Purchase Luxury STR or multiple mid level STR

[John Rankin]

I would like to hear opinions of experienced investors on what type of STR would be best to purchase going forward. I am about to purchase my first and/or second STR property in the Southeast. With the market changing and housing being expensive would you recommend purchasing one higher end luxury property around $700k or two mid level properties around $300-$350k? Running the numbers on a few properties they both have good COC and CapRates but the mid level properties are not as exciting or alluring as the nicer property (obviously).

I am having a hard time finding any worthy turnkey $300k properties that will allure to the public and am worried that the mid range may not cashflow in the long run as much, however it is a lower cost so my liabilities will not be as much. There seem to be more options for the $650k + properties but I won't be able to purchase multiple as my cash will be tied up for a longer period. Listening to podcasts it sounds like a lot of people are focusing on higher end but wanted to get opinions if that would be wise for my first STR.

My goals are to own 3-5 STR in the next 2 years and then transition into some LTR as well as Mulitfamily and want to know the best pathway to get there. Hope that makes sense, sorry for the long winded wording. Any input would be appreciated.

[Carson McGee]

Hi John,

I personally prefer higher-priced "luxury" short-term rentals. If the options are an STR that costs $350,000 and makes $52,000 vs an STR that costs $700,000 and makes $104,000 I would take the second all day. It is logistically easier to own and manage a single property.

If you are confident in the market and valuations then the higher-end property may make more sense. This also brings along slight economies of scale when you go larger. If you need to remodel the house you are only spending the money to update one kitchen vs two, you only need to furnish/design a single property, etc. There could be an argument to diversify and spread out the risk, which is definitely something to consider. 

My company doesn't have an issue with the risk as we purchase across multiple markets at different entry prices. If these are your only investments then you should be confident in the value of the property as well as realistic revenue projections. Generally speaking, there is more margin for error in luxury properties, if a recession limits consumer spending, you can drop your ADR and still be the obvious choice for guests. With the lower-tier STR, it may feel like a race to the bottom at times, but there can also be fewer expenses with those properties. It all depends on the specific deals and their returns. I saw you are looking in the Southeast, we own and manage in Orlando, FL (Kissimmee/Davenport) and Panama City Beach, FL. If you are interested in those markets, feel free to reach out!