STR vs LTR vs Cutting Lose HELP NEEDED

[Benjamin Stacey]

My wife and I recently moved to Lynchburg, VA for work and will be living here for approximately a year and a half. Our work is expected to be completed by early 2026, after which we plan to move back to our hometown. In the meantime, we purchased a home with the intention of converting it into a short-term rental (STR) once we leave. We also plan to finish the basement, which would add about 700 square feet of living space.

Before purchasing the property, we ran preliminary numbers, and converting it to an STR seemed promising. However, after taking a deeper look at the financials, we realized the property would barely cash flow. Based recent STR projections, we expect about $40,000 in annual revenue for a 5-bedroom, 3.5-bath house near Rivermount Blvd, which would only net us a couple of hundred dollars in monthly cash flow. The estimated cost to finish the basement is around $25,000, with an additional $24,000 needed to complete the rest of the property. Our latest calculations show a cash-on-cash return of just 5.87% based on the $40,000 revenue projection. At this point, we're feeling uncertain.

We’re seeking guidance on the best approach moving forward:

1. 1. Should we pursue the STR strategy and aim to be one of the top-performing properties in the market to increase cash flow, potentially up to $1,000 a month?
2. 2. Should we pivot and rent the house to long-term tenants? However, the potential long-term rent is about the same as our mortgage, meaning we’d lose money when factoring in repairs and maintenance.
3. 3. Should we go the STR or long-term rental (LTR) route to break even and rely on future appreciation, with the goal of selling in five years?
4. 4. I plan on DIYing the basement to save costs but is having this extra square ft even worth the trouble? 
5. 4. Should we sell the property when we leave and cut our losses?

Our ultimate fear is that we dump $50,000 into this property for a very small return. The biggest issue is that we already currently own the property and are unsure where to go from here. 

[John Mason]

Benjamin

When you check on zillow for houses similar to yours for last 10 years how much it appreciated?

Not saying it will happen for next 10 years  but it would give some idea:) I usually look at it and multiply it by .6 just as a  safeguard

[Rene Hosman]

These are great questions you're asking @Benjamin Stacey ! 

Here are my thoughts: 

1. Will you have lived in the property for 2 years by the time you move out?
If so potentially worth taking what gains you might have as tax-free capital gains and selling the property if you can get out a little more than you put into it? Unless you really like the idea of having a rental in this area! Then ignore my first comment entirely!

2. You say you're finishing out the basement, is there any chance to divide this property into an up down duplex? Even if the lower level is small? I don't know your market well at all (I am in Colorado) but even a couple hundred extra a month from an additional LTR in the basement could make this worth it to hold on to given the situation you're in. For up/down duplexes, I would ALWAYS spring for full sized windows in the downstairs if you can, and of course the required egress windows in bedrooms at a minimum. Bedroom or studio, full bath, kitchenette, as much nice lighting as possible.

3. Have you considered/is there a market for Mid-term rentals in this area? Maybe there's military nearby or hospitals or universities? Anywhere that people get assigned temporarily or have seasonal demand could make for a good mid term rental. Check out furnishedfinder.com to see if there's many MTR in your area and what the going rate for them is. Mid term rentals are usually 3+ months and you can list on VRBO, FurnishedFinder, & Airbnb. BP Podcasts have a couple great episodes on mid-term rentals which is how I got into them. 

Also paging @Garrett Brown the STR specialist to see if he has any insight to this area or advice on how to get to one of the top STRs in your neck of the woods.

[Benjamin Stacey]

Quote from @John Mason:

Benjamin

When you check on zillow for houses similar to yours for last 10 years how much it appreciated?

Not saying it will happen for next 10 years  but it would give some idea:) I usually look at it and multiply it by .6 just as a  safeguard

 Do you just look at the price changes for the last 10 years to get this number? 

[John Mason]

Yes when you go to Zillow to the house and look for Market value tab

you will see some thing like this

Zestimate® history+192% in last 10 years

[Garrett Brown]

Hey Benjamin! Welcome to the forums. I think from just briefly reading your issues I have a few questions to help me understand your goals better.
1) Would the basement be a separate STR or another bedroom/area in the main house?
2) Do you plan on self managing or getting a property manager? Do you have time and energy for an STR?
3) Is this an AirDNA projection for 40k? Is that including the basement or not?
4) What is the projection for LTR?
5) How much revenue are the top 3-5 places similar to yours doing in the area, and could you beat them with amenities, design, location, etc?

