STR - Does Home Size Matter During A Recession?

Hi Scott,

Thank you for your reply, but was wondering if you might elaborate on something because I'm a little confused by one part of your answer.

First I agree with you about bigger not always being better, and I certainly appreciate your thoughts around the cash flow percentage.

However, you then stated that the "smaller short term rentals will get crushed" which leads me to think, in that scenario, wouldn't the larger be better?

Or perhaps I'm just not fully understanding where you're coming from. Any clarification would be greatly appreciated.

Thank you!

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

If you have a great property enough people will still have vacation money.

People can pool their money for bigger properties.

5 Reply

Andrew SteffensBusiness Member

Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes

[email protected]813-563-0877

Hey Scott - We are a PM just over to the West a little in Tampa.

For us (as mentioned above) larger homes do generate larger revenues but not necessarily bigger returns. Purchase prices as well as taxes and insurance all come into the play on a case by case basis.

Large(r) homes provide value to travelers as more people can split the bill. Also from a LTR perspective large homes also rent to large families. Neither is immune or necessarily better in an upturn or downturn.

The advantage to larger homes besides what is mentioned above is that there are less of them. Do a search of 3 bedrooms, then 4 bedroom, then 5+ bedroom and it gets less and less.

I also would implore you to look beyond Orlando. While the market is more "saturated" (I would not say it is saturated, but more of a balance where good properties still do well and bad ones are faltering) I do hear Orlando is struggling from other members of these boards and contacts I have. Beach markets do well in any economic environment. There is a lot of beach in FL! And we are still doing well over here in Tampa area :)

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Raymond J. RodriguesBusiness Member

Lender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes

[email protected]619-456-8311

Hi @Steve Uekert, reach out to @Judson Osbon. He should be able to provide you with some sound advice on this!

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Greg ParkerBusiness Member

Realtor, Contractor, Property Manager · Montgomery AL and Kowaliga, AL · Member since 2017 · 669 posts · 536 votes

I like the idea of a smaller property that can easily shift to a LTR. Thats a good plan B.

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Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

Quote from @Steve Uekert:

Hi Scott,

Thank you for your reply, but was wondering if you might elaborate on something because I'm a little confused by one part of your answer.

First I agree with you about bigger not always being better, and I certainly appreciate your thoughts around the cash flow percentage.

However, you then stated that the "smaller short term rentals will get crushed" which leads me to think, in that scenario, wouldn't the larger be better?

Or perhaps I'm just not fully understanding where you're coming from. Any clarification would be greatly appreciated.

Thank you!

Think of this situation. Parents and married kids want to vacation together. Mom & Dad, sister and her husband, son and his wife plus their little kiddos.

In a hotel they would need 3 rooms at $200 a night for $600. Or, they could go with a house that is 5 bedroom for $400 a night, have a back yard and a place to have dinners together and have a lot more privacy than a hotel.

Or a college reunion, or a wedding group and so on.

They save money and get better accomodations by pooling their money.

Individuals will downsize from staying in an STR to staying in a hotel to staying in a national park camping. They will still travel, they just will look for ways to do travel more cheaply.

And, it's really a matter of what kind of guests you are after. If it's traveling nurses, singles or couples, a small place works. If it's larger groups you need more space to be competitive. It's two different markets.

3 Reply

Michael BaumPro Member

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

Like others have stated @Steve Uekert, a larger home allows for extended family vacations. When things are tight, people still look for ways to get away. If they can spread the cost out over 2 families and/or grandparents, all the better.

Our house is pretty big (4/3 2700sqft) and we get multiple families at a time.

Sarah KensingerPro Member

Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes

[email protected]330-557-3021

I was on a Zoom call yesterday and the Orlando market was discussed, and I thought I would pass on what was shared. VRBO shares with Premier hosts how many people search the town/city the property is located. Orlando/Kissimmee is way down, like the graph was an amazing difference compared to last year. So, you might want to be aware of that before you purchase a STR there. Give it a few years and it might come back or if you're up for a challenge it might be for you now. A couple people on the call had 10+ bedroom homes and they are still fine but definitely have less bookings this year.

I don't know much about the Orlando/Kissimmee market except it's one of the most competitive in the world but wanted to pass along what I heard about it.

Hamp Lee IIIPro Member

Real Estate Agent · San Antonio, TX · Member since 2019 · 1k+ posts · 832 votes

Make sure the property will cash flow as an LTR first, so if the STR doesn't work out, you can pivot.

I wish you all the best.

3 Reply

Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

First, it is not accurate in terms of the bigger it is the better the cash flow. In the majority of the cases it should generate more revenue but that is not cash flow. Cash flow is what's left after your expenses have been met. There are thousands of things that can manipulate that. A major factor that can manipulate that is the numbers you acquire it for. If you get your 5 bed 3000 sqft property for 385k and someone got an identical property for 320k they will (most likely) beat you in cash flow. If someone really was able to get a vicious wholesale deal for a 4 bed and 2500 sqft property for 200k all in, they will beat you in cash flow. Its all about the numbers and tons of other things to determine what you net in cash flow (i.e operating expenses, competent management, fees, pricing, maintenance etc.)

