STRP with cash flow of about 17k/year - worth it?

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STRP with cash flow of about 17k/year - worth it?

Mark Hower
Nashville, TN · Member since 2016 · 28 posts · 10 votes

Hi all,

New to forums. I have around 500k saved and trying to deploy it in real estate. I'm looking at purchasing a new high-end home and using it as a STRP (short term rental property, i.e. listing on Air bnb, etc) This works really well in my area. I'm not as much concerned about discussing the pros/cons of the STRP business, but trying to get a sense of when is the return "worth it?" When is it worth the hassle and potentially tying up around 500k in capital/lending ability to move forward with an investment. I have a few friends that are currently doing this and they think its great, but they're not very analytical as far as tracking their numbers.

I've completed my cash flow analysis below. At what cap rate and what cash-on-cash return does it become worthwhile to move forward with an investment? I know this will vary for the individual and the type of investment, but it seems most are happy if the mortgage is covered and it cash flows some minimal amount.

For an STRP, its not completely passive as I would be hiring someone to handle the listings/cleaning but its much less work than the business I own. So I'm considering this as one potential stream of income. I'm also continuing to research by undervalued SFH to rent as long-term rentals.

Thoughts and feedback?

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Samantha Klein
Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
10y

You could make a much better return leveraging that 500k across multiple properties. When I leverage, I like to see at least a 20% COC.

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  • Paul Kessenich
    Investor · Ann Arbor, MI · Member since 2015 · 13 posts · 4 votes
    10y

    Hi Mark,

    You're the recipient of my very first post on BP.  I've been renting my own home as a short term rental for a year now, but I have also been looking at my own market as a place to deploy a similar strategy on future homepurchases.  

    My feedback on your spreadsheet is:

    1.  What are you basing your 80k revenue on?  Do you expect to rent nightly, weekly, or monthly?  It will probably be a bit of each.

    2.  With question 1 in mind, how do you get your number for Maid Service?  We add this as an extra fee on top of our base price, so it wouldn't appear in this sheet (or it would appear under both expenses and income).

    3.  Your insurance number looks low if you're wanting to insure your furnishings as well.

    4.  Speaking of furnishings - I think your $20k furnishings number is a little low, but it depends on the size of the house and quality of the furnishings.

    5. Does your DTI support this kind of loan? If not, how will you convince banks? I'm especially interested in your answer to this for my own selfish reasons.

    6.  Your utilities number looks low - $200/month for cable, wifi, heat, electric, water???

    7.  Listing service number looks high.  I'd put it closer to $1000/yr.

    8.  You have no property management built in here.  From what I understand, a property manager in this space is going to run you 15-20% of gross rents (we self manage).

    In terms of the business itself, I'd expect lower occupancy the first year as you establish your property's reputation (stars on whatever site(s) you list on).  Once your stars are established and you've found your sweet spot on price, this can be very profitable.  There is probably going to be more volatility, year to year and month to month on a property like this, which means you might gross over 100k one year, but only 60k the next.  This means you won't see as consistent a return, but your upside (and downside!) will be higher (lower).

    Thanks for posting.

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  • Samantha Klein
    Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
    10y

    You could make a much better return leveraging that 500k across multiple properties. When I leverage, I like to see at least a 20% COC.

    1Reply
  • Mark Hower
    OP
    Nashville, TN · Member since 2016 · 28 posts · 10 votes
    10y

    @Paul Kessenich- Thanks for the response.

    1. Revenue is based on 3 things: a- anecdotal evidence of 2 friends that have been doing this for past 1.5 years b- studying the market rates and availability of other listings on air bnb c- asking some STR management companies (i.e. turnkey) for their estimates based on the properties I'm looking at.

    I'll definitely admit, its an estimate. I'd like to think I'm estimating on the low side, but I really don't know for sure. It definitely increases risk of investment. I expect it will be almost all weekends with some occasional weeks being rented. That's what I've seen most common. 

    2. So my revenue number is based on an all-in revenue number including maid service.  Maid service number is based off my 2 anecdotal examples,  studying my friends Quickbooks for last year. Approximately $400/month

    3. Thank you for feedback on insurance number. I haven't called around for quotes on that. Made an estimate based off my home owner's insurance and my business liability insurance.

    4. House is 4 bedrooms, roughly 2000 sq feet (depending on the house, several I'm looking at). Needs to have numerous beds. This is an estimate based off my colleagues furnishing there rentals.

    5. I make decent money, so I don't believe I will have trouble qualifying for a second home loan. I don't know how that will affect me moving forward and looking at future purchases. I've read that lenders won't include STR income, therefore I could be blocking myself out.

    6.  You're right. That's low. I'll adjust. Probably closer to $300/month depending on cable package. I'm basing off my utilities since I live in same neighborhood.