It's tough to answer because there are a lot of numbers involved. BiggerPockets has a Rental Property and Short-Term Rental calculator that you can try to see if the numbers work differently for you!

[Benjamin Stacey]

Quote from @Garrett Brown:

Hey Benjamin! Welcome to the forums. I think from just briefly reading your issues I have a few questions to help me understand your goals better.
1) Would the basement be a separate STR or another bedroom/area in the main house?
2) Do you plan on self managing or getting a property manager? Do you have time and energy for an STR?
3) Is this an AirDNA projection for 40k? Is that including the basement or not?
4) What is the projection for LTR?
5) How much revenue are the top 3-5 places similar to yours doing in the area, and could you beat them with amenities, design, location, etc?

It's tough to answer because there are a lot of numbers involved. BiggerPockets has a Rental Property and Short-Term Rental calculator that you can try to see if the numbers work differently for you!

Garrett, 
Thanks! I appreciate your input. Here are my answers to your questions. 

1) Initially we were wanting to make the basement a separate STR. But realized they were a lot more hoops to jump through with the city to make it a separate dwelling unit so we have opted to make it an extension of the home. Finishing the basement would bring it from four bedrooms to five bedrooms. The holes would need to jump through would be getting an architect involve to stamp a set of drawings.

2) We plan on self managing. We currently have a short term rental in the Smokies so we know the ends and out of the short term world. Hoping this property would help expand our portfolio. 

3) The 40k projection is from Rabbu, which includes the basement. The 40k projection we found is for a 5/3 home. Is Rabbu reliable? 

4) LTR projections range from $1600, which is from bigger pockets rent estimator to about $2500 from looking at comps in the area.  

5) Top properties do about 10 to 15 grand more potentially, in 50k+ range which we would be happy with. Beating the competition with design and amenities is definitely possible due to the smaller pool of people but my concern is having to invest potentially large amounts of extra cash for the amenities just to have a chance in making it cash flow. Is this a true concern? 

[Benjamin Stacey]

Quote from @Rene Hosman:

These are great questions you're asking @Benjamin Stacey ! 

Here are my thoughts: 

1. Will you have lived in the property for 2 years by the time you move out?
If so potentially worth taking what gains you might have as tax-free capital gains and selling the property if you can get out a little more than you put into it? Unless you really like the idea of having a rental in this area! Then ignore my first comment entirely!

2. You say you're finishing out the basement, is there any chance to divide this property into an up down duplex? Even if the lower level is small? I don't know your market well at all (I am in Colorado) but even a couple hundred extra a month from an additional LTR in the basement could make this worth it to hold on to given the situation you're in. For up/down duplexes, I would ALWAYS spring for full sized windows in the downstairs if you can, and of course the required egress windows in bedrooms at a minimum. Bedroom or studio, full bath, kitchenette, as much nice lighting as possible.

3. Have you considered/is there a market for Mid-term rentals in this area? Maybe there's military nearby or hospitals or universities? Anywhere that people get assigned temporarily or have seasonal demand could make for a good mid term rental. Check out furnishedfinder.com to see if there's many MTR in your area and what the going rate for them is. Mid term rentals are usually 3+ months and you can list on VRBO, FurnishedFinder, & Airbnb. BP Podcasts have a couple great episodes on mid-term rentals which is how I got into them. 

Also paging @Garrett Brown the STR specialist to see if he has any insight to this area or advice on how to get to one of the top STRs in your neck of the woods.

 Hey Rene, 

Thanks for replying to my post! I really appreciate it!!

1) Unfortunately we will be a couple of months away from the 2 year make as of right now. 

2) This was our first idea but to make it a short term rental downstairs. But
realized they were more hoops to jump through with the city to make it a separate dwelling unit so we have opted out of doing it. We need to get an architect involve to stamp a set of drawings for the basement finishing. 

3) I have not considered MTR. This is something that I definitely need to look into. I was under the impression that it typically is a lower cash flow then STR which is why I haven't don't any investigation. Have you seen that to be the case?
I need to check out some of those podcast. 

[Benjamin Stacey]

Quote from @John Mason:

Yes when you go to Zillow to the house and look for Market value tab

you will see some thing like this

Zestimate® history+192% in last 10 years

 I did not realize that. Thank you!! 

