How to invest in STR real estate

Buying an STR may be a good opportunity for both individual real estate investors and group investing. Here are the general steps to follow and things to consider when purchasing STR real estate:

1. Determine the reason for investing

Some investors buy an STR to add to an existing rental property portfolio, while others are just getting started. A buyer may decide to only look in certain markets or may compare all markets to decide what works best for them.

2. Research the local regulations

Regulations on STR real estate vary from place to place. Some cities that thrive on tourism, such as Kissimmee, FL, and Galveston, TX, are STR-friendly, while other locations actively discourage homes being rented for less than 30 days at a time. An STR investor often will be required to obtain a business license and collect a lodging or rental tax to be remitted to the local municipality.

3. Locate the best STR real estate markets

The best short-term rental markets typically have a high demand from leisure or business travelers—and sometimes a combination of both. However, many also can be located within a day’s drive or less of a major metro area.

According to research from Realtor.com, the 10 best places to buy an STR include Joshua Tree, CA; Sedona, AZ; and St. George, UT. In great STR markets like these, it takes 16 days or fewer for an STR to generate enough income to cover the monthly mortgage payment.

4. Create a budget and financial projections

Resources for finding real-time data on STR real estate include Airbtics, AirDNA, and the Roofstock STR Marketplace to find STRs currently listed for sale.

Key metrics used to measure the financial performance include:

• ALOS
• ADR
• Revenue per available room (RevPAR)
• Occupancy
• Average rent per year
• Cash flow
• Cap rate
• Annualized return

While STRs have similar operating expenses as LTRs, investors should be sure to budget for ongoing costs that are unique to STR real estate:

• Initial cost of furnishing and outfitting an STR and replacing items that are beginning to show wear and tear
• Utilities such as electricity, internet and cable TV, water, and gas
• Supplies for the kitchen and baths, such as toiletries, towels and linens, cooking items, and condiments
• Booking fees paid to short-term listing sites, such as Vrbo or Airbnb
• Cost of cleaning an STR and making repairs in between guest bookings

5. Arrange financing

The process for getting a mortgage for STR real estate is similar to buying an LTR property. The down payment required for an STR may be 30% or more of the purchase price, with interest rates typically 1% higher than the loan for a primary residence.

A lender will ask for documents, including a completed loan application, income and debt documentation, and a credit report. Borrowers generally must have a credit score of 680 or higher, a DTI ratio of between 28% and 36%, and enough cash in reserve to pay for up to 6 months of operating expenses and mortgage payments.

6. Make an offer

Making an offer on an STR property is done the same way as an offer for an LTR. A written purchase and sale agreement is generally used to make an offer on an STR and includes basic terms and conditions, including:

• Property address and legal description
• Purchase price and whether the property is being financed or paid for in cash
• Earnest money amount
• Contingencies such as a property inspection, review of historical financial performance (if the property is already used as an STR), and a financing contingency
• Specific date of closing escrow
• Date and time a seller has to accept the offer

7. Close on the transaction

Once an offer has been accepted and escrow has been opened, a buyer begins due diligence by performing an inspection and removing any contingencies one by one. The lender will begin the loan underwriting process, and the transaction may close in 30 days or fewer.

Closing is normally handled by a title company or real estate attorney, depending on the laws of the state the STR is located in. A buyer takes possession of the property the day of closing and can start collecting rental income the same day.

Where to find STR real estate

While almost any home can theoretically be used as an STR, many investors choose to purchase STR real estate that’s already being used as a rental. 

--Jeff Rohde (roofstock)