How to financially structure my first STR?

Question

How should I should I structure my first STR to net the most income possible?
I recently got approved for my STR license on my primary residence which will be a full time rental. My wife and I will be full time managing part time cleaning the property at first and deciding what to delegate as we go. I’m hoping to take home as much income as possible to offset a new mortgage cost and do it all over again. What’s the best strategy to do so?

Additional questions I’m exploring:

How much can I pay her or myself to pay the least amount in taxes?

Can I use the net profit toward another mortgage and keep it as a working investment similar to a 1031ex?

Any help is greatly appreciated.

Collin Hays · Answer

1. Go to your local bank and see what terms they offer for an investment property. It's likely 20 percent down.  There are 10 percent deals out there, but you are taking a bigger financial risk only having 10 percent equity if there is a downturn and you need to sell the house.  There are plenty of investors in the Smokies right now that are stuck pigs because of this situation. They need to sell, but can't sell the home for an amount that would pay off their note.  DON'T TEMPT THAT.

2.  You can pay her or yourself, and while that is a tax-deductible business expense on one side of the ledger, it is income for one/both of you on the other side of the ledger. Income and FICA taxes will be due regardless.

3.  You can use the net profit to do whatever you want with.

Aaron Zimmerman · Answer

Speaking on the cpa side, you will definitely want to connect with one to talk through the ramifications of owning and managing a short term rental. There are significant tax benefits at stake and there's a lot of variables you don't want to miss.

biggest things are renting the property out for an average of 7 days or less, 100 hours and more than anyone else's time (or one of the 6 other material participation tests, and not using the property too much post move out

Jeff Chisum · Answer

Three main mortgage products that are utilized in scaling STR portfolios are the 10% down second home occupancy loan,  DSCR and 5% down multi family for primary

Andrew Steffens · Answer

+1 for getting real estate/STR friendly CPA, and even a good financial advisor to boot.  CPA can also advise on tax questions.  For questions of netting the most money - that is broad and a broad answer is do best practices.  Things like getting pro photos, making sure the house is well outfitted: i.e. modern professional design, amenities, etc.  Make sure your pricing is competitive, garner good reviews so and do forth.  There is no magic bullet so practice good fundamentals and you should do great!

Mike Grudzien · Answer

Get a real estate familiar CPA

Michael Baum · Answer

Definitely get with a good CPA and get things setup.

Kevin J. Notte · Answer

All great stuff here guys, thank you.@Denver McClure What type of advertising would you recommend? Do you find more traffic to come from social paid ads, VRBO, SEO backed website etc.? The property is located in Charleston,SC and have compared similar properties. You are spot on with the ‘feels like home’ vibe that 90% of the listings out here have. I’ve installed a completely turf backyard, putting green and lounging patio area. The interior will theme a retro beach style vibe to match the outdoor design. Well at least I’m hoping it will haha. @Collin Hays I am currently approved with a few lenders for my second investment/primary home until converted to an MTR or what I decide down the road. I was curious to see what most owners did structuring their LLC to pay out ‘employees/contractors’ at a max 12K annually, or how the math would be affected in relation to the gross revenue. And if I didnt buy something right away, any strategies to invest that money into tax deferred roll over strategy (if that exists) So probably more of an CPA, situational based topic.

Again, I appreciate all the feedback guys.

Denver McClure · Answer

Hey @Kevin J. Notte, I'd recommend chatting with a CPA like @Jeff Nash on your additional questions. Regarding your STR strategy, you'll want to focus on advertising first to drive more revenue, not cost cutting. New STRs struggle due to the fact they have no reviews and lack the proper decor/amenities. Find some great STRs in your area and see what they offer that you might not have (EV Charger, Hot tub, outdoor seating, stocked kitchen, etc.). A lot of my clients have done something similar, converting their primary to an STR. Biggest issue I see is them no updating the furnishings to make it appealing. Pick a theme, and keep it minimal like a boutique hotel would. Remove the feeling that it's just someone else's home. Feel free to PM if you'd like to bounce ideas around.

How to financially structure my first STR?

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