[Marc Winter]

Why risk $50k on a "maybe 5%" return when you can get 4.3% on a CD?  No muss, no fuss.  

Even if one thinks market values will continue to increase over the next few years (I have my doubts), I would not invest in finishing a basement.  That's a low-return improvement, compared to say new bathrooms/kitchens.

IMHO, if you expect to increase your net through rental and market appreciation, consider the length of time it will take to realize that goal—many years. 

I believe this market cycle is topping, and one should tread very carefully before investing more money into an 'unsure' property.

That does NOT mean to stop investing; just make sure you aren't trying to catch a falling knife in an unsure environment.

[Benjamin Louie]

It sounds like you're facing a complex decision with several factors to consider. Let’s break it down:

1. Pursue STR and Aim to Be Top-Performing:

If the STR market in Lynchburg is competitive, it's possible to generate higher returns if you can position your property as a premium option. Since you're located near Rivermont Blvd, which is likely a desirable area, you could focus on standout amenities like the finished basement, appealing decor, and targeted marketing. However, the projected $40,000 annual revenue seems to only offer slim margins at the moment. If you believe there's room to boost occupancy and rates, aiming for top-performer status could potentially net you an extra $1,000 in monthly cash flow, though it would take careful management.

Pros:

• Potential for higher income if you can boost occupancy/rates.
• Short-term flexibility with potential tax benefits (depreciation, etc.).

Cons:

• Risky if you can’t significantly improve revenue.
• Requires time, effort, and expense for marketing and management.

2. Rent as Long-Term Rental (LTR):

The fact that long-term rent would just cover your mortgage (before repairs and maintenance) makes this option less appealing for immediate cash flow. If your goal is stability and less volatility, an LTR could be more predictable, but it wouldn’t give you the cash flow cushion you’re looking for.

Pros:

• More predictable income with less management effort than STR.
• Lower vacancy rates compared to STR.
• Less risk of fluctuating occupancy rates.

Cons:

• Potential negative cash flow if maintenance and repairs exceed margins.
• Limited growth potential for income.

3. Break Even and Rely on Future Appreciation:

If you believe the Lynchburg area is poised for appreciation in the next five years, you could take a hybrid approach—run the property as either an STR or LTR to break even (or get close) while banking on property value increases. This is a longer-term strategy, but it could be beneficial if the market trends upward. However, appreciation is never guaranteed, so you'd need to consider how much risk you're comfortable taking.

Pros:

• Potential to cash in on appreciation in the future.
• Flexibility between STR and LTR depending on market conditions.

Cons:

• Requires holding costs and maintenance during the interim.
• No guarantees of appreciation.

4. Is DIYing the Basement Worth It?

Adding 700 square feet could help increase your rental income, especially if you convert it into a usable STR space or add a separate unit for LTR purposes. However, finishing the basement for $25,000 when cash flow is already tight may not offer a sufficient return on investment (ROI) unless you're confident it will significantly raise occupancy or rates.

Pros:

• Potential to increase the property’s rental appeal and income.
• DIYing the basement could save on labor costs.

Cons:

• Upfront costs and time investment.
• The additional space may not increase STR income enough to justify the expense.

5. Sell the Property and Cut Losses:

If the financials and risk are too tight for comfort, selling could be a viable option, especially if the market is still strong. This would help you avoid sinking more money into a property with marginal returns. However, you’d want to carefully evaluate market conditions to ensure you don’t lose too much on the sale.

Pros:

• Avoid further investment and risk.
• Free up capital for other opportunities.

Cons:

• Selling costs and potential difficulty finding a buyer.
• You may miss out on potential appreciation.

Recommendations:

• STR Route: If you believe there's potential to improve revenue and occupancy by refining your property's appeal, going the STR route could work. Focus on standout features and premium amenities (e.g., the finished basement, unique decor).
• DIY the Basement Only if It Significantly Adds Value: Ensure the basement project will provide enough of a boost in rent or property value to justify the cost.
• Sell Only If Risks Outweigh Benefits: Consider selling if the stress and financial risks feel too great, but try to ride out any short-term uncertainties if possible.
• Appreciation Play: Relying on future appreciation while breaking even might be the safest middle ground. It would allow you to hold the property long enough to see whether the market improves in your favor.

