Considering another Short Term Rental property - help!

[Julie Halloran]

My husband and I currently own a STR property at a ski resort in New Hampshire. Last year was our first full year of owning the property and renting it out, and we think we did fairly well. We calculated our total yearly costs of the unit to be $27k (mortgage, taxes, insurance, HOA fees, electric/water/cable/internet. We made about $17k in short term rentals using AirBnB and VRBO - but because it was our own vacation place first and an investment second, we didn't rent it out on the most popular weeks of the year (Xmas, school vacation, long weekends, July 4th, leaf peeper weekends in the fall, etc). We feel like if we bought another unit that was strictly for investment, we could come closer to breaking even from a cash flow perspective.

The question is, what am I not thinking about? To me, it seems like a no brainer to invest in a property, have other people pay my mortgage and fees, and one day own the property outright without ever having to put much of my own money in it. Even losing $5k a year or so if we don't quite break even makes sense to me. So, what am I missing? What am I not considering that will come back to bite me? We have the cash for a down payment and a renovation. I guess the other option is to put that money in stocks or another type of investment vehicle.

Thanks in advance for any help!

[Troy Zsofka]

Hi @Julie Halloran - 

Allow me to play devil's advocate.

STR / Vacation Rental to supplement the cost of your own vacation home? Yes, great idea; even has significant tax benefits by qualifying it as an investment. It's like putting a yacht on charter when you're not using it in order to offset, and write-off, some of the costs of ownership.

STR / Vacation Rental strictly as an investment property? Let's think about this numerically.

Let's compare a short-term vacation rental to a long-term single family home:

I wish I knew what you paid for the unit, and what the weekly rents are, but I don't. Anyway, let's assume you can get $1,250/wk (maybe you get more, but that'll wash when you compare the investment amount). Let's then say the long-term single fam rents for $1,250/month. Everyone's thinking "well geez, I can make the same in a week with the short-term that I could make in a month with the long-term, it's a no-brainer...". Not so fast...

I'm no STR expert, but I would suggest that the vacancy rate will result in your gross rental income being only a few to several thousand more than the $15K you'll get from the long-term rental (say 15-18 weeks rented per year if you're lucky?). In other words, an extra 50% in gross rents at the absolute best. Once you add-in the cost of utilities (especially heat), furnishings (couches, tables and chairs, beds, sheets, towels, table cloths, pots and pans and plates and silverware, napkins, toilet paper, TV's and radios, washer and dryer and refrigerator - yes, it's common for a long-term SFR not to include a washer, dryer, or refrigerator - etc, etc, etc), plowing/lawn/trash (or HOA fees), cleaning, extra repairs and maintenance (I promise that a long-term house renter takes better care and causes less wear and tear than a revolving door of vacation renters), turnover management and screening, etc, etc, you are not making any more with the vacation rental than with the long-term SFR where the tenants pay all the utilities (possibly with the exception of water/sewer), and take care of the lawn and snow, and provide their own furnishings soup to nuts. You are, however, increasing your workload and risk exposure significantly.

Now, if we lived somewhere warm, or in an urban area, where there is year-round demand for STR's and you can reasonably expect to rent it out the majority of weeks in the year, everything changes and the additional juice may become worth the additional squeeze. However, where we live, it just seems a whole lot less passive and risky for little to no additional upside.

Oh, one more thing. That SFR that rents for $1,250/month long-term with no utilities will cost probably half as much to purchase as the STR that rents for $1,250/wk. Our average rent is currently $1,195.59/month (should be higher but we are conservative on raising rents and enjoy an average tenancy of over 4 years). Recently, we have been into new acquisitions for under $100K including purchase and renovation on houses that rent for $1,350-1,450. Naturally, we're buying stuff in significant need of rehab, but a turn-key that will rent for $1,250/month in our area will run somewhere around $115-135K. How much more do you have to pay for that vacation rental? How many more SFR's could you purchase with the same money? Wouldn't you rather not only cover your mortgage and expenses, but get a modest cash flow as well? (Oh yeah, speaking of which, don't forget to add in Cap Ex / Replacement Reserves to your numbers. I promise you'll need a new roof, or heating system, or windows, or deck, or flooring, or cabinets, or whatever, before you've paid the mortgage off entirely).

I don't have your actual numbers, so I'm making a lot of guesses here, and I don't typically reply to postings unless I know pretty darn well what I'm talking about. However, I have compared actual numbers on vacation rentals in the past to my own long-term SFR rental portfolio, and I've come to the same conclusion: unless you're doing it to subsidize and write off your own vacation rental, or unless you can reasonably get over 50% annual occupancy, it's doesn't shake out any better than a much more passive (read: less time and headaches) long-term SFR.

Happy investing,

Troy