How are investors feeling about the Texas STR market?

Question

I am very interested in Austin, TX specifically, seems like Agents are optimistic about the future of the market. I want to hear more about what INVESTORS think about STR, LTR, or possible Prefab homes?

Any suggestions or observations?

Denver McClure · Answer

Agree with Nathan. I ran a few STRs in the Dallas market and converted both to MTR and LTR last year. If you dive into the STR market data in Austin, and several other Texas cities, you'll see the STR inventory is increasing, while occupancy rate continues to fall. Supply increases as more people follow the trend of Airbnb hosting to chase higher margins or subsidize their income, and demand is falling as we move into a recessionary environment meaning consumers have less discretionary income to spend on travel and layoffs are impacting household budgets.

I would hedge yourself and consider MTRs which allow you to flip on/off the STR switch depending on the season and economic environment. I cut out my 10% STR management fee and 9% Dallas Hotel Occupancy Tax immediately by booking tenants for 30+ days, so there are ways to cut expenses while maintaining nearly 100% occupancy.

Nathan Grabau · Answer

There is so much margin in STR's, that it is hard to not be excited about it. That being said, I would run your numbers based off of 2019-2021 data, not 2022 data and make sure they still work. The deals I help underwrite, even at these interest rates still pencil. That being said, I would not be encouraging anyone who is living off STR income, to leave their jobs right now, because I would expect margins to compress in 2023 as competition grows.

Tiffanie Figueroa · Answer

I do agree with you about the taxes and profit margin. There aren’t tons of homes where the numbers make sense. I sift through the MLS almost everyday and sometimes I only find good deals a few times a week or none at all. Like I said, knowing what works and where really increases revenue. I think as supply increases the poorly managed and cheap feeling STRs will go under

Jeff Langley · Answer

Between state tax, occupancy tax, and the price to entry- the profit shrinks. I’ve been trying to find some that make sense but it’s turning out to be too many expenses and not enough to set yourself apart from the other 7000+. I don’t see many scenarios where the revenue increases, but instead decreases with supply. Just my $.2

Ryan Moyer · Answer

Demand likely will fall.  But demand has not even begun falling yet.  Both Amex and Visa just called out travel spending specifically as being a standout amongst their spending categories, blowing historical figures and their predictions out of the water.

Airbnb and Airdna are reporting the same.  Discretionary travel spending is still at peak, outlier numbers.

It's a common misconception going around.  The recent fall in occupancy rate is 100% supply driven.  If and when demand does actually drop, the occupancy gaps people are seeing right now will seem like child's play.

Michael Baum · Answer

Hey @Andrew Chime, ok I hear ya.

So you are going to have to decide where you want to be. The STR market differs from place to place. You had mentioned Austin, but I think you are going to have to get out of the city in order for it to work.

Have you read everything in the forum? There is a ton of info there that will help you get a better understanding overall.

You are going to have to get more specific. ADUs for example are allowed some places but not all places. It is highly dependent on the municipality. In Seattle for example, ADUs are legal but only for long term rentals.

If you are a whippersnapper and from your photo I think you are, you could look at doing a house hack with a 4 plex. Live in one and rent the others. Do an FHA loan for it. That should allow you to live rent free and probably make positive cash flow you can stuff into savings. Then after a year or so, move out, renovate the last unit and refi to a conventional then do it again with FHA.

You will build a tremendous amount of equity and assets that will cash flow for you, then start looking to branch out into STRs or whatever.

If I was a young man this is exactly what I would do. You could be financially independent in less than 5 years I think. Just my opinion my man!

Tiffanie Figueroa · Answer

I am an agent in San Antonio and our market is much more stable than Austin’s. We do have density restrictions on STR’s here which is a good thing. There are currently over 5,000 permitted STR’s here and I expect that number to continue to grow. With that being said I do feel that there is still room to run a profitable STR in San Antonio. Knowing what works well and in what areas of SA is key.

Bruce Lynn · Answer

@Andrew Chime  My guess is you are trying to catch a falling knife.  It will likely be very tough to make the numbers work in Austin.   House hack is probably your best option.   Lots of restrictions in Austin, so learn those to keep yourself out of trouble.

Andrew Chime · Answer

I am very grateful for your response, Michael. You made some great points that I will be diving into more. Thank you!

Sara Levy-Lambert · Answer

We have not slowed down with investors on purchasing in Austin, Texas. The wild days of 50+ offers per property are over, but there are plenty of people selling, more people moving there and STR demand is at an all time high. Happy to connect you with our agent in the area so you can ask any questions

How are investors feeling about the Texas STR market?

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