    7. Listing service is paying my girlfriend to manage. I was not aware that listing air bnb had a separate listing service fee above and beyond what they charged the renter. I will add a column for listing service and separate column for "management fee"

    8. Yes, property management I've looked at is 18%. I would keep in house for a period of time.

    Thanks for feedback and forcing me to look at my numbers a little harder. 

    I really want to make this work, but it seems like more work and higher risk than may be worth it. I'll spend more time on the boards and hopefully can get a better sense of when the reward is worth the risk.

    Paul- what are the #'s that you are looking at? What is cash-on-cash return and cap rate for the properties? Is there a better metric besides those two to compare two properties apples to apples?

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  • Mark Hower
    OP
    Nashville, TN · Member since 2016 · 28 posts · 10 votes
    10y

    @Samantha Klein- thanks for feedback. I'll keep reading on boards and hopefully get a better intuitive understanding of what is a good return.

    I keep comparing it to the common alternative of throwing it in a passively managed index fund and what I would expect the return to be there. But obviously that is the beauty in leverage and real estate.

    So 20% COC.

    What do you look for in cap rate?

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  • Paul Kessenich
    Investor · Ann Arbor, MI · Member since 2015 · 13 posts · 4 votes
    10y

    Hi Mark,

    I used your spreadsheet design to do a quick analysis of a property in my area.  Properties near downtown/hospital/university don't tend to be very uniform here in Ann Arbor, so the analysis needs to be customized for each one.  

    I do think my numbers are fairly realistic for this one.  We manage ourselves and the cleaning and tax gets passed through to the renters.  

    For my wife and I, we don't have the income to qualify for this kind of mortgage (we have a mortgage on our primary residence now), and knowing how much we'd need to come up with for the initial investment and knowing it would take some time to get the occupancy up to where we want it, it seems risky to use hard money or some funding with a higher interest rate.

    I would like to make this happen at some point though because there seems to be high upside and this market doesn't seem to be going away anytime soon - at least not in this area.

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  • Paul Kessenich
    Investor · Ann Arbor, MI · Member since 2015 · 13 posts · 4 votes
    10y

    Hit send here before I asked this:  

    What kind of renters are renting these 4 bedroom houses in your area?  The market is key when you're talking about short term rentals...

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  • Mark Hower
    OP
    Nashville, TN · Member since 2016 · 28 posts · 10 votes
    10y

    @Paul Kessenich- in Nashville, the target market for these larger home is bachelor/bachelorette parties and other larger social functions (reunions, weddings)

    That is another degree of risk for long term. Not sure how long Nashville will stay an "it" city with streams of large parties coming through. 

    For now, it seems to be working well enough.

    0Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    10y

    @Mark Hower What area of Nashville are you looking to purchase the STRP?

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  • Mark Hower
    OP
    Nashville, TN · Member since 2016 · 28 posts · 10 votes
    10y

    Luka,  I've been looking in East Nashville and Wedgewood Houston. 

    Values on properties are just so high right now that I've been hesitant to jump in.

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  • Brian Hood
    Nashville, TN · Member since 2016 · 10 posts · 24 votes
    10y

    I run something very similar downtown, and have seen similar numbers (although a higher gross yearly income).  The bachelor/bachelorette thing is an absolute goldmine in Nashville. 

    One thing you're going to need to factor in is income tax on all of your profit. This is not the same as a traditional rental property. The profit for this is going to be taxed similar to any other self-employed person. 

    Also, if the market shifts, and it no longer makes sense as a vacation rental, make sure you have an exit strategy in place. With those numbers, it doesn't make sense as a traditional rental (at least with current market rents). 

    Just keep that in mind when making your decisions! 

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  • Mark Hower
    OP
    Nashville, TN · Member since 2016 · 28 posts · 10 votes
    10y

    @Brian Hood- thanks for the feedback. I agree about the gross rents. I have 2 friends that have both been getting much higher gross rents. I tried to go very conservative for this estimate and also used a proforma from a company that specializes in vacation rentals (Turnkey). But good to hear from someone else that things are higher in reality. How many people does yours sleep? Is it in downtown? Average rents or yearly gross? Answer whatever you feel comfortable.

    Yes, the market shifting definitely is something I consider. Seems like we would have at least a year or two of good rents before Nashville loses its cool factor (but who knows). But it wouldn't be recession proof. I'm the type to always keep a large amount of cash on hand, so at least if it didn't cash flow I wouldn't lose the property. But the ROI would be soooo much lower if no large parties, that it would definitely defeat the purpose.

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  • Mark Hower
    OP
    Nashville, TN · Member since 2016 · 28 posts · 10 votes
    10y

    double post

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