STR Evaluation & Market Trends

[Doug Lee]

Good morning. First post here concerning STR's. I've been following for a while and this board seems like a great resource.

A few questions concerning my STR analysis for a unit I'm looking to purchase.

Details - 

1. New small beach town subdivision.  40-50 homes.  All brand new.   2 bed/2 bath/1 loft.  300 yards from the beach.

2. Using what I feel is reasonable criteria - 162 nights @ $300 per night - $48k annually (real estate investor's projection).  Break-even is around 142 nights/year.

3. Financials for year 2+ (ignore year 1 due to furnishing investment) - Right around $10k annually for cashflow, COC - 12.878% from around a $75k - $80k initial investment.

4. I'm 5 hours away, so I'm definitely not local.  Would plan to self-manage and need to find reliable maintenance, cleaning, and possibly a co-host for emergencies.

5. Other details - An investor just 5 minutes away made 90k last year in 2022 on a 3/2 (plus a small additional room in the old garage - 4/2?) for comparison just 12 rows from the beach.  Currently it looks like many have the same idea for renting these 2/2 units in this subdivision.  I've seen 4 to 5 units posted recently on Airbnb.  I looked at all their calendars...granted it's early in the season, but they don't have much at all booked.  I also looked at more established units on the beach, and they took look pretty sparse.  

My concerns - 

1. The market seems to be softening from what I'm reading.  I get real estate is cyclical....just like the stock market (that's where I'm mostly familiar).  You need to ride out the lows.  Have your units been renting at the same pace as before?

2. Is this still a good time to get into the STR market? The bad - The loan rates aren't great. Insurance is high on this unit because it's close to the beach. I will likely have significant competition because all these units in my neighborhood are identical in layout. Differentiation will be difficult, although, if demand is there, we all could profit. The good - The units are new. I do have some small tricks up my sleeve to differentiate. The pricing on the unit is 'relatively reasonable' and the residential market values still seem to be holding up well. This investment could help me round out my portfolio.

3. Is it normal for most of your units to book late?  I'm a planner, so my vacations are typically booked 6-12 months in advance.  Hosts' calendars don't seem to reflect this.  This has me slightly concerned.

4. What do you keep in cash reserves to float a unit in your projections?  Do you keep a full year of expenses on hand?  2 years?  When do you decide if it's worth selling if the unit isn't bringing in what you project?

5. What ratio of bookings do you utilize outside of airbnb & VRBO?  Are you utilizing your own website, booking tool, and contracts?  I assume if you are you're able to pocket more of the proceeds?

6. What do you think of the projected financials for this unit? 12% COC is better than sitting in the bank, however, it feels low compared to other types of investments I'm used to. I currently have other options to invest in that could produce anywhere from 30-40%, but there's no asset base at the end. It's just a straight up passive investment.

Appreciate any thoughts.  

Thanks again.

Doug