It sounds like you’re leaning toward minimizing your risks, so focusing on breaking even in the short term while keeping an eye on appreciation might offer the most balanced strategy.

[Rene Hosman]

Quote from @Benjamin Stacey:

Quote from @Rene Hosman:

These are great questions you're asking @Benjamin Stacey ! 

Here are my thoughts: 

1. Will you have lived in the property for 2 years by the time you move out?
If so potentially worth taking what gains you might have as tax-free capital gains and selling the property if you can get out a little more than you put into it? Unless you really like the idea of having a rental in this area! Then ignore my first comment entirely!

2. You say you're finishing out the basement, is there any chance to divide this property into an up down duplex? Even if the lower level is small? I don't know your market well at all (I am in Colorado) but even a couple hundred extra a month from an additional LTR in the basement could make this worth it to hold on to given the situation you're in. For up/down duplexes, I would ALWAYS spring for full sized windows in the downstairs if you can, and of course the required egress windows in bedrooms at a minimum. Bedroom or studio, full bath, kitchenette, as much nice lighting as possible.

3. Have you considered/is there a market for Mid-term rentals in this area? Maybe there's military nearby or hospitals or universities? Anywhere that people get assigned temporarily or have seasonal demand could make for a good mid term rental. Check out furnishedfinder.com to see if there's many MTR in your area and what the going rate for them is. Mid term rentals are usually 3+ months and you can list on VRBO, FurnishedFinder, & Airbnb. BP Podcasts have a couple great episodes on mid-term rentals which is how I got into them. 

Also paging @Garrett Brown the STR specialist to see if he has any insight to this area or advice on how to get to one of the top STRs in your neck of the woods.

 Hey Rene, 

Thanks for replying to my post! I really appreciate it!!

1) Unfortunately we will be a couple of months away from the 2 year make as of right now. 

2) This was our first idea but to make it a short term rental downstairs. But
realized they were more hoops to jump through with the city to make it a separate dwelling unit so we have opted out of doing it. We need to get an architect involve to stamp a set of drawings for the basement finishing. 

3) I have not considered MTR. This is something that I definitely need to look into. I was under the impression that it typically is a lower cash flow then STR which is why I haven't don't any investigation. Have you seen that to be the case?
I need to check out some of those podcast. 

I'm getting the sense that your heart is really wanting an STR? Is that the case or is it I'm wondering if you need it to be considered a separate dwelling by the city to operate just the basement as an STR? In Denver where I invest it's actually a PLUS to not have the other unit considered separate because permits are only allowed for STR if you're renting out your primary residence and I know many folks who put a locking door on part of their home and have a separate external entrance to that part of the house, and rent it out as an AirBNB without it being considered an additional unit by the city. Do the numbers change much in your favor in the long run if you're able to have the top and the bottom units rented on AirBNB separately? I know there are some folks who rent two units in the sam building separate but also are able to combine them for bigger groups and having that flexibility could benefit you!

In terms of mid-term rentals, I find it's a little less $ than STR but, at least in my area, tends to be more steady and a little less work. I allow pets with a pet fee and have a cleaning fee, tenants change out every 3-6 months on my MTR usually.

Here's two episodes I might start with on your STR/MTR decision journey

Buying in Overlooked Short-Term Rental Markets https://www.biggerpockets.com/blog/real-estate-948

The Step-by-Step Guide to Building a Medium-Term Rental Empire https://www.biggerpockets.com/blog/real-estate-780

If you like those two episodes, please feel free to reach out to me for more, there's a good amount of STR/MTR BiggerPockets podcasts and content. If you want to get a weekly dose of STR info I highly recommend signing up for Garrett's STR news that is emailed weekly, here's how to do that - https://app.tango.us/app/workflow/BiggerPockets-free-Short-T...

Keep us updated on what you decide and how things turn out! It's so helpful for the community to see when people have questions, and see their thought process, and then learn from what they decide!!

[January Johnson]

Quote from @John Mason:

Yes when you go to Zillow to the house and look for Market value tab

you will see some thing like this

Zestimate® history+192% in last 10 years

The CEO of Zillow sold his own home at 40% BELOW the Zestimate, so I would caution that Zestimate ≠ Market Value.

[David D.]

Personally I would sell the property. The project seems to be too much risk for too little reward.

