All Forum Posts by: Josh Green

Any good real estate agents in the Tampa area??

@Josh Green Unfortunately, these are the exact generalities, I see over and over again. Often from Buyer's agents in certain areas: "There are opportunities", "You have to do it right". With no details or numbers to support. Focusing on being a top performer is great. That is why the above calculations are based on 75th+ percentile ADR and Occupancy. 

I would love to see a response that picks any current Pinellas or Tampa on market property as an example, and shares some actual numbers with property taxes, insurance, etc. included in the metrics to show how those numbers "actually" return a positive investment. No need to share the secret recipe. Just a few high-level details versus broad statements. 

Bottom Line Up Front: The Tampa and Pinellas County market has become saturated with STRs. This significant increase in competition, combined with the normalizing or decrease of STR occupancy rates/ADRs (2020 and 2021 were anomalies) and remaining high area home prices, in part driven by low-inventory, makes purchasing a new STR using traditional methods in today's market conditions - an investment that is not likely to return a profit in the near future that can't be better replicated by other passive investment sources. Do your diligence prior to purchasing any properties listed on the market/MLS. It is highly likely that these properties will NOT be good near-term investments for most individual buyers. For the institutional or more seasoned investors, such as those with access to better financing terms, certain off-market properties, cheaper labor and materials for value-add renovations; or those purchasing for alternative reasons only (e.g. tax), there are few properties that may still be good near-term investments. This is the significant exception to the rule.

For those claiming that buying Pinellas and Tampa STRs in today’s market using traditional methods can be profitable, I’m interested in your numbers. Specifically, numbers that include tax expenses (both property taxes and State and local rental taxes) and insurance premiums. I see a lot of calculations where the numbers work and in these many costs are missing or are woefully understated.

This is a long read. However, if you are involved in the STR business in Tampa or Pinellas or are considering it, I believe it is worth the time. Interested in your feedback.

Analysis: I'm a seasoned investor based in Texas with multiple STRs locally and nationally. I purchase based on data and not speculation. I was asked by a friend, who also does not live in Tampa, to investigate the Tampa and Pinellas County markets to help him decide if he should purchase a new SFH for a STR.

Guidelines:

• -This analysis is based on current market and rates for the normal non-institutional investor. This means almost always 20% down is required to purchase a second home or investment property for desirable rates.
• -Current traditional investment or second/vacation home rates @ 20% down: 7% + 2 points. Anything less than 20% down results in higher rate/points; anything more does not considerably move the needle. Other loan programs (e.g. DSCR); rates are higher.
• -This analysis is limited to SFHs – which will almost always be more profitable contemplating condo fees, etc.
• -This analysis is limited to STRs in areas of Hillsborough and Pinellas County that currently allow STRs. There are some STRs operating in areas of Pinellas that do not permit recurring STR stays, such as St. Petersburg (which is limited to 3 stays under 30 days in an annual period). This may continue for a limited time but is not a strategy I would rely on. There are growing sentiments in these areas for enforcement and revised regulations to completely remove STRs ability to operate, including enforcing serious penalties.
  •  -For information on areas of Tampa and Pinellas that permit or do not permit STRs and related restrictions, this is one of the best resources: Short Term Rentals - PRO/CPRO REALTORS® (pinellasrealtor.org)
• -This analysis is for a new investor purchasing a SFH property listed on the market/MLS. I'd be interested in hearing from local STR Buyers' Agents what percentage of properties they offer/assist their clients in purchasing are on-market versus off market. I anticipate 95%+ in the last year will be on market.
• -A word on Appreciation. Appreciation is speculative. It is impossible to know if you are buying at the top, middle or bottom of the market for next decade and what the housing market or economy will do in the future. Many people will argue that investing in an area with anticipated appreciation is a "good investment" or "you are safe" if you plan to hold a property for an extended period of time. The Tampa and Pinellas markets have appreciated significantly in the last few years (SFH prices are currently up 18% year over year). It is possible that the Tampa and Pinellas markets will continue to appreciate. They appear to be strong markets with an influx of capital and new developments (such as the Gas Worx development that will connect Ybor and Channelside in Tampa, or the Water Street project financially backed by Bill Gates). However, this is no guarantee that in 5 years, 7 years or whenever you need the equity in your property that Tampa or Pinellas or your home will have appreciated in value significantly enough to have made today’s purchase a “good investment” with otherwise bad return on investment. In my opinion, anyone who includes potential appreciation in their investing metrics, is foolish. Instead, any appreciation that does occur should be seen as “an added bonus”.

