how are LTR profitable with these figures?

Question

Hi everybody,

I'm looking to buy a property in my are (north Houston) as an investment. My plan is to do STR, but I am also making the LTR calculation in case STR does not work out or in case I do no longer have the time to self-manage.

I'm looking to buy a single family for 250-350. I did my calculations for a LTR and currently a 310k listed home I am looking at rents out for $1900. Assuming to buy it for 300k, then taking into account maintenance (5%), Capex (5%), tax, insurance ($170/m), vacancy (5%), that results in a negative CoC return of -7.4%. I understand the unfavorable interest rates doesn't help, but the Cap rate is also only 3.3%. I also understand home values are high, but even if I would find a similar property for 225k and do a 25k reno and be able to rent it out for 2000, the Cap rate would only be 4.3% and cashflow still negative (-1.7%).

So my questions is: what am I missing here?

Cody L. · Answer

You're not missing anything.  Not all single family homes work as LTR/STR.  In fact, most don't.  It's why multifamily is so popular.   I have some SFH's that I bought as rentals that happen to make money just because of when I bought them.  But if I were to buy them at what they're worth today, based on what they rent for today, they'd all be dogs.

Buying a $300k+ home in Houston, with where property tax / insurance is, and getting under $2k in rent, is never going to pencil.

I bought a ton of patio homes for $240k/each (galleria area).  They lease for about $2,200.  Those make $ due to the ratio but if the homes were an extra $70k and the rent was $300/month less, I'd be upside down.

Zeona McIntyre · Answer

Hey Klaas, I recommend using MTR (medium-term rental) as your back up strategy for your short term rental property. Long term won't make sense for the first few years of ownership, but you will likely get there if you hold onto it and get tired of the STR turnover.

I also recommend multi-family to make the numbers easier.

I also have an excellent agent in Fayetteville if you want to try that market like Sara suggested. PM me

Daniel Tanasa · Answer

Now with the interest going up I start receiving some good from wholeseller. You can look for off market properties and still buy with a realtor. The only problem in this scenario is: since is not on MLS, the seller will not pay for your agent and you will need to pay the agent yourself.  But if is a killer deal it will still make sense. What numbers you stated in your first comment don't even meet the 1% rule of thumb. You can at least find something like that, or close to that after you add the rehab, off market from wholesalers.

Let me know what area are you looking at and I can forward you a couple of them.

Eliott Elias · Answer

What are you putting down? The more you put the more you cash flow

Klaas V. · Answer

Thanks for all your replies!

Reading and listening to podcasts about RE investing (typically the BP ones...) sometimes make it seem so easy :-) Sometimes it is just good to have confirmation of your own conclusions. I know other investors are buying in this market I'm looking at, but that may very well be cash and long term view. I do think the area is good on the long term (fast growing population, jobs and good schools), although maybe not extreme appreciation since there are no boundaries to expansion in Houston north.

I understand I should be looking in other areas, but like @Sara Campbell said, I want to keep it close for the STR and I have time to manage those. There are several major hospitals in the area which seem to be an important factor for STR. AirDNA data tells me high occupations (60-80%). I don't necessarily need the cashflow now, so I like @Alex Bush  suggestion to  bite through the high interest rates for a while. Thanks @Zeona McIntyre for confirming the strategy that I was thinking myself! Regarding the Multifamily: I would like one, but there seem to be very few available in this area; maybe off-market, but I prefer to buy (at least my first property) with my realtor.

Alex Bush · Answer

yea, the sad reality is that those are the numbers and most of the time they don't work out with single family homes unless you buy a distressed one and BRRR.

Your assessment and calculations are correct and as @Cody L. said it all depends on the price you buy at.

That said you could, for a couple of years, pour all the profits you make from the STR on your house into paying down the mortgage until the point when your principal and monthly payments are smaller and the numbers start to workout to LTR the property. But the downside is that the technical ROI on capital your pouring into is going to be low.

Sara Campbell · Answer

You're in the wrong market. I have the same issue in my market here in Clarksville, TN. Even the multiplexes don't cash flow for the price right now. I've had to look into other markets. There are still markets out there that do cash flow as LTR. I have one in Fayetteville, NC that does really well as a LTR and I even have a 15 year mortgage on it. It's really just about finding the right market.

Unfortunately with STR its best to have it local in my experience. I've had so many problems arise with my STR that I'm not sure how anyone manages those long distance without serious guest issues.

John McKee · Answer

cash on cash return and cap rate are the same thing.  I assume your calculating in mortgage debt and that's why it doesn't cash flow.  The bank won't do the deal unless it does cash flow at 1.20 DSCR.  It just really depends on how much you have to put down to meet the DSCR, and then what you really want to calculate is your return on equity.  It's a tough market for sure, so I would look for value add deals.

Bruce Woodruff · Answer

Due to the interest rates right now, you may find a long term view to be the best one. You can get a lower price now, but with higher rates. So it may not cash flow like you want right now, but if it even works out close, imagine when you ReFi in a couple years.....then you will be making the ROI you want.

Todd Goedeke · Answer

@Klaas Versterwhy are you looking to self manage a STVR when you can NNN lease a property to a STVR business manager and earn a 20%+ annual cash on cash return as a passive investor?

Find a STVR business manager who will sign a lease for 10% of property value . Let them help you find a property since they will be ones responsible for paying you the lease income. They will also pay for furnishings , RE taxes, insurance and interior maintenance.

how are LTR profitable with these figures?

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