STR projections are only projections and can go underwater fast if 2-3 luxury properties with serious amenities pop up in the neighborhood. If you want an Airbnb there are a lot of great markets that you can buy a property without the renovations specifically for that purpose.

[John Mason]

@January Johnson  Right , it is called an estimate which si sometimes way off:)

[Johnny Lynum]

Hey, Benjamin—sounds like you’ve put a lot of thought into this! I'm from Leesburg. 🙂 So many great comments here. Love it! I tried to read them all. Here are my 2 cents (and probably some alternative options/strategies you might consider)...hope this helps. (though excuse my long response 🙂) 

1. STR Potential

With $40K in annual revenue, reaching $1,000/month in cash flow will require some adjustments. Focus on enhancing the guest experience, and check Lynchburg's STR regulations for potential costs.

2. LTR or Mid-Term Rental
If STR doesn't work out, consider mid-term rentals targeting professionals, which could offer higher rents and more stability than long-term leases.

3. Future Appreciation
Lynchburg’s market has seen about 5% appreciation recently (4.3% Sep 2024), meaning your property could gain around $110K in value over 5 years, helping to cover renovation costs. Keep an eye on local developments that could boost property values.

4. DIY Basement Buildout
Finishing the basement for around $25K could improve your STR competitiveness and increase rental rates. Be sure to check permit and code requirements.

5. Tax Considerations
STR income is taxed higher than LTR, but deductible expenses (e.g., repairs, furnishings) can offset this. Consider talking to a tax advisor.

6. Sell vs. Hold
Selling when you leave simplifies things, but holding can provide long-term gains. Refinancing could help improve cash flow later.

Additional (Potential) Scenarios To Consider:

1. Hybrid Rental Strategy
Rent as an STR during peak seasons, then switch to mid-term rentals during slower months to increase income and reduce vacancy risks.

2. Rent-by-the-Room
With 5 bedrooms, renting by the room could provide higher cash flow, especially if marketed to students or young professionals. Lynchburg has been ranked as "College Town" and has several hospitals. Could help you get closer to the 40k target atleast. 

3. House Hack
Finish the basement as a separate unit (if zoning allows) to rent out while you live there. Once you move, you can rent the entire property.

4. Sell After Renovating
Renovate and sell the property before you leave to potentially make a lump sum profit, especially if market conditions are likely to improve.

5. Lease to a Property Management Company
Partner with a management company that handles the STR or corporate rental for a predictable income with minimal hassle. Gives you more time to scale up.

6. Equity Partner Buyout
Consider an equity partner to help fund renovations in exchange for a share of the profits, reducing your risk and investment.

STR seems like a solid option, but these alternative strategies give you flexibility depending on how things play out.

There's an upcoming in-person event in Landsdowne, if you're up for it, I'd love to shake hands! Either way, would love to connect here and there! 

Test and go! Always be ready to make pivots. 💪

Best of luck, brother!

-Johnny

[Drew Sygit]

@Benjamin Stacey you didn't mention your family size, but if just the two of you, what would happen with your numbers if you finished the basement and lived down there, while renting the upstairs?

Cities usually don't care if the OWNER lives in the basement, just tenants.

You could use the extra income to offset cost of finishing basement and more. Maybe this would also make it worthwhile to jump through the city hoops to make the basement a legal unit.

Then you could maybe put a LTR in the basement who could assist with the STR in the main area.

[Trevor Finn]

@Garrett Brown you’ve got a lot of options, but it sounds like cash flow is a top concern. Here’s a quick rundown:

1. STR Strategy: If you're confident about managing an STR well, aim to stand out in the market and try to hit that $1,000/month target. The additional income from STR could justify the renovation costs, but it requires active management and market awareness.
2. LTR or Break-Even Strategy: Renting long-term might simplify things, but if it only breaks even, you’re right to consider if appreciation is enough motivation to hold.
3. DIY Basement: DIYing the basement could increase STR appeal without the full $50K outlay, especially if extra space attracts more bookings. But if the market for large STRs is thin, the basement might not add substantial value.
4. Selling: Selling could free up cash for other investments with better returns, especially if you're uncomfortable with the low ROI and management required for STR.

It's a tough call, but if STR potential is there, it might be worth a trial period to see actual cash flow before committing fully to the basement investment. Keep me posted on what you decide to do!