The “Exceptions”:

• -Are there people who purchased 3+ years ago or at a sub 3% rate with STRs in Tampa or Pinellas are profitable? Yes.
• -Are there people who can pay all cash for a property or put 40%-60% down and be profitable? Yes. That doesn’t make this the best use of such capital for most investors.
• -Are there people who are buying primarily for tax benefits (such as 1031 exchange)? Yes.
• -There will always be unicorns:
  •  -Is it possible to find the rare off-market amazing deal?
• -Or an even more unlikely, an on market property without significant competition where you can renovate with positive margins to add significant value (e.g. 2BR to 3 BR)?
• -Is it possible to persuade a seller to do owner financing with less than 20% down or rates sub 7%? Yes. This is a true unicorn.
• -These are the major exceptions!

Selecting a Profitable Property Type:

• -For the purpose of this analysis we focused on STR properties that have the potential to be more profitable – a 3 BR/2BA that can be marketed in the mid to upper tier of homes professionally listed on AirBNB/VRBO with amenities that appeal to STR guests in this market, including some homes with pools, desirable locations close to amenities, etc. Reviews of available properties accounted for, where needed, making minor renovations or remodeling that a normal investor could oversee (e.g. minor kitchen and bath remodel, etc.).
  • -I've read a lot of content here on BP about the Tampa STR market. With some recent claims that on-market homes purchased in the $450k-$550k price range can effectively generate significant return on investment. This may have been a reality 2+ years ago or at a sub 3% interest rate. It is not any longer.
    • -On AirBnB alone, there are currently over 1,400 3 BR active homes in Tampa proper and 1,220+ in Pinellas with prices ranging from $80-$650+ per night. This is almost a 100% increase in competition in approximately 3 years.
  •  -As of Feb/March 2023, the Tampa and St Pete areas currently have only 1.9 months supply of inventory of SFH. The benchmark for a balanced market (favoring neither buyer nor seller) is 5.5 months of inventory. Meaning, this is still a significant Seller's Market. While there has been a slight decrease in SFH sales year over year in Tampa and Pinellas, this was a slight decrease from a hyper-competitive market. With over 200 people moving to these areas each day, investors are still competing with homeowners for traditionally listed properties. These buyers make purchase decisions based on desires other than profitability. Homes in Tampa and Pinellas are still generally selling at historic high prices.
  •  -The reality: Tampa and Pinellas homes currently selling on the market in low to mid-end of the $450k-$550k price range (unless an off-market deal): (1) are considerably older model homes that require significant renovation, repair or maintenance to allow them to effectively compete with the volume of other STRs – unless you have access to reduced cost labor and materials for renovations, (2) outside the preferred areas that most short term renters desire to stay in or are in neighborhoods that are not yet developed or lack access to amenities that a large portion of other STRs currently provide, (3) the homes themselves lack amenities that draw STR travelers, such as pools, access to welcoming outdoor space, etc.
  • -Based on a review of 3BR homes currently on AirBnB that are performing in the top 75th percentile for ADR and occupancy, and doing a quick CMA of the values that they would sell for in today’s market:
  •  -The average current price to purchase the quality of a home that will enable a new buyer to most effectively compete with the myriad of existing STRs in Tampa proper (including Downtown Tampa, South Tampa, Heights: Seminole, Tampa, Riverside, Oakford Park) or Pinellas where STRs are permitted (including unincorporated Pinellas, Largo, Seminole and Indian Rocks) at the 75th + percentile for ADR and Occupancy is $597,000.
  • -Recently, I hear a lot of inexperienced STR investors say: "I'll make my AirBNB standout with professional pictures and unique furnishings" argument. "This will get me an ADR way higher than the 75th percentile and I'll have 85%+ occupancy!". Maybe this would have worked 5+ years ago. But the reality is, almost all of the 75th percentile of listings already have this! Plus, amenities that you cannot afford buying at today's prices (e.g. walking distance to beach, water views, etc.) unless you are purchasing in the $800k+ range. There is a reason we use data; numbers don't lie!

