing "turn/key" properties in this market for STR? Is it a horrible idea?


Yessir, really bad idea.....If you buy high, you're leaving, let's say, $100k on the table. Sure you can still make a return on your investment, but you just gave away $100k. Why would you do that? Just wait a year until the market corrects....then you have your income, plus that $100k you didn't leave on the table....just makes sense doesn't it?

 

@Alex Smith

If it’s a deal, it’s a deal. You should be running your numbers just the same as you would in a buyers market.  There are still deals out there. It just takes more patience and negotiation skills to get them in this market.

I think the trap in this market is that we tend to look at all current things - demand & rent - in a vacuum, and assume everything will at least stay the same, and will probably get better.  That's very risky.  There are storm clouds building that could push rental income down in a hurry:

1.  Airbnb and VRBO are on major cash-grabs currently.  Just 24 months ago, a guest paid a 7-10 percent surcharge for their booking.  Now it is approaching 20 percent.  That is unsustainable, and will most certainly impact an owner's ability to raise prices, and in fact, will eventually begin damaging demand, if that isn't in the works already.

2. Since owning an STR is now in vogue and even your uber driver is talking about it, look out: Construction will reach the point where supply meets and exceeds demand. So you may be earning $50K this year, but $40K in two years. How does that make your investment numbers work?

3.  Demand will not continue at this pace.  Currently, everyone is awash with disposable cash, thanks to Uncle Sam helicoptering $ trillions of dollars from deficit spending, onto everyone's roof top.  That isn't sustainable either.  The money is going to run out, taxes are going to increase, incomes are going to decrease, and interest raise will rise.  

I own a number of vacation rentals and am contemplating lightening my load.  When the phrase "This time it's different" starts going around - and it is - it's time to get your flashlight out and locate the nearest exit.  

Originally posted by @Collin H. :

3.  Demand will not continue at this pace.  Currently, everyone is awash with disposable cash, thanks to Uncle Sam helicoptering $ trillions of dollars from deficit spending, onto everyone's roof top.  That isn't sustainable either.  The money is going to run out, taxes are going to increase, incomes are going to decrease, and interest raise will rise.  


^^^^ This. Everyone pay attention and get ready. There is no question IF this will happen. The question is WHEN.

 

Originally posted by @Bruce Woodruff :


Yessir, really bad idea.....If you buy high, you're leaving, let's say, $100k on the table. Sure you can still make a return on your investment, but you just gave away $100k. Why would you do that? Just wait a year until the market corrects....then you have your income, plus that $100k you didn't leave on the table....just makes sense doesn't it?

——-
 

These are my thoughts as well, but then I do a quick search on these forums and people have been saying, “a crash is coming” for the past 3 years. I would hate to have been waiting on the sidelines for the past 3 years. 


I agree with @Collin H. and @Bruce Woodruff which is why you need to run the numbers like a business, because that’s what this is. Underwrite conservatively and keep your finger on the pulse of the market. Reserves and good business practices/plans are key. Do the best you can with the information you have and bet on yourself if you think you’re up to the challenge. If you are…go for it and maintain sound business principles. If not, less competition in the market for me.

Originally posted by @Alex Smith :
Originally posted by @Bruce Woodruff:


Yessir, really bad idea.....If you buy high, you're leaving, let's say, $100k on the table. Sure you can still make a return on your investment, but you just gave away $100k. Why would you do that? Just wait a year until the market corrects....then you have your income, plus that $100k you didn't leave on the table....just makes sense doesn't it?

——-
 

These are my thoughts as well, but then I do a quick search on these forums and people have been saying, “a crash is coming” for the past 3 years. I would hate to have been waiting on the sidelines for the past 3 years. 

Regardless of the investment vehicle, when the demand turns parabolic, as is the case with real estate right now, a significant and painful correction always follows.  I don't know where the top is, but we are getting close.

 

@Alex Smith

If you think in 3yrs prices will be lower, then best to not buy. My personal thought is that prices will be higher. Interest rates are still low, there is a ton of cash in the sidelines, policy will remain accommodative, and taxes will probably move higher (making real estate more attractive).

Run the numbers first and if it makes sense go for it. Better to buy and wait than wait and buy real estate.

