Need Guidance and Direction

[Jimmy Johnson]

Happy New Year Bigger Pockets. I have listened to the bigger pockets podcast for the last 6 months and my wife and I are now in a position to purchase our investment property. We are leaning towards a STRproperty. I hope you guys will be willing to give us guidance on what direction we should go as we are new to this world and any insight would be greatly appreciated.

Our situation:

We live in Orange County Ca. We have no debt other than our house, which we owe 330K and it's worth 730K+ (about 400K in equity). We have 40K set aside for a STR property and are comfortable taking around 120K out of our equity in our house for the right opportunity.

What we are currently looking at:

Short Term Rental in a nearby (drivable) desirable area.

1. Bullhead City Az. 4 hours from our house. Our family currently owns a vacation home out there that we love to visit at least 5 times a year. We are looking for a turnkey property (3bed, 2 bath, pool) this would run around 550k and according to Airdna this property would rent for $250 ADR at 56% occupancy. This would put our initial investment at around 126K and a cap rate of 6.4%. I feel like these are conservative numbers with what I have seen on Airbnb and Vrbo.
2. Mammoth Lakes Ca. 5 hours from our house. We have friends that currently have STR rentals in this market. A property (2 bed, 2 bath) here turnkey would be about 600K or a fixer at 500K + rehab of 50K and according to Airdna the property would rent for $330 ADR at 58% occupancy. My friend who is in this market currently tell me his numbers are $250 ADR at 85%+ occupancy. This would put our initial investment at around 126K and a cap rate of 8.7% with the Airdna numbers and a cap rate of 9.9% with my friend's numbers.
3. Sedona Az. 8.5 hours from our house. We took a vacation here and absolutely loved this town. Housing is really expensive and limited in the nearby area. It looks like it will take some work but we could be able to pick up a 2 bed, 2 bath property (condo) for 650K. According to Airdna the property would rent for $280 ADR at 83% occupancy. I feel like the $280 is low from what I have seen on Airbnb, so this could be conservative. This would put our initial investment at around 150K and a cap rate or 9.1%.
4. Some market or investment I have not thought of.

Any insight into these markets or direction that you would take in our situation would be greatly appreciated. This is something my wife and I have talked a lot about and are very excited about the possibility of owning and managing a STR just want to make sure it is in the correct market. Thank you for your time.

[John D.]

@Jimmy Johnson I would strongly advise you to throw out CAP rate, and compare these in a STR-specific spreadsheet to help show cash-on-cash return. If you are looking for a rule-of-thumb, look at your gross rent ratio. This is the total amount of rent divided by the total cost of the property. It looks like you are considering properties with a 10% or less gross rent ratio (i.e. $50k gross rents on a $500k all-in property cost as an example). Most investors I know are looking for 15%+ in turnkey properties with low overhead, 20% + for low-to-medium overhead properties with minor effort, and 25% plus for properties that are expensive to maintain and may require significant effort to bring to market. If you are familiar with Bullhead City, I know it's fairly easy to do significantly better then 10% in neighboring Lake Havasu City. You do not want a 3/2 however, the market is flooded with them. You probably want a few smaller units in one complex, or one larger unit or one that is differentaited in some way. Hope it helps!