Short Term Rental calculation

[Stephen Scire]

Hello BP members, although I am not new to rental properties, I feel that there is always something new to learn & I feel strongly that this site has some of the best advice & smartest minds when it comes to investment properties.

So.... here's my dilemma 

2 years ago , my wife and I purchased a short term rental in Maine, beach area, steps away from the beach & the location is very good.

We now know how fortunate we are that after jumping over many obstacles to obtain it, there is much value here & will  be a good investment as years pass. The last couple has more of an appreciation play than cash flow (not in the red, just lower cash on cash return) and we see an escalating rate as time goes on.

These are 2 cottages on 1 parcel of land , so they ARE seasonal right now.

That being said, my abutting neighbor , who we get along with very well, has decided to put her vacation rental on the market. She woiuld love to see us with the purchase , since she favors this particular 1 & sees that it would be in good hands. There are some features of this home that I would like to share to help me with the decision.

This STR is only 6 years old, in very good shape, is year-round so has Heat/AC (which we do not) , a larger unit (4bd / 4 bath & sleeps 12) & has been booked each year with repeat vacationers

The property has not taken advantage of off season rentals, which happens in this area ( Oct - May) .

I have included these #s conservatively in my NOI.

I understand the formula for commercial investment property, NOI / cap rate.

Can I use this same formula to evaluate a purchase price so I am not over paying for the property... I am looking at this strictly as a  business, as it should. I am aware that the biggest mistake for many bad investments is buying too high.

 The asking price is over double what we paid for our cottages but this has double the revenue,  without off season rents to be considered.

Note; current NOI is 62,450

With off season winter rental added in , NOI is 77,658

Thank you for your thoughts & advice...

Steve

[Dan Weber]

Hey @Stephen Scire, this sounds like a great opportunity, congrats! Personally, for a property like this, I much prefer the "cash-on-cash" return metric to evaluate and decide if it is a good investment as it sounds like it is a single family rental. Given the age of the home (6 years old), there should be minimal capex for quite some time. I would figure out what your initial output will be between downpayment and closing costs, divide your annual cash flow by that initial cash outlay and see what your return will be.