I dont think anyone can accurately predict what is going to happen in a recession. Too many variables in my book. I do know that with my STR at the ski resort they assumed we would go belly up during the pandemic. Through the summer and winter seasons we smashed records beyond what we were doing prior. Id say make sure to the best of your ability you get one that will work as a STR or LTR.

You are not over thinking anything and your approach is highly intelligent. Always have contingency plans and thought out strategies. With my investments I always have multiple exit strategies. No such think as over thinking with this and believe me, what you are doing will pay off in the end. Too many approach this as some easy *** get rich fad or easy MLM gig which doesnt take much thought.

Great job and best of luck!

6 Reply

Melissa Nash

Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes

hi, just some thoughts.... Why are you investing? that is the first question you need to ask yourself. Are you investing for pure cashflow- any market will do? Are you investing for long term appreciation/ wealth? Do you want an STR to cover the bills and you can use it? You need to know these first. Then you will have more answers. The "market" and who you are attracting is a totally different tenant STR vs LTR. If you are buying an STR in a vacation town... that also goes down a different rabbit hole with different prices/ cashflow/ expectations. Some markets have slowed down and some have not, it depends on LOCATION. And your cashflow depends on what you paid for the property not necessarily more bedroom.

Example: I have a small cabin that is 2 bedrooms and is promoted as a romantic getaway. I charge more per night for a small 2 bedroom than most 4 bedrooms in the area. Because the property has the AMENITIES and is marketed to my ideal client avatar. So, I think you need to go back and define your goals and objectives better, then look for markets that fit your goals. Hope that helps!

3 Reply

Michael PorchePro Member

Rental Property Investor · Boise, ID · Member since 2017 · 220 posts · 101 votes

Quote from @Steve Uekert:

Happy Wednesday everyone,

I have a question that I've been pondering. After sitting on the sidelines for a long time, my wife and I are finally moving from interested, to serious in our pursuit of a STR. We're likely going to be staying in our backyard (so to speak) of Orlando for our first since we can learn and be close to it before we start out of state investing.

Anyway, my question revolves around the size of home, but it's not from a typical angle I think.

In this market, it seems like the larger the property you can afford, the more you can expect from cash flow. This of course assuming you have the right theming, manage it great, etc.

So as a loose example, a 5 bed home might get revenue around 50 to 60k a year, a 10 bed home has the potential to earn a couple of hundred thousand a year. I know these figures depend on a lot of things, but I've seen research from quite a few properties and they all seem to point to the same thing.

All of that might point to "get the bigger house" but my concern as a newbie is, what about a recession?

If we assume we're looking at recession over the next year or two, the first thing to typically dry up is peoples discretionary budget so trips to Disney get postponed or cancelled altogether.

Therefore, from a planning perspective, if the STR market dries up or slows WAY down like it is in other markets, it would seem to be to be an easier thing to potentially shift to long term rental for a year or two if you were renting out a 4 or 5 bed home, versus trying to LTR in a 10+ bed home.

I'm just looking at this from a strategic perspective and trying to play this as smart as I can. I know there will be risks regardless, but I'd like to try and mitigate as many as I can as smartly as possible.

Or maybe I'm just over thinking this too much.

I would appreciate any thoughts or feedback on this.

Thank you everyone!

Steve

Yo Steve! First of all, great questioning and line of reasoning. Now, I'd say there is a lot to unpack, but I'll try my best to help clear up a little.First: Size of home is not the greatest factor in determining cash flow.

Yes it can be a factor due to how many people it can sleep at times. Meaning larger groups of people need more accomadation so there for willing to pay more.

However the 2 largest items that corelate with increasing revenue is 1) LOCATION. 2) EXPERIENCE/AMENITIES. I have studios that out perform 5 bedroom houses in the same market because of how strong 1 & 2 factors are.2nd: Timing recession. If you look up on google the average time a recession will last is 10 months.

That means, if you are atleast cash flowing. I wouldn't worry as much about is today the right time, but rather just find a strong deal! If you do, then the recession will be over before you know it.3rd: I would consider going out of Orlando... it comes back to what your goals are. If you are getting in this game for financial freedom, time freedom, then investing in your backyard may not be the best fit if you are aiming for cashflow. Now that doesn't mean you can't find a good deal in your backyard... but I'll tell you my first deals were out of state and they have caused me financial freedom in the long run!

Hope this Helps!!!

Shawn McCormickPro Member

Realtor · Central Florida-Orlando · Member since 2014 · 1k+ posts · 892 votes

@Steve Uekert plenty of good points to consider here. I'm in Orlando too and do quite a bit with STR clients.

A lot of the advice is not relevant to Orlando. Real estate, to me is hyper local. You can't compare how well a cabin in Asheville or a penthouse in NYC to a themed out house next to Disney. So then it comes down to a resort community with tons of amenities and a well themed house close to the parks or take a chance on a tier 2 or 3 community with a lower cost of entry and see if you can keep your head above water while you build out your reviews and work out the kinks.