Has anyone ever owned a vacation rental in a real estate bear market?  I recall back in the 2010-11 range, my son and I were staying at some pretty swanky condos in Colorado when we went fly fishing.  We were paying $50-80 a night most of the time, and the places were like ghost towns.   I remember asking one of the resort managers why they were so cheap, and she said (paraphrase):  "Many of these homeowners are stuck, and they'll take anything just to have a little bit of income."

Does anyone think that can't and won't happen again?  What does your investment look like when you are charging someone $80 in peak season just to keep some money moving into your account?

@Collin H. you seem pretty bearish on the state of the current market. I agree that there are many factors that cause concerns, but it seems there are just as many factors that would say this market could continue for years to come. Full disclosure I am still new to real estate investing and have not owned during a bear market (unless you consider the first part of covid that). I am curious as to what strategy you would recommend for new people that have already jumped in with multiple properties or people like @Alex Smith who are looking to jump into investing? My thought process is that all investing whether in real estate, stocks, or business ventures is inherently risky, but so is doing nothing and holding cash with inflation running rampant. Buy less properties while putting down more cash on the front end so that you have more equity in case of a crash or hold off investing at all?

Originally posted by @Joshua Strickland :

@Collin H. you seem pretty bearish on the state of the current market. I agree that there are many factors that cause concerns, but it seems there are just as many factors that would say this market could continue for years to come. Full disclosure I am still new to real estate investing and have not owned during a bear market (unless you consider the first part of covid that). I am curious as to what strategy you would recommend for new people that have already jumped in with multiple properties or people like @Alex Smith who are looking to jump into investing? My thought process is that all investing whether in real estate, stocks, or business ventures is inherently risky, but so is doing nothing and holding cash with inflation running rampant. Buy less properties while putting down more cash on the front end so that you have more equity in case of a crash or hold off investing at all?

That’s a fair assessment of me. I’ve been bullish on STRs since 2005, but I’ve become bearish since around the first of 2021.  I think there’s more downside than upside risk currently.  that doesn’t mean I’m sitting on my hands and not re-deploying assets.  There’s always an emerging bull market somewhere.

@Alex Smith I think it's mostly depended on the management of the properties and the market. I have STR's in California and I think with the management I have it's much safer than long term rentals we make more on low months than long term rentals make. Is this as good a time to buy a STR as last year? Probably not but it's a better time than in ten years from now.

Originally posted by @Serena Kim :


My personal thought is that prices will be higher. 

I think you're correct that RE prices will be higher in 3 years. But there will have to be some point between now and then where the prices fall to correct this craziness. IMO, that's the time to buy, not at the absolute top of the market, where we currently are.

Originally posted by @Zachary Beach :

@Alex Smith I think it's mostly depended on the management of the properties and the market. I have STR's in California and I think with the management I have it's much safer than long term rentals we make more on low months than long term rentals make.

Is this as good a time to buy a STR as last year? Probably not but it's a better time than in ten years from now.



Well said...
 If STR's can do as well as they did during the pandemic then they are golden. Assuming of course that you have the right location and have a really nice property. And I think there will be a time between now and ten years where a deal can be had in the market.

 

Originally posted by @Collin H. :

I think the trap in this market is that we tend to look at all current things - demand & rent - in a vacuum, and assume everything will at least stay the same, and will probably get better.  That's very risky.  There are storm clouds building that could push rental income down in a hurry:

1.  Airbnb and VRBO are on major cash-grabs currently.  Just 24 months ago, a guest paid a 7-10 percent surcharge for their booking.  Now it is approaching 20 percent.  That is unsustainable, and will most certainly impact an owner's ability to raise prices, and in fact, will eventually begin damaging demand, if that isn't in the works already.

2. Since owning an STR is now in vogue and even your uber driver is talking about it, look out: Construction will reach the point where supply meets and exceeds demand. So you may be earning $50K this year, but $40K in two years. How does that make your investment numbers work?

3.  Demand will not continue at this pace.  Currently, everyone is awash with disposable cash, thanks to Uncle Sam helicoptering $ trillions of dollars from deficit spending, onto everyone's roof top.  That isn't sustainable either.  The money is going to run out, taxes are going to increase, incomes are going to decrease, and interest raise will rise.  

