Simple Rule to Analyze Short-Term Rentals

[Serena Kim]

What are the metrics you use to analyze your short-term rentals? 

I've been analyzing my 4 short-term rentals from Kissimmee / Orlando (Disney area) and over the past few years they've grossed consistently around 18-22% of their value. 

Total Annual Gross Revenue = 18% of Total Investment (Property Price + Remodel)

Are you seeing that in different markets in the US in your properties?

My two 3br rentals generate $50-55k gross revenue each year ($300k properties). The 4br generated $55k last year and is on track to generate over $65k this year ($350k house). Finally, the newer 6br ($550k house) is well on track to generate over $100k this year.   

Just wondering if that could be used the same way we use the 1-2% rule on long-term rentals. Would be great to be able to quickly analyze a $1 million cabin in the Smoky Mountains vs a $500k house in Disney or Destin FL. 

With the fast property appreciation this rule will probably be closer to 16-18%, but should be a very simple way to start an analysis. I'm assuming a property with good location, management, and reviews.

Cash on cash return is another metrics I look at of course but wondering what you guys come across in your situation/market. 

Serena 

[Erik Stenbakken]

@Serena Kim, 

Here are some metrics I use:

GRM. Gross Rent Multiplier. This is gross rent for a year x _____ = purchase price. We aim for 8.5 or lower. It's getting much harder to find. This is most often only useful when comparing properties in a given market (say Orlando vs. Orlando). Not super useful when comparing a cabin in the woods vs. a ski resort condo, as the condo will have much higher HOA fees, thus the net may be very different.

Cap rate. NOI/purchase = cap. This one is more useful to me because although STRs are not sold on a cap rate, it does tell me how the property is performing. And the NOI portion tells me how it'll do if there is no debt service. Most will call me crazy, but I do not plan to carry debt on all properties forever.

60/40 "rule." It's not a rule at all, but GENERALLY on my properties I find that 40% of the gross goes to expenses (not including debt service). So out of the roughly 60% remaining, that goes to debt service, CapEx savings, and cashflow. My Tennessee properties hit right around 40, while my Colorado properties hit closer to 35% (due mostly to lodging tax difference on gross).

It's important to note that GRM can change if rents go up after purchase (a good thing). And cap rate has two lines: purchase cap and current cap. Current cap looks terrible on some of mine because their current market value has gone double purchase price. The 60/40 thing holds pretty steady regardless of the home value. I use this span of metrics (in addition to CoC) to keep pulse.

Hope this is helpful as folks analyze.