STR - Palm Springs vs Indio (and some specific questions)

[Amit Raghavan]

This is a long post and appreciate you reading through it. We are looking to buy a SFH in Palm Springs (or possibly Indio) for STR purpose. I know the forum has a bunch of info (appreciate it) but wanted to ask a few Qs as it relates to our needs:

1) PS vs Indio - We visited both places over the weekend and almost considered a brand new home on the lake at Terra Lago in Indio but had a last minute pause. We liked the TL home and nice lakefront view but here are some cons: pretty far/isolated, no real dining options outside and besides the music festivals/BNP tournament, didn't know if it would do well as a STR. Also, almost every lakefront home on TL is on STR. Indio is currently STR friendly as well as the HOA but I've heard there may be caps coming soon by the HOA - we wouldn't have to worry yet. However, PS is more established and we are focusing on 4/2 SFH (no land lease and under city caps). Even if STR goes south, we feel there is decent demand for 30+ day rentals as well as the property prices holding its value long term. Or is Indio a good safe bet with potential appreciation - especially the Terra Lago area?

2) PS specific home - We looked at a few and were intrigued by one that is a 3/2 (plus self sufficient ADU, former garage) with a nice pool, yard but 2/2 on city records. The house was rehabbed with good quality materials and overall looks great but should I be worried with unpermitted modifications? Per the listing agent, the additions/changes were way before this seller and he simply just spruced it up. Oh and no garage (converted to ADU with bathroom and kitchen) and a carport instead. Questions on risks/liabilities: 1) Will the appraiser appraise it as a 2/2 2) How will insurance view it? In the event of some disaster, will they do a replacement cost for a 4/2 or 2/2? 3) STR guests - if something goes wrong on the unpermitted add ons, will it be a bigger risk/issue vs something happening in the permitted portion? I do plan to hold it in an LLC, have good insurance and umbrella as well.

3) Older homes in PS - most of the homes in PS are built in the 40s-50s and for those that own them, do you constantly run into issues with major ticket items - plumbing, electrical, etc (things that are not visible to the naked eye). Or anything else to consider when purchasing homes built that old?

4) Prop Mgmt - I am not new to real estate but new to STR and live 6-7 hours away from the area. Read the book on STR by Avery and most recommend DYI if you are tech savvy and can be hands on. Do you recommend self managing in PS (or even Indio) where tenants may be a little more high maintenance:) I ask because PM fees can be anywhere from 20-30% and will deplete any cash flow we may generate. We plan on using DSCR loan (yes high rates but our complicated taxes makes non conventitional as our only choice at the moment) so PM fees will def kill anything. However, we also want to make sure we start off strong with a seasoned PM and then possibly take over in a year (but reviews may not transfer?).

Ultimately STR here may not work out but we do have a desire to buy in the area. I appreciate your feedback on any/all of the above. Thanks BP community!

Amit

[Pablo Flores]

Amit,

I would advise you not to invest in PS if this is purely an investment decision. The city recently reduced the number of allowed bookings in a calendar year to I believe 20. Before it was 32 + 4 during the summer. Even if you do 5 night minimums this will still give you less than a 30% occupancy for the year which will really hurt your CoC return. If this purchase is more of a second home/vacation property for your family that will make some money on the side, then I get buying in Palm Springs. I currently manage a multi million dollar home in Palm Springs that has its own gated entrance and sits on a hill. Because of its seclusion, we can get away with circumventing the city regulations as code enforcement has no way to verify how much the property gets booked. Most of the bookings we get for this property are also through our website, so the city cant verify through Airbnb or VRBO how many bookings we are getting. However, the owner of this home did not purchase it with the intention to be an investment home and its seclusion allows us to do significantly more than 32 bookings per year. For your average PS home, this would not be possible. And if you happen to buy something like this where you can get away with doing more than 32 bookings per year, then the asking price will likely be very high and will erode your CoC returns looking at it purely from an investment perspective.

My recommendation would be to looks elsewhere in Indio, Coachella or Bermuda Dunes. You can absolutely still kill it with a STR in the Coachella Valley, and in my opinion the returns you get here are unmatched compared to anything you can get elsewhere in the country. The caveat is that the market has gotten so saturated that your property REALLY needs to stand out and the upfront cost you need to get started is much higher than anywhere else in the country. I just closed on a 6 bedroom/ 5 bath home in Indio with a huge empty lot where I am going to build a resort style pool in the backyard. My upfront costs with 25% down, pool building costs, renovations, furnishings will run me about 425k out of pocket. But gross income will be about 250k-275k per year.

To answer your last question, self management is possible but most people have no idea how difficult it is to self manage a truly successful STR with 60-70% occupancy. Again this largely depends on what type of STR you have. I manage 20+ high end STRs in the Greater Palm Springs market. Our average daily rate(ADR) is high for our STRs, and we provide many amenities to cater to a more luxury clientele, but because of that guests have very high expectations when they book. Most investors would not be able to self manage a successful STR like this from afar. This has been part of the problem last few years; the market has became saturated with first time investors buying your average 4 bed 2 bath home thinking they are going to kill it self managing, only to realize the returns are no where near what they anticipated and the work needed to self manage is more than they thought it would be. So my advice: understand your market and local regulations, avoid the average cookie cutter STR home, make your home STAND OUT and be aware of the significant upfront cost needed to do so, and absolutely hire a local PM company. Good luck Amit!

Pablo

Helios Vacation Rentals