Market Analysis

• -In the very short term, the Tampa and Pinellas markets, like most major markets, have softened ever so slightly. This softening, however, is after 2+ years of exponential growth. There is a limited supply of homes in Tampa (current demand is still exceeding supply), and buyers are forced to compete, often resulting in higher prices that tend to benefit sellers.
• -I use a combination of tools to analyze markets and STR properties. These often include AirDNA, Mashadvisor, Pricelabs, Rabbu, and the Enemy Method. The tools and data aggregators provide insights at a high level. I then use actual numbers and reviews of active AirBNB or VRBO properties to validate that data. I also often partner with local or national property management companies that will provide their data as well.
• -Some sample data pulls:
• · AirDNA (including market wide aggregate data and Rentalizer tool)
  • -3BR/2BA Pinellas Properties in locations that permit STR:
    • -Average Daily Rate (ADR) 50th-75th percentile Annual: $270 ($310 with pool)
  •       -Average Annual Occupancy: 65%
  •       -Average occupancy and ADR rates have dropped considerably since July 2022
  •  -3BR/2BA Tampa Properties:
    • -Average Daily Rate (ADR) 50th-75th percentile Annual: $268
  •        -Average Annual Occupancy: 64%
  • Note: AirDNA data looks back one year and estimates data for the following year. This skews the data when you are in time periods of market change. AirDNA data includes the total nightly rate plus cleaning fees. It does not deduct any business expenses. The Rentalizer tool bases its standard projections using similar properties in the 50th percentile. Often These are low. For this type of property these numbers should be adjusted to 75th and higher percentiles to reflect more accurate numbers. You will get the best data by using the AirDNA subscription that allows you to see the actual comps that make up the estimate. If you don’t have a subscription to AirDNA, Awning.com (Market Data) pulls similar base-level data which is free.
  • · PriceLabs (Market Dashboard function) – Pinellas and Tampa Dashboards
  • -3BR/2BA ADR 50th-75th percentile: $285
  •  -3BR/2BA Average Annual Occupancy: 66%
  • • - I selected comparable properties to validate the numbers being shown by online tools. The results confirmed an ADR of approximately $285 for top performing competitors.

What You Need to Know About Purchasing a STR in Tampa and Pinellas County

• Property Taxes
•  -Florida has some of the highest property taxes in the nation.
• -As a new buyer your taxes will be based on your purchase price, not the Seller's prior property tax. The tax is often incorrect using most commercial real estate sites (e.g. Zillow). Always use the County Property Appraiser Tax Estimator. As an example, the average effective tax rate in Pinellas County is 0.96%. On a $597k SFH in Largo, Zillow lists taxes on purchase at $5,731 a year. Using the County Tax Estimator for the same Largo for the same home the correct estimated taxes are $10,100.
• Insurance Premiums
  •  -Florida has some of the highest insurance premiums in the nation. This includes Flood Insurance. Know your flood zones – e.g. Zones X or X500 (no flood insurance required on a financed purchase), Zones A, AE, etc. do.
  • -Insurance rates are up almost 40% year over year in Tampa. I received quotes between $13k-$18k annually for insurance for sample properties in this range (this DID NOT include Flood). Driving factors in the high prices: premiums from carriers for STR hazard (higher risk) and wind coverages
• State and Local Taxes
  • -Florida STR investors of non-owner occupied properties must pay three taxes: (1) the Florida Transient Rental Tax – 6% of the listing price including any cleaning fee for reservations of 182 nights or shorter, (2) Florida Discretionary Sales Surtax (e.g. Hillsborough = 1%), and a (3) County Tourist Development Tax (e.g. Hillsborough = 5%).