I own a number of vacation rentals and am contemplating lightening my load.  When the phrase "This time it's different" starts going around - and it is - it's time to get your flashlight out and locate the nearest exit.  

 1. I don't think Airbnb and VRBO are trying to increase their prices and are on a "cash-grab". They're building a platform to scale the economy of short term rentals and will be decreasing prices as time progresses. Also, if they are, I'm perfectly fine if Airbnb takes 20% while my listing has increased by more than that in the same period of time.

3. The fact is that there is newly printed money now in circulation. Disposable income usually just moves around until it goes into the pocket of the wealthy business owners. Since purchasing a home has been so difficult in STR markets that are hot, I think STR will continue to rise. But I think you're right about STR revenues dropping in the future, just don't know how much. Maybe we can look at the market we're researching to see what prices were before the pandemic and have that as the low.

There's no telling and everything I'm saying is my own research/speculation but thought to share :) 

@Bruce Woodruff eventually, absolutely. You don’t think we are heading for a sort of “new normal” though? A price skyrocket that is pushed by actual demand? Isn’t this only not sustainable if something big economically changes? Sure the free money is helping this push slightly but surely a few thousand dollars from the government isn’t pushing this insane market completely. Once interest rates rise it will only hinder the big push right? Not completely drop it. I’m very curious on specific thoughts on this.

@Corey Frank Here is my opinion and is probably worth what you paid for it…

I believe the threat to the STR market will be an economic downturn that doesn't so much effect housing prices, but rather median wages. The loan process is much stronger today than during the Great Recession which if you look back through history was the largest housing crash since the Great Depression by far and the market still came back in less than a decade. So even if it "crashed" history says it is much more likely to level off or go down by only 5-10% vs. 50%+ like it did in 2008.

However, if wages do not keep up with inflation then people will have to choose between going on vacation or buying groceries. This could cause STR rates to fall which probably will regardless once people can begin going on cruises and traveling to other parts of the world. Basic economics of increased supply with the same demand. 

I don’t have a crystal ball but personally see the STR and housing market remaining strong for the next couple of years given we don’t see a world changing event like Covid 2.0 or a war.

Last point - If I didn’t invest in STRs then it would either be stocks, crypto, or other business ventures. Diversification is a great hedge, but all of those would also be effected by any unforeseen event. And with inflation on the rise I choose assets over dollars in the bank. (Other than my very conservative amount of reserves for a rainy day.)

@Corey Frank I do think that there is a new allocation of cash towards real estate as folks who didn’t prioritize having space pre-COVID, now shift where their dollars are going. People saved a lot of money not traveling, not going out to eat/drink, not going to sports and other events, etc. and improving their living situation is a natural move. If even a small number of companies allow remote work going forward, that will be a permanent change in where the economy’s dollars flow.

All that said, the only thing you need to survive a bear market is reserves. If one is thoughtful about their STR investing, they should focus their analysis on bear market resilient plays, and that in turn means perhaps less reserves needed.

@Collin H.

On your graph showing YOY mortgage applications are you accounting for base effect from the low/zero period post lockdown?

Also both in the general RE market but specific to STR are we following the demographics? We have an older generation who still has the capital to travel and may be "aging in place" post retirement but also travel and utilize STR.

In addition we have a younger generation who waited longer to have children and buy houses. The always travelled but as they age and now have families have moved from hostels and hotels to VRBO and ABNB.

It seems to me the demographics show a large portion of the push and COVID exposed it. I don’t believe the current demand will sustain forever but the market is growing and that would make sense based on the above tends. I

@Joshua Strickland Those are very good points. I have heard so many different points of view on the future of the real estate market but not yet considered wages keeping up with inflation like you mention. I keep hearing people talk about a big, life changing crash in the next year or 2 but have not heard any good points to back those views up. From what I see, there is demand so I do believe that a small dip is more likely than a major correction in the very near future.  Thank you for the reply and insights. 

@Alex Smith It can be done. It's just harder to find and might have to talk with someone who's got access to off market deals. That's how I've gotten most clients hooked up with turnkey properties recently. MLS listed properties are probably going to be overpriced, or if they're priced decently, they'll get offers put on it aggressively the day it hits. Just what I've been seeing the last few weeks even more so than the preceding months.