IMO, to do well in Orlando the 3 things that will give you a better chance will be 1. buy in a community that is as close to the theme park as possible. 2. buy as much home as you can afford (remember, a 8 bedroom home can always be rented as a 3, 4, 5, 6 or 7 bed too) 3. Theme it out as much as makes sense (depending on how many bedrooms...you don't want to deck out a 4 bedroom home!)

The rest will come down to how good of an operator you are. How to you manage reservations, negative reviews, complaints, damaged furniture etc. I've sold to people that turned around poorly run homes and also to people the ruined a cash cow because they didn't put in the work.

It is true that there are far less larger homes than 3,4 & 5 bedrooms, so you automatically have an advantage. Next, something that many touched on..multi gen families coming here to rent one big home...but they didn't mention that Orlando(Disney) is about as recognizable global destinations on the planet. We aren't just talking the Smiths from Ohio. We are sooooo International and get vistitors from every corner of the planet and they all come with large families. Those travelers are not going to a cabin or a house boat, they are coming to Disney to spend money, take advantage of that!

As far as recession goes, these CAN be rented long term, but the resort communities aren't the most family friendly when you are living there..schools aren't good, the communities are gated and strict, shopping is very touristy and your neighbors are on vacation and change every week. It's a fine exit strategy if the numbers work, but sometimes taking a loss can have tax advantages....(I'm not a CPA or lawyer ;).

There is a lot more to touch on, so reach out if you want to go over more, love talking about this stuff!

Best of luck!

7 Reply

Brian Barch

Member since 2022 · 272 posts · 253 votes

I like smaller:

it appeals to more people
has higher occupancy

Easier to clean

2 Reply

Patricia Steiner

Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes

Let me ask you a few questions:

What is the market? What type/size of housing is in greatest demand and price? What is the supply to the demand? Everything you need to know about what makes for the best investment in a specific market is about market demand and supply.

The size of a home doesn't matter - that's a product. What matters is what is the housing preference in your market and at what price does it command. My problem often with "BP chatter" is that it tends to focus on property type. A larger sq foot house may come with a big rental price but it may also sit on the market for a long time waiting for a rare tenant type which is a heavy carry and use of cash - whereas a 1000 square foot home has multiple applicants within minutes of coming on market at a lower acquisition cost.

Don't get caught up in doors and size and bigger and better. Let the market tell you what is hot and what is not.

Hope this helps...

2 Reply

Jon Martin

Member since 2022 · 1k+ posts · 1k+ votes

A smaller home is safer in case you end up having to cover some of the expenses yourself. In better times, there is more appreciation upside and more exit opportunities with a 2-3 bedroom. You are bound to make some mistakes or frivolous purchases/spending in regards to furnishings, decorations, rehab etc with your first purchase so it's better to do that on a 2 bedroom vs a 4-5 bedroom. Then you can take what you learned and scale up for the next property.

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

@Steve Uekert larger properteis haveig more cash flow is not a good assumption short to medium term. What is the relative supply of smaller vs larger in the particular market you are looking? An oversupply of larger properties is not likely to lead to being more profitable.

Account Closed

Homeowner · Celebration, FL · Member since 2023 · 37 posts · 14 votes

@Steve Uekert I own and manage luxury vacation homes in the Orlando region, and can help here for guidance.

Be wary of advice and data from people without local knowledge. I can't tell you the number of people who tell me ‘Orlando is over saturated and bubble has burst' those people aren't focusing on the units in the 34747 zip code gated and zoned STR communities. They are collecting city-wide data.

There are two factors to look at regarding 2023 performance so far and recession concerns. One is to note that 2022 was an exceptional year for STR here, and yes 2023 has settled back into pre-Covid figures, but you shouldn’t be negative by more than 10% on bookings from the prior year. The second point is related to recession. This area has seen recessions and Covid, and those property managers who are still around are the ones that know how to react to a changing market, to help their homeowners. I would also take a look at alcohol and cigarette company profits during a recession, as they actually go up, not down. People tend to spend money to escape reality, STR provides that and makes it affordable when homes holds high occupancy.

A good property manager will know which months are typically low for US audience (Feb/May/Oct) and have a good revenue strategy for the homeowner to increase occupancy (ie Feb = Brazilian tourist high season, May = cheerleading teams competitions, Oct = UK holiday season), in addition to dynamic pricing and list optimization. You should also look at the commission rates and hidden fees, a good property manager should help you with your net revenue return, not simply say “make more money with us”, and they should be putting your revenue in a trust account, for security and transparency, so you can track performance in real-time.

Regarding which STR will provide best cashflow, your formula is a good rule of thumb if you apply to single family homes, I would however make exception for higher performance on certain lower bedroom count for reunion homes (ie custom build).
I would not invest in townhouses or condos, they will deplete any potential strong cashflow. They are great deals for the guests, as townhouse/condo STR market here tends to compete with hotel nightly rates.

STR zoned and gated resorts such as Windsor Westside/Windsor island/encore/reunion/championsgate/solara will also be solid performers, and retain house value well through a good and bad economy.

Let me know if you want me to run a revenue forecast pro-forma for you.

Thanks - Andy

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