Short Term Rental Analysis

• I use a custom spreadsheet to calculate STR returns, but there are a number of great publicly available tools and spreadsheets; such as the Short Term Shop Short Term Rental Cash Flow Estimator and Tony Robinson’s Short Term Rental Analysis Calculator.
• Key numbers for this Analysis:
• Startup Costs –
  •  -Purchase Price: $597,000 (20% down @ 7% interest + 2 points) and closing costs (2% for processing, appraisal, title insurance, recording, state tax, etc.) This assumes turnkey – no renovations needed
  • -Setup and Furnishing Costs (Furniture, TVs, Smart Locks, Kitchen, Bath, Outdoor): We average $15/per square foot. To effectively compete with rother similarly priced STRs in this market $25,000 is the number we calculated for a mid to higher end 3 BR/2BA. I would expect to exceed this number in you want to compete at the 75th+ percentile.
• Operating Expenses:
  • -CAPEX/Maintenance: 10%
  • -Property Management: 5% (to save on costs, I use a combination of remote-self management, software, and local resources that can assist with onsite emergencies, repairs, etc.). A full time property manager would cost significantly more.
  • -Platform Booking fees: 3%
• Revenue:
• -Expected Annual ADR (based on AirDNA, Price Labs, Enemy Method, etc. data): $285
• -Expected Annual Occupancy (based on AirDNA, Price Labs, Enemy Method, etc. data): 66%

Conclusion

• -Total Initial Investment: $161,892 (20% down + points + closing costs + $25k startup and furnishing costs)
• -Final Numbers: -9.91% CoC Return. Total monthly cash flow of -$1,605. Cap Rate 3.16
• -What about 70% occupancy and $300 ADR? -6.67% CoC Return
• -What about 80% occupancy and $300 ADR? -2.22% CoC Return
• -What about 70% occupancy and $350 ADR? -1.48% CoC Return
• -So what price would an investor have to buy a 3BR SFH at today using 75th percentile ADR and Occupancy % according to multiple data sources to return positive CoC on a STR? Approximately $400,000. And then successfully complete with properties with amenities currently valued at 1.5 to 2 times that amount!

I have been wanting to invest in STR near me at a nearby ski resort or in a town where they use a lot of traveling medical personnel. Is now a good time to invest in either of these areas?

 

I guess i'm also wondering if this is the best time to buy? Not too many people out there speaking about the challenges in this market and what not to do.

Since I signed up for my BP membership, I have been pretty diligent about trying to evaluate at least a few properties every day.  Originally, just to get reps in I was utilizing the rental calculator for everything just to try and validate my preconceived thoughts on if something was going to cashflow or not.  It basically all but confirmed for me that anything that doesn't hit at or is really close to the 1% rule is just not going to cashflow... at least not with the inputs I am using, I could manipulate things to "make it work" but the assumptions were based on deep discounts, getting into a lower interest rate down the line, or 0'ing out things like property management.

In order to run through a lot more properties I have recently transitioned to doing a bulk scrape by zip codes of the MLS to look for anomalies in $/sf and to do a 1% rule check. Anything that is a 0.9% I will run just in case. Ultimately what I have found is that I can get a lot of properties close but nothing I have found so far will actually cashflow at least not with what I am evaluating off of.

My general inputs have been the following:

Purchase Price: Input list and manipulate down from there. 

Closing costs: 1.5% of purchase price.

Down payment: 20%. (Cashflow doesn't get better if I go lower)

Interest rate: 6.5% to 7%... basically whatever the rate is that day.

Loan terms: 30 yr

Income: depends on the BR/BA configuration but I am checking with BP and rents available on various listing sites based on comparable properties.

Property Tax and Insurance: taking from what my realtor's software is providing me as an estimate.

Repairs / Vacancy / Capex / Management: 5%/5%/5%/8%

All other expenses are on the tenant.

Is there something that looks wildly off with my inputs?

What is a reasonable % discount to shoot for off list?

Should I start assuming that I will make the seller cover closing costs based on the market?

Should I accept short term negative cashflow knowing that right now I don't have a mortgage payment and getting a property gets me off the sidelines and at least paying down something with someone else's money.  The other expectation being I might eventually be able to get a better interest rate down the line.

Do I need to move on from MLS searches and transition to a wholesaler or doing my own direct mail? I don't have the capital to be a cash buyer unless I took money out against my primary residence which I would prefer not to do.

Really trying to figure out where I am missing the boat, so I appreciate any feedback.