Thoughts on the 15% rule for short term rentals?

[Clay Asplundh]

Hello all!

Typically when I am analyzing STR deals my most efficient way to find out if a property will cash flow well or not I use the 15% rule. This is where the revenue for the property needs to be 15% or more of the purchase price.

Example: 150K in revenue projected for a $1,000,000 property. 

Does anyone else use this rule, and if not what do you use to quickly analyze STR deals?

[Bill B.]

Can’t use ANY profit based on income percentage.

Does the property have a $1,000/mo Hoa because it's in a condo tower or on the waterfront? Is it a new build home or condo, or a 100 year old historic home that's going to need 10x the capex and use double the utilities? Is it in a flood or hurricane zone with triple the insurance cost? Is it in Texas or other states with double or triple property taxes? Are you paying cash, getting a 5% owner occupant loan, a 7% dace loan or a 9% HML?

You have to compare it to the same type of property in the same market with the same costs to even have a guess. But still, it won’t be income as a percent of purchase price. At least not a straight percent. 

You’ll figure out your local insurance, property tax rates, add any Hoa, calculate your interest/payment based on your interest rate, and then adjust for maintenance/capex. and then guesstimate your income. :-)