STR - How much return can I reasonably expect?

Question

Hey all

Of course, all I'm hearing about is STR these days.  I know the 1% rule isn't everything, but it is an easily comparable metric.  Currently, I'm not finding it easy to find the 1% rule in markets I'm investing in as the properties sit, but I am finding it possible to find properties that I can reasonably expect to get to the 1% rule within a year or so by raising nearly market rents to market.

What's a reasonable return to expect in a good STR?  Is it worth it to take on the extra work, existing or potentially new  local ordinances, and seemingly new daily competition for a higher return or have I already missed the boat?

For added info, there's no nearby locations that I'd like to have a second home in that I'd use regularly.  I already bought a cheap "used" timeshare at a location I like, and I can't even get there often enough.  Long story short, this would be a strictly financial decision.

I'd love any thoughts.

Thanks!

Ryan Moyer · Answer

What market were you looking in when you ran those numbers?

Like I said it should be extremely easy.  Pull up any log cabin in Gatlinburg or anything within 2 blocks of the beach in Destin and I think you'd have a hard time finding a listing that's NOT doing more than 1% of purchase price in monthly gross.

I bought a home in Southern Utah for $515k in March and one in Orlando for $568k in May and both do well over $10k/month gross easily and that is not counting taxes in that gross rev number.  Granted prices have continued rising since then and I put some decent money into the Orlando house but like I said above, any vacation market should be flooded with listings that meet that metric.

On the flipside I would warn of two things...

1) I think you need to set your standards higher for STRs.  STRs come with added expenses that LTRs do not such as all of your utilities, platform fees, etc.  A house doing only 1% of purchase price in gross monthly rentals is probably not one I would put on my list.

2) Most of the current revenue that makes finding 1% easy is post covid revenue, where we've seen a huge boom in the whole market.  Given that property prices have risen alongside this increased revenue, if revenue drops back to pre-covid levels it would be troublesome.  For instance in your example above if you bought a place for $950k in Gatlinburg I would think you could reasonably expect it do do $150k-$180k in gross revenue annually (so $12.5k - $15k per month).  But in 2019 that same place might have been more like $80k-$90k so if we get back to those levels you would be in trouble.

So it really comes down to whether you believe the vacation rental boom is a temporary outlier or if you believe vacation travel has fundamentally changed.  Personally while I think 2021 might prove to be an outlier year I don't think we'll ever see the numbers nearly as low as 2017-2019 again.

Dave Stokley · Answer

There was a thread about COC return less than 24 hours ago. Google it. We agreed that 25% COC was good.

Ultimately you gotta decide what your personal goals are. Run the numbers. What makes sense for you?

Bruce Woodruff · Answer

The following is my opinion only. Stop thinking high-end, ritzy homes for STR. Find a city that has year-round appeal. Buy a house(s) as close as you can get to the heart of town. Older is good, Quaint and quirky even better. Make them unique by shopping at thrift and antique stores. Sit back and enjoy the $$$ returns :-)

Ryan Moyer · Answer

1% rule is more of a LTR thing.  How are you applying it to STRs?

Are you talking gross monthly rent to purchase price?  In that case finding 1% should be extremely easy.

Bruce Woodruff · Answer

@Chris John You're welcome. Remember that when you are buying/furnishing a STR, you can sometimes gain value from things that a typical renter might find a turn-off. Such as shorter ceilings upstairs, tiny bathrooms, weird closets/no closets or other spaces that wouldn't work in a LTR.

What would bother someone who has to live in the house day after day may actually be thought of as interesting and quirky by a weekend guest......

Chris John · Answer

@Dave Stokley and @Bruce Woodruff

Thank you for the responses.  My head is spinning thinking about this.  Usually I'm a numbers guy, but I'm struggling here so I'm definitely going to put more time into this.

I'm able to buy 4plexes for around 380k right now that are renting for around $3200/mo that I'm expecting to be around $3700-3800/mo by the end of the year.  Not home runs by any means, but they should pay for themselves pretty easily.  I also am betting on inflation, so it wouldn't shock me to see rents of $4000-4500/mo in the next 5 years or so.  Definitely low hanging fruit.

So, when I see the 25% COC number, is that assuming traditional financing and self-management with cleaning fees, etc. accounted for?  By the way, I couldn't find the thread you were referring to, but have come across several other interesting ones, so thanks for that.  If you can link it, I'd appreciate it though.  Was it on BP?

When you say an ROI of 3-5 times, are you comparing that to the returns of what would probably considered high-end homes?  My thought is that the typical ROI of a high-end home is probably pretty low to begin with.  Would the 3-5 times ROI outpace a more traditional LTR property too?  Obviously, appreciation on a nice STR is probably ridiculous compared to that of the 4plexes I'm talking about.  However, I see these being in a growing market in a growing state in a growing part of the country, so I'm probably more hopeful of appreciation than I should be.

In the end, I'm not often intimidated, but you slick talking STR people have me second guessing myself!  I'm concerned about jumping in late, buying an expensive house with all of the learning curve that comes with and realizing I could've made more money buying another 4plex or two... Of course, there's no growth in that and I think I'm stagnating a bit.  Just don't want to get crushed with my empty STR while you self-managing ninjas make all the money!  haha.

Thanks again!

John Underwood · Answer

Typically 4X what a LTR rental would pull in.

Ken Boone · Answer

I think this might have been hinted at in this thread but if you are going for a purely financial decision, and want to do STR, I would stick only with existing tourist vacation destination locations that have been that way for some time.  Those are the markets that are going to make you the most money, least headaches with local jurisdictions, easier to find cleaners, handymen, etc..

Bruce Woodruff · Answer

Exactly.....My personal opinion/observation is that the vacation rental craze is only in it's infancy. While the millenials have been onto it for a while, the 40+ people are still discovering it. I have several people a month say that they will never stay in a hotel again. And why would you? Same price (basically) for an actual house with kitchen....where you can feel 'at home' and come and go without an elevator.....

Bruce Woodruff · Answer

I can't address local regulations, because some areas are really tight and others very relaxed. But the commonly heard number for ROI is 3- 5 times what you would get from a traditional long term rental. The extra management is really very little, but we do it all ourselves.......YMMV

STR - How much return can I reasonably expect?

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