1031'ing into a STR / LTR / or no rental at all

[Reid McCutcheon]

I think this is my first post. I signed up in 2017 but forgot I had an account here until I just recently started listening to the Bigger Pockets podcast.

Anyway, question for the group here. We currently have 3 single family homes we rent out as long term rentals. We also have another single family we short term rent.

I have a property management company that manages the long term rentals, but after everything is said and done on those, the monthly cash flow on them is only $1830.00. I say only because the total value of all three houses would be around $720k and the remaining equity between all three after mortgages would be around $525k.

I'm considering the option of selling all three and 1031'ing into higher cash flowing properties. My wife likes the idea of short term rentals. We now have a little over a years experience with our first short term rental. We 1031'd two LTR properties into one single family short term rental. Purchased it for $450,000 free and clear. We have it managed by Evolve, but we also have to be up there every week to make sure things are clean and in order (90 mile round trip) because the cleaners aren't amazing and the options for most service work in that area is hit or miss. We did gross almost $66,000 on it between when we started on April 1st of 2022 to March 30th of this year. But between management fees, cleaning, travel cost, upgrading, decorating, furnishing, painting, insulation, heating and cooling, plumbing, and supplies we spent about $66,000 of that amount. I'm thinking a lot of that first year stuff was a one off and this year will be better.

I do like the idea of short term rentals because I know they can make great returns, but I also want to know from people's experiences. The first year is usually the worst year for a return, right?

Now as far as my long term rentals, what do you all think. In the current real estate market with the new higher interest rates, should $500k be able to be 1031'd into either STR's or LTR's and make well over $1830 a month?

[Wayne Bolen]

Sounds like you did a major renovation year 1, eating up all your profits, so from that perspective, yes you should expect to retain more in year 2. That being said, like Ryan mentioned, the STR craze peaked at the end of last summer. I don't think this is due to a lack of travel, but the market has been absolutely saturated in the past couple of years. In order to be a high performer going forward, you really need to find a way to stand out above the crowd. I see posts all the time in STR groups where people are desperate because their properties are not booking. In most cases, these are very average properties and they are competing with hundreds or thousands of other properties. If you move forward, be sure to buy the best properties in the best areas that you can afford. Then looks for ways to incentivize potential customers to choose your property vs